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Better together? Why a focus on alignment is a precondition for ‘transformative’ M&A

Posted by David Derain

David Derain

By David Derain and Frédéric L’Héréec

Every merger or acquisition faces two parallel challenges – bringing the businesses together, while at the same time maintaining continuity. To achieve this, companies typically form a program management office (PMO, also known as an integration management office). Its job, post-close, is to design the new organization in around 100 days, and then make it happen.

There are two problems with this. The first is that human nature being what it is, PMOs spend more time on the design (which is relatively easy) and not enough time on execution (which is much harder, and in reality takes up to 1,000 days). This is one of the reasons why up to 90 percent of M&As fail to deliver (Dangerous Liaisons, Hay Group, 2007). The other, deeper issue is that while the PMO model might sometimes work in a straightforward M&A deal, it’s not equal to the task of achieving a more complex, ‘transformative’ integration.

What does transformative M&A look like?

Simple Transformative
  • Building existing capability
  • Expanding geographically
  • Scaling up what is already known
  • Adding more capacity

 

  • Developing the ability to do something new
  • Entering new markets, dealing with discontinuity
  • Seeking to develop new capability
  • Creating a step change in performance

Traditional PMOs focus on bringing together the core tangible assets of both counterparties: for example IT infrastructure, client databases and HR systems.

This works fine in simple deals. But transformative M&A typically involves a great deal of intangible capital, which accounts for up to 75 percent of the value of an organization. This value cannot be integrated using the linear, project-based approaches and thinking relied upon by PMOs.

The three types of   intangible capital
  • Organizational capital – management processes,   culture
  • Relational capital – brand strength,   customer management, partnerships and networks
  • Human capital – knowledge, skills,   leadership and employee engagement

What’s needed to secure intangible capital – and therefore success – in transformative M&A is a focus on alignment. In essence, alignment is simple. It means, for example, having a board that shares a common conviction about the deal; executives who are motivated to see it through; and employees who feel both engaged, and equipped to get the job done. It is a ‘learning process’ that builds an organization’s capability as it changes.

In practice, achieving alignment is tough, even in a steady-state business. Making it happen during a complex integration – when the pressure’s still on to keep delivering the numbers – is extremely difficult.

Hay Group’s solution, pioneered with seismic organization CGG, is to create and manage an ‘alignment office’ that mirrors the activities of the PMO, but focuses on intangible assets and on the transformation process itself.

CGGVeritas: How alignment helped a transformative merger succeed
When CGG paid $3.5bn to acquire major competitor Veritas, CEO Robert Brunck knew he had to act fast to deliver on his promise of creating a global seismic services powerhouse. He recognized that one of his key ‘must win’ battles was to manage the risks to the company’s intangible assets. “Both companies were fiercely proud of their past histories and achievements. They had unique approaches to the market, different governance and operating models, management styles, and cultures. In addition to managing the functional integration, I knew we needed help in re-aligning these intangible aspects of our company around my new vision and business strategy.”

So in parallel with traditional PMO integration work – on IT systems and operations, for example – we worked to ensure leaders, managers and employees worldwide shared a common vision and were held accountable for delivering their actions on time. A year after this work began, CGGVeritas saw results faster than expected: doubled margins, increased market share, EBITDA up 38 percent and a $1.7bn order book.

How does the alignment office work?
In formal terms, it’s a ‘transitional governance body’. While the PMO is working to make sure both companies’ systems and processes come together and work smoothly, the alignment office focuses on managing barriers to change, and creating the conditions for change to be implemented. The PMO can track and capture synergies; the alignment office makes sure maximum value is achieved from them. The PMO is ‘left brain’ and rational, the alignment office more ‘right brain’ and intuitive.

Rather than a monolithic, linear project, the alignment office represents a targeted approach akin to acupuncture: pinpointing and working with key leaders and critical teams rather than trying to change everything at once. It drives a fractal process as opposed to a sequential one.

At CGGVeritas, only six small teams were needed to work with a total employee population of 10,000 worldwide. This is a much more targeted and actionable approach, significantly more effective than speeches, memos and roadshow presentations that employees quickly forget.

In essence, the alignment-based approach is about working smarter rather than harder, mapping out must-win priorities early on, then making sure the right people have ‘skin in the game’ so the message spreads effectively. It’s also essential to check progress frequently using short ‘pulse’ surveys so leaders can make the adjustments necessary to ensure the project stays on course.

For any business undertaking transformative M&A, the prize is significant. With up to 75 percent of the new organization’s value at stake, it pays to invest in securing the value of intangible assets.

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This blog has been co-authored by David Derain and Frédéric L’Héréec

Frédéric L’Héréec heads up the Life Sector for Europe as well as managing key global clients in FMCG and other industries. Frederic primary focus and expertise lies in advising clients on issues that arise from business transformation and their impact on organizations and their people.

 

 

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1 Comment

  1. Chary Chigurala

    Chary Chigurala

    December 19, 2013 at 2:06 am

    David

    Great write up. Its a great idea to setup ‘Alignment Office’ and PMO as complementary offices to get to Business As Usual (BAU) status quickly. Your point about Intellectual Property is spot on.

    We have handled 40 M&As in the last few years. A couple of things that worked well for us include:
    Firstly, the process of identifying talented staff in the target company starts 90 days before Day 1. We found this extremely valuable for setting up and running the alignment office.
    Secondly, our alignment office transcends across key functions (ie, Finance, HR, Supply Chain, IT) because all of them must reach the same mile stones at the same time.

    Integration in our view is a ‘financial game’ which requires the companies to get back the P/E multiple premium paid for the acquisition at the earliest possible time. We run the integration office with very clearly defined milestones such as Employee Day 1 and Customer Day 1. The entire executive management tracks the achievement of these milestones.

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