Successful mergers through effective focus on people and process

Andrew Roskell talks #mergers in #socialhousing in the latest DTP Views blog.

I have been reflecting recently on mergers that I have been involved with as lead advisor, or where DTP have been engaged to conduct due diligence (financial, property, cultural etc).  One observation is that the characteristics which initially all point towards a successful merger (process and beyond) don’t always guarantee success. 

Over the last few years or so, these characteristics have changed somewhat, with generally less emphasis on the potential for large scale efficiencies and financial savings, which would then  be invested in enhanced services, better outcomes for customers and greater capacity to build new homes.  The need for a business case demonstrating such potential is still there and certainly the focus on these sorts of outcomes is as strong as ever, but the levels of savings, post rent cut, have been accepted as being much harder to generate and predictions in this respect have been scaled back.  One of the obvious reasons for this is the general decline in operating margins and the growing desire, in the face of unprecedented challenges and headwinds, to fundamentally secure greater resilience from partnership. 

So, if on paper (eventually a ‘business case’ for) a proposed partnership appears able to deliver greater resilience, as well as additional capacity for the priorities I have set out above, surely the rest is just process isn’t it – how can it not be a success?  

My recent experience of such matters has shown that, notwithstanding what can often appear to be a very solid platform in support of a proposed merger, other factors, if unchecked, can sometimes conspire to undermine what should be a successful process, eventually leading to a collapse in discussions – and inevitably an awful lot of expense. 

The conventional way to manage and help to reduce cost exposure during a merger process is to break the project down into stages – usually (though not always) three.  Stage 1 is where the Outline Business Case (OBC) is established, with financial modelling supporting this.  Should the boards consider the OBC to be enough evidence to warrant progressing further, then a key (approval) ‘gateway’ will have been passed.  This is an important watershed moment, because Stage 2 usually involves quite a lot more costs than any that have arisen before.  Stage 2 leads to a Detailed Business Case and this includes costly due diligence work and formal tenant consultation.  At the end of Stage 2 there is another key (approval) ‘gateway’, leading (if approval is secured) to the final stage - Stage 3, which concludes all engagement with funders and involves the key legal transactions and approvals. 

Having a robust approach to the project management of the merger process is obviously a good thing, as conventionally mergers are achieved through a series of transactions.  Focussing solely on transactions and process, however, is not good enough, as there are many other factors which if not carefully overseen and managed can sink what should otherwise have been a successful outcome.

In particular, I would highlight a few important areas to focus on:

Leadership

It is vital that Chief Executives are aligned in providing joined up leadership and confidence to all involved – including executives, board members and staff.  If staff and executives have (quite natural) concerns about their future, it is important that these matters are spotted and thoroughly addressed, as these can leak wider, affecting the wider staffing groups and sometimes impacting (no matter how strong the business case) on board members’ attitudes towards the proposals.  Board member views should also be assessed and monitored at the outset and during the process.   Negativity, or scepticism, towards merger is not unusual and to some extent could be considered a good thing.  It isn’t always a good thing to have complete alignment of views – a balance is often healthy.  That said, it can be extremely unhelpful to have influential board members holding and consistently espousing sceptical opinions, in the face of strong, independent evidence to the contrary.  It goes without saying how important good chairing is at these junctures. Facilitating open, honest and mutually respectful debate between board members is incredibly important.

Expectations

It is important at an early stage to secure a broad view from executives and more importantly board members (who will eventually be asked to decide) for what the key components and outcomes of a robust business case will look like.  Should these early expectations not be deliverable, then some unpicking might be necessary to make further progress.  In a worst case the reduced outlook might (not unreasonably) lead to the collapse of the process.   If a reasonable baseline expectation can be established at the outset however, it becomes harder (later) for any ‘merger sceptics’ (there are usually some) on either the board or the executive to claim that the business case isn’t convincing enough.   The boards will eventually decide, of course, but for the boards (or just one board) to ‘pull the plug’ at the end of Stage 2 (as some have done), on the basis that the business case wasn’t strong enough, is not really evidence of good governance.  Quite the contrary in fact, if the plug could have been pulled earlier, saving significant expense to both parties. 

Decision-making

In some cases, boards have decided to hold key decisions without key advisors being present.  Sometimes, executives have also been excluded.  Whilst board members from a certain background might consider this to be common practice in auditing arrangements, for example, this is not good governance in action in relation to collaborative leadership and open dialogue and not the most effective way of ensuring that properly informed, considered decisions are made, especially when the deployment of such significant resources is involved.

Due Diligence

This is an important, but also a very expensive element of a merger process, including financial, legal and more often than not these days, property, due diligence. As such, it is vital that the process (often commenced and completed within a 2-month period) is carefully managed.   There are a few key issues which are useful to consider:

·        As far as possible you should aim to agree joint (common) scopes for due diligence advice.  There will always be a need for some diversion from the common scope, as no organisation is the same as another, but a general aim to approach due diligence in a common way, should enable a spirit of fairness to be maintained, rather than one party feeling that the other is delving deeper and asking more questions than they are.

• All advisors must be clear about reporting timelines, so that boards are jointly informed of the outcomes at the same time.  One late report can throw the process out. 
• Protocols should be commonly agreed for what will be considered material and what is not.  As far as possible a common form of reporting should be agreed, so that boards can understand the significance of Red Amber Green (RAG) ratings and specifically there should be a common view on what each grading actually means – what actions are required and when, should be clear and commonly understood.
• ‘Mission-creep’ from advisors should be avoided.  It is not acceptable for the due diligence advisors to progress their analysis, by just doing what they have done in the past.  Mission-creep can spread the analysis wider than intended (by the clients) and also unevenly (between the parties) – it should be avoided.

Finally, it is often said during mergers that a “cultural” and “values fit” is vital and quite often the merger process itself will test this out in practice.  It remains important for the boards however to check this out and to be clear where there might be a misalignment of culture or values.  If the evidence suggests there is, this must be recognised and boards must lead the necessary change to deliver a best fit for the future.  

There are other factors which I could have been included here, as this is not an exhaustive list.  These are important considerations however and experience has led me to believe that these matters are of at least an equal importance to the need for effective project management of the transactions and the process.  Successful mergers are achieved through effective focus on people - as well as process.