Kathleen Hesketh

Focus article PwC’s 2014 Integration Survey: Winning the Integration Marathon Capturing significant value from M&A transactions remains a top priority for technology companies. As pressure from stakeholders to achieve deal objectives and deliver quantifiable deal value increases, and the focus of many companies’ M&A strategies shifts to larger and more transformational acquisitions, companies are entering relatively unchartered territory. It’s a marathon of strategic, financial and operational challenges that requires a rapid start at the sound of the gun, but also a consistent focus on the finish line. Only those who understand the proper integration momentum, including early planning, rapid execution and long-term commitment, can realize the full value of their M&A activities. Understanding the potential pitfalls According to PwC’s 2014 M&A Integration Survey, dealmakers agree that outcomes don’t always measure up to M&A deal objectives. More than one-third of technology companies reported significant success in meeting operational targets, which was exactly the same as respondents overall. Only 35% reported significant success in achieving financial goals. While 65% of all respondents characterized recent deals as a success from a strategic standpoint, most technology organizations still struggled to meet the strategic objectives of transformational deals as a result of increased complexity, including gaining access to new brands, technologies, products and markets. Respondents were also clear on the integration risks and challenges they face. Integrating technology systems and aligning operating procedures and business processes were identified as the biggest post-close challenges. These challenges are in line with the rising number of transformational deals. Transformational acquisitions require strong collaboration and alignment between the companies, compared to traditional absorption deals which follow a more direct approach of migrating to the acquirer’s procedures and processes. Regardless of the acquisition type, survey respondents ranked research and development as the most difficult function to integrate. Cultural disconnects between companies can prevent essential collaboration and often lead to talent leakage. The upsurge in transformational deals also plays a part, by driving a stronger emphasis on the importance of new product outcomes, one of the lengthiest of integration milestones. Overall, respondents reported challenges in capturing revenue-based synergies while indicating favorable results in capturing cost synergies. 8 PwC US technology deal insights Figure 1: Most common post-close integration challenges Percentage responding post-close difficulties were encountered: 45% Information technology and systems 59% 45% Operating procedures and business process Organizational structure, people management, and work practices Managing multiple locations (incl. countries) All respondents 53% 37% 12% 23% 29% Technology respondents Running the perfect race — you will never win a race if you do not get out of the gates clean No one expects integration efforts to achieve immediate success, but the likelihood of reaching predetermined milestones and overall objectives is enhanced by focusing on three primary components of the integration process. Early planning, rapid execution and long term commitment improve deal success. Quick and systematic integrations that make optimal use of the time between deal announcement and deal close, as well as the initial period post-close, set the course for long term commitments by delivering continuous deal value. The integration process provides a natural arena for redefining business processes and redesigning organizational structures and systems, clearing the course for ongoing cost efficiencies. Before areas of improvement can be identified and roadmaps put in place, leadership must be aligned within the organization. Higher levels of deal success were reported by those companies who achieved leadership alignment within the first three months, underscoring the need for speed as well as a systematic approach to the integration. Leadership selection and organizational assignments also allow for early and comprehensive communication of integration objectives. Meeting communication targets within the first three months or less is directly attributable to increased customer focus, employee commitment and productivity, the speed at which decisions are made and overall confidence in the direction of the integrating business. Of equal importance is the need to integrate operating policies in less than six months after deal close. According to survey respondents, the highest performing deals achieved this milestone in three months or less, and the reasons are clear. Quickly integrating operating policies solidifies awareness of the company’s direction, providing employees a well-defined understanding on where to focus energies to achieve the objectives that matter most. Closing the final mile Establishing the key foundational elements within the first three months sets the starting blocks for the race to the finish line, but sustained commitment to the integration plan over the long term is essential to realizing deal objectives. Survey respondents for 68 percent of the highest performing deals indicated complete commitment to long term plans and objectives. This is evidenced through the development of robust execution plans during early integration, as well as the commitment of resources and capital to deliver and track synergy progress against goals over time. According to survey data, companies with the highest performing deals not only incorporated robust tracking into their integration plans, but applied more deal performance indicators, particularly in the areas of cost. The 2014 M&A Integration Survey is clear on one point: Early planning and fast action that includes strategic thinking about the long term are critical components of successful integrations. While dealmakers instinctively know how to deliver deal value and recognize the importance of early integration execution, only 50 percent of respondents reported being completely committed over the long term. Among all respondents, less than 50 percent completely achieved five of the six most important deal objectives as ranked by survey respondents, such as access to new brands, technologies, products and markets, growth in market share and capturing operational synergies. Among technology companies, 47 percent and 31 percent of respondents reported completely achieving the strategic goals identified as most important, growth in market share and capturing operational synergies, respectively. Turning the tide is all about good strategy and focus— planning integration early and staying involved long enough to deliver deal value. Quickly selecting the strategic, financial and operational objectives that matter most and performing the integration activities that have the greatest potential impact set the stage for long term investment and provide the means to realizing the full benefits of M&A deals. For more information about the results of the 2014 M&A Integration Survey, please visit http://www.pwc.com/2014maintegrationsurvey Figure 2: Connection between deal success and early leadership alignment, stakeholder communications, and operating policy integration Time to achieve leadership alignment: Among highest performing deals* Among all respondents Among Technology respondents Immediately to 3 months after close 56% 44% 29% More than 3 months after close 44% 56% 71% Time to achieve stakeholder communication objectives: Among highest performing deals* Among all respondents Among Technology respondents 3 months or less 68% 53% 4 to 6 months 24% 18% 18% More than 6 months 8% 29% 29% 53% Time to fully integrate operating policies: 3 months or less after close Among highest performing deals* Among all respondents Among Technology respondents 44% 25% 30% 4 to 6 months after close 32% 29% 29% More than 6 months after close 24% 46% 41% * Deals where respondents report the highest level of success in all three areas of performance—strategic, financial, and operational Q3 2014 Update 9 Acknowledgments Author Tom Erginsoy Director, Technology Deals-- Focus Article Paul Hollinger Principal, Deals-- For a deeper discussion on technology deal considerations, please contact one of our practice leaders or your local Deals partner: Martyn Curragh Principal, US Deals Leader--Silicon Valley Rob Fisher Partner, US Technology Industry & Silicon Valley Deals Leader-- Central Doug Meier Partner, Deals--John Biegel Partner, Deals--Southeast New York Metro Brian Levy Partner, Deals-- Matt McClish Partner, Deals-- East Dan Kabat Partner, Deals-- Q3 2014 Update 11 www.pwc.com/us/deals www.pwc.com/technology About our deals publications: Published annually, with quarterly updates, by PwC’s technology specialists in our Deals practice, PwC’s US technology deal insights covers deal activity and trends in the US technology industry. About PwC US PwC US helps organizations and individuals create the value they're looking for. We're a member of the PwC network of firms in 157 countries with more than 184,000 people. We're committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/US. Gain customized access to our insights by downloading our thought leadership app: PwC's 365™ Advancing business thinking every day Learn more about PwC by following us online: @PwC_LLP, YouTube, LinkedIn, Facebook and Google +. © 2014 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC US refers to the US member firm, and PwC may refer to either the PwC network of firms or the US member firm. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.