Are you getting your Post Acquisition Integration right to realize the synergistic value?

Once the deal is concluded and Day 1 of the change of ownership is defined, the acquiring entity should back-work and determine what would be ready by Day 1 as full integration and what would be done in a phased manner. Equally important is the periodic evaluation of the benefits realization to be sure the acquisition integration is yielding the benefits of synergy as defined in the business case. Only when the acquiring entity can confirm that the benefits are realized as per the business case or closer to it would an acquisition be called as successful.

There may often be no mistake in the acquisition, but acquisition can become a failure. The primary reason for that failure would be attributed to poor post-acquisition integration management and poor change management.

This will be very regretful and can even impact the valuation and credibility of the acquiring company. Hence, the post-acquisition integration framework must be followed to ensure the integration is completed as planned and monitor whether the benefits are realized.

We are covering the various blocks of the post-acquisition integration framework at a very high level for the readers to understand. We focus only on finance and allied processes and do not address overall integration.

What are the Nine Blocks of Post-Acquisition Integration Framework?

1. Integration team – Formation and Functioning

2. Financial Accounting – Integration

3. Management Accounting – Integration

4. Financial Systems – Integration

5. HR Integration from a Finance Perspective

6. Treasury and Cash flow management

7. Compliances – Tax, Regulatory and Legal

8. Corporate Communication

9. Benefits Realization

1. Integration Team – Formation and Functioning

a. Formation of the team:

• Identify key stakeholders for each track for the acquiring and acquired companies to be part of the dedicated integration team.

• Identify the Integration lead or project manager who would be responsible for the complete Integration program, and he should have good working knowledge and capability to drive the same.

b. Define roles and responsibilities for various teams.

c. Define Program track-wise timeline calendar with process ownership.

d. Governance review by key stakeholders at regular intervals to track progress.

e. Mitigation actions were needed to be put in place proactively.

This team's ability to work collaboratively can only make the post-acquisition integration successful. Equally, it will be important for the organization's leadership to communicate to all stakeholders the criticality and importance of this project and the right support and attention which, when sought, should be provided.

2. Financial Accounting – Integration

The key person to lead the financial accounting integration and his team should be notified by the Parent company. This team must be a bridge to ensure the acquired company is at ease and smoothly aligned with the new ways of working. The main points to focus on are as follows:

a. Review the Financials of the acquired company.

b. If there are any discrepancies, they may need adjustment.

c. Understand the accounting policies and practices and bring consistency to align with the parent company.

d. Align the Chart of Accounts and Reporting structure/format.

e. Review the segmental reporting and a decision must be made regarding alignment with the parent company.

f. Review the financial data, schedules, and their granularity to ensure adequate control and, where necessary, change systems, processes, and working methods.

g. Do all data gathering to complete the business combination accounting and assessment of fair value, goodwill, and intangibles.

h. Speak to the acquired company's auditors and the parent company's reporting timelines. Should a need arise, the change of auditors may be initiated at an appropriate stage.

i. Review whether all internal controls are in place and commensurate with the nature and size of the business.

j. The integration team of the acquired company should do a workshop with the financial accounting team of the acquired company, do a walk-through of the monthly, quarterly, and annual closing timelines, and debate the challenges and options to be on the same page.

3. Management Accounting - Integration

a. The person who will be the Integration SPOC for FP&A activities has to be identified, and he should be knowledgeable from the acquired company side. A dedicated team must be established to hold a process alignment workshop with the acquired company.

b. The above team's priority should be to go through the Monthly Management reporting format, KPI, and financial metrics and their definition/computation. Align the same as per the acquired company. It must go as granular as from TB (chart of account), which line-item maps to which line item of management reporting must be put in place, and where allocation rules are needed.

c. There will be debates on how the business of the acquired company would be mapped to the parent company management reporting, such as whether it will be part of one segment entirely or into multiple segments or a new segment. Clarity would have to come on these on top priority.

d. Alignment of Profit and Cost centers is equally essential for capturing the cost pool and allocation. Alignment of allocation principles also needs to be on the same page. This will bring consistency in the data reported at the consolidated level; otherwise, the management will be lost in explanations only.

e. Periodic forecasting, rolling budgeting cycles, and annual and long-term planning cycles must be explained to the acquired company so that both companies are in sync on meeting deadlines.

f. There will often be a need to get the data of past periods for analysis, so teams in the acquired company should be asked to prepare the past data to align with the new format and template for the past period as may be required proactively. While this may not be consolidated for any sensitivity analysis or future decision, this would be relevant.

g. Management reporting dashboard must be aligned suitably, leaving placeholders for the acquired company's financial reporting and consolidation for management review.

h. All the stakeholders in the acquired company must be informed of the process of management reviews in the parent company, the need for readiness as a process, and the annual planning cycle. The relevance of various KPIs and financial metrics must be communicated so that both teams are in sync. This is an important step for the acquired company to fall in line to meet the parent company’s expectations.

i. At this stage, the acquired company needs to know the business case that the parent company has put in place to justify the acquisition, and the same indirectly will become their operating plan for achievement, which they need to work towards. If there are any disconnects, both teams should discuss it at that stage and have appropriate mitigation plans.

j. Some of the metrics may be better or poorer than the parent company. Wherever the metrics are poorer, there would be an immediate need to put a get-well plan to action with timelines and be monitored for improvement.

k. As part of synergy, multiple sets of actions will be on the cost optimization rationalization or redundancy front. These should be put into action on priority from the value or synergy realization front. The governance board would be keen to have updates, which would need focus.

l. Vendor/supplier rationalization and renegotiation would be significant in getting the best of both worlds by benchmarking the goods and services procured by both the acquired and acquiring companies.

4. Financial Systems – Integration

Below are the typical process steps the integration team follows, consisting of the core finance team from the acquired and acquiring company and the IT team. There will be threadbare discussions on various processes and tools to assess the best-fit processes and gap analysis on other processes. There is no straight textbook answer for this activity; it evolves based on experience, circumstances, and complexity. A wrong move here can cause more damage, so well-thought-through steps must be planned. To make your acquisition successful, pay attention to this to avoid rework.

a. Assessment of existing systems

b. Alignment of objectives

c. Choose the best-fit Integration approach.

d. Data mapping and cleansing

e. System configuration and customizations

f. Data migration

g. Integration testing

h. Training and Change Management

i. Go-Live

j. Transition

k. Documentation and knowledge transfer

l. Post Implementation Support and Continuous Improvement.

5. HR Integration from a Finance Perspective

· An HR Integration team should be put in place by the parent company to review all the HR policies and practices of the acquired company and align them with the parent company. Wherever there are disconnects, an impact analysis is done, and a decision needs to be planned to implement the changes.

· Systems and processes for aligning payroll and allied activities need priority and finance and HR must work together to ensure they transition smoothly and seamlessly. A similar approach must be done for any contract workers. On a progressive basis, the rationalization of resources and contract employees may be undertaken to improve P&L.

· The accrued liabilities of leave encashment, any open employee litigation and related liabilities, Gratuity provision, ESOP, open long-term incentives, and commitment need to be understood by both Finance and HR to account for the same appropriately in the acquiring company books.

· HR should assess to ensure all PF, ESI, TDS, and related compliances are in order, and if not, necessary steps have to be initiated to ensure that due controls are put in place.

· There are a couple of other activities that HR may undertake and keep finance in the loop where there are financial implications:

a. Compensation and benefits

b. Organization structure

c. Performance management

d. Staffing requirements

e. Open employee issues

f. Work environment and employee safety issues.

g. Cultural alignment

h. Employee engagement

i. Leadership engagement

j. Training and development

k. Continuous communication

Some of the activities need to be budgeted, and these need to be planned as part of the post-acquisition spending budget. Many activities may be planned, and timelines must be established and tracked for completion.

6. Treasury and Cash flow management

A Treasury management person should be named as part of the Integration team from the parent company to carry out the various integration steps mentioned below:

a. Compare the ways of working in treasury management function between both companies (acquiring and acquired) and align the same basis best practice.

b. Review the cash pooling and liquidity management:

· Bring centralized visibility to the entire cash position and liquidity of all banks.

· Study the cash pooling arrangements and see if proper controls are in place for clear visibility.

· Check for the cash liquidity requirements and verify if the cash flows are commensurate.

c. Financing Strategy alignment leveraging banking relationship:

· Review the cash flow needs in the short term and long term and assess the liquidity requirements.

· Study the debt-equity structure and make appropriate financing decisions.

· Review the current credit limits and examine if there is a need to renegotiate the bank financing structure to make it efficient.

· Examine the banking relationships and, where necessary, rationalize several banks and check if the terms offered are optimal in line with the parent company or renegotiate all terms.

·     Review the set of bank signatories and incorporate necessary changes as deemed necessary.

d. Risk management assessment – Assess policies and practices followed on Forex hedging and get them aligned as per the parent company. Also, the interest rate risk and credit risk must be assessed, and they must be duly aligned. Further, the insurance policies and their coverage should be reviewed, and the preferred rates of the Parent company should be leveraged appropriately. Overall, the objective should be to ensure no open risk. At times, changes might be possible during renewal only.

e. Technology Integration – The acquired company must also use the tools the parent company uses to ensure that all companies are on the same platform and that there is a seamless way of working. Doing this quickly is vital for real-time visibility of funds and action.

f. Compliances – Review whether all compliances are met and filings are done on time, and if there are any corporate-mandated additional compliances, the same needs to be understood by the acquired company and be met.

g. Training and continuous development will be a continuous process.

7. Compliances – Tax, Regulatory and Legal

A compliance integration team should be put in place by the parent company to review the following three areas:

· Tax compliances, Tax policies alignment, Tax structures efficiency.

· Regulatory compliances, Labour compliances

· Legal compliances.

Typically, the process would be that the team checks the as-is compliance and non-compliance and the necessary steps for remediation if any gap is found. Further, all contracts, open disputes, and cases are reviewed, including the position taken, and the next steps are documented.

Take the list of Tax and legal advisors and see if they can be aligned with the Parent company.

Assess if there are any IPRs, trademarks, etc., and take control of the records.

Ensure the respective compliance teams are aligned with the parent company's working methods, and that record keeping is safe and secure.

8. Corporate Communication

The Acquisition announcement must be communicated comprehensively to all layers of the organization. The management needs to hold town hall meetings and periodic communication sessions to ensure proper cultural alignment.

All vendors, customers, and leaders should also be communicated to ensure there is no dilution of collaborative working.

Any employee grievance should be addressed regularly to ensure seamless integration of the company.

9. Benefits Realization

In any acquisition, there is a business case that is put in place which covers the following from a synergy point of view:

· Revenue – Entry into a new market, product segment entry, cross-selling, account mining, increasing market share, increase in revenue, etc.

· Profitability – Improvement in profitability% for the combined entity since there will be cost optimization at SG&A cost level. Where possible, optimization at the gross margin level would also be done. All these would be baked into the business case wherever economic bargaining is feasible.

· Working Capital & related Metrics: There may be scenarios of financing planned and optimizing working capital that also need to be tracked and monitored.

Overall, it is vital that the finance team ensures the business case and ROI are compared with actual progress. Any slippage or gap vs. what was envisaged initially not happening needs the attention of all stakeholders to put mitigating action to achieve the business case. If the business case is ambitious, it must be called out, and a realistic case needs to be drawn at the outset and agreed upon with the Board so that actual achievement is within the explainable range.