Planning the Integration
Planning for the Realities of M&A Integration
by Adam Smith
What must companies do differently to increase the probability of a successful integration?
With mergers and acquisitions (M&A) as an embedded growth strategy for companies across all industries, businesses are constantly searching for opportunities to leverage economies of scale and enhance their existing product/service portfolio. However, most research conducted on M&A performance measures shows that 65-75% of all M&A deals fail to meet margin and growth goals.
Think about that for a second.
A common growth strategy utilized by many successful companies fails to meet the expected growth and profitability measures at least two-thirds of the time! This holds true for conglomerates engaged in large scale acquisitions and for private equity firms focused on smaller scale acquisitions as part of a buy-and-build strategy. Logically, a strategy with such high of a failure rate is a target for rejection by any board member. However, the potential value in combining two or more synergistic businesses is too great to ignore.
There is not a magic answer for ensuring the success of every M&A transaction, but it is easily imaginable that a CEO who oversees three M&A transactions in their career would not be satisfied if only one was deemed a success. Admittedly, there are certain unforeseeable influences out of the acquiring company’s control. Changes in the economic or regulatory environment can negatively impact financial performance of the newly combined company. Conversely, there are many activities within the M&A lifecycle that a company can control to positively impact results.
To improve the probability of successfully combining two or more businesses, executives must identify where their organization’s greatest deficiencies exist related to executing activities within the M&A lifecycle. In other words, what must you do differently to increase your M&A success rate?
Acquiring companies typically invest a significant amount of focus and effort to perform the target identification, due diligence, and synergy assessment phases of an M&A transaction. It is vital for these activities to be performed well to ensure the company is making a sound business decision for its shareholders. As such, many companies have become extremely adept at identifying and valuing takeover targets. However, the focus and planning for integration is often overlooked.
Our experience shows the greatest improvement opportunity for companies during the M&A lifecycle is to increase the focus on planning for post-merger integration activities. This includes creating a robust integration playbook. A robust integration playbook should provide a holistic strategy and approach for performing integration activities.
Naturally, an integration playbook should align with the long-term strategy for the newly combined company. The integration playbook should take into account how the acquired company’s organization, enabling technologies, and business processes will be integrated to meet long-term operational and financial objectives. Without the right playbook, integration teams are unprepared to address the realities they will encounter. So what exactly are these hidden integration realities that companies will run into and how should they be addressed?
Organization Integration Realities
Arguably, the most critical and complex factor to the long-term success of an integration is how the newly combined organization will be designed. This includes determining whether to integrate the new business into an existing brand or let the business continue to run as its legacy brand. A common mistake many companies make is to simply look at role redundancies and begin to slash names without performing a skills assessment or evaluation. Acquiring companies tend to underestimate the impact differences in culture will have on how employees acclimate to the new organization.
For example, a company in the engineering and construction industry dealt with the side effects associated with organization integration activities. After years of serial acquisitions and the substantial resulting growth, the company didn’t realize expected synergies. A closer look at the situation revealed that the company did not develop an organization strategy prior to integrating each of the acquisitions. Each business acted as its own stand-alone entity, which resulted in a duplication of roles and unclear responsibilities related to ownership of key business processes. Each of these factors significantly drove up the cost of doing business.
There is no such thing as over-planning when it comes to preparing for the integration of a new organization. Acquiring companies must create an organization strategy and integration plan that incorporates the following items:
- Identification and description of critical roles and responsibilities
- Organization alignment expectations between geographies and product/service lines
- Assessment of employees’ skill sets and alignment with key roles
- Understanding of cultural differences and the impact on new employees
- Change management requirements related to new policies, procedures, processes, and technology
Accounting for the considerations above can assist with driving long-term success of the newly combined company. This includes ensuring proper alignment of people and roles, investing in training, and mitigating key causes of employee turnover.
Business Process Integration Realities
Many companies incorrectly assume acquired company’s business processes can be integrated with the newly combined business to achieve economies of scale. However, acquiring companies often find existing business processes are not scalable, not compliant in some areas and pose significant business risk.
For example, an acquiring company may assume the safety processes of the acquired company can be integrated without modification or additional cost. The reality is that the integration team will most likely find the processes require additional rigor to meet business and compliance requirements. These process changes will require additional resources and technology, negatively impacting the performance measures of the newly combined company.
A global manufacturing company made a significant acquisition. Following the integration, the company quickly realized the acquired company’s existing quality assurance processes did not comply with global requirements. The company was forced to establish more stringent processes and systems, which required additional employees to meet global standards. The cost of the new systems and resources had an unforeseen negative impact on the profitability of the new entity.
Companies must create a plan for assessing business processes to determine where potential risks or added complexities exist. A common example of an added complexity is the logistics associated with providing products/services to customers in new geographical locations. In addition, performing business in new locations typically results in the need to create processes for statutory and other compliance information requirements. Conducting necessary planning and incorporating the right business process considerations into the integration playbook can greatly improve the long-term profitability of the newly combined company.
Enabling Technology Integration Realities
Integration teams typically face the challenge of integrating an acquired company’s systems and data with the new parent company.
Teams often assume the newly combined company can operate on a single ERP platform without compromising business requirements. Although the new company might save technology support costs by combining ERP platforms, administrative costs can rise in the acquired business unit. An acquired company in this situation will create workarounds, custom solutions, and bolt-on systems to meet their needs.
For example, a global oilfield services company purchased a wireline business to add to its product offerings. The wireline business was forced to adopt the global ERP sales order system. The sales order templates in the global ERP system did not have the ability to capture billing information required by the wireline business customers. Each of the wireline business divisions and field offices were forced to create manual invoices. The additional procedures had a significant impact on resource requirements in the business units and negatively impacted collections. This is a prime example of an integration approach focused solely on meeting short-term integration objectives. The company is now faced with the decision of maintaining status quo or investing millions to customize the proper solution for the wireline business.
The optimal way to address the reality of system integration is to properly assess requirements and develop a future state strategy for how the newly combined company will utilize enabling technologies. In our experience, when making decisions related to integrating technology, companies often fail to account for their long-term growth strategy and additional complexities added by the acquired company. Common examples of added technology complexities include:
- Operations in new geographic locations
- Number and location of customers
- Number of additional products/services
There are times when enabling technologies can be rationalized and a single, integrated ERP system can be utilized. The decision must be vetted to ensure the systems selected for the newly combined company meet business requirements and facilitate the company’s long-term strategy.
Companies continue to grow through mergers and acquisitions. The long-term success of these transactions can be dramatically improved by adequately planning for the realities of integration. Creating a detailed and robust integration playbook, which incorporates the key considerations mentioned in this article, is a critical step to success.
Read below about five steps companies can take to ensure a successful integration.
A Successful Integration or a Pipe Dream?
by Peter Purcell
The recession in the early 2010s put a lid on acquisition activity among industrial product and services companies. The survivors had a chance to enjoy low cost structure with optimistic projections. The economy moving out of recession created an environment where the industrial acquisition-oriented companies could restart their growth engines. For some, it had been a while since an acquisition. It has been important that future integrations succeed to keep investors happy and minimize negative impact on profitable operations.
Following are five steps a growth-oriented company can take to ensure the growth engine runs well:
1. One brand = one company
There is a myth that it’s important to save an acquired industrial company’s brand following an acquisition or else risk the chance of losing customers. Our research has shown the brand is at the bottom of the list of corporate purchasing decisions. Brand = status in consumer markets, not in industrial markets. The more successfully integrated companies have established a single brand across the organization.
One brand sends a clear message to employees and the market. Following the acquisition, employees of the target company will spend more time working and less time worrying about legacy issues. Holding onto an acquired company’s brand after an acquisition makes it difficult for the market to truly understand the company’s identity. Is this a real company or just a confederation of independent entities? Lack of cohesiveness makes it difficult for investors to make educated decisions about purchasing stock in the growth-oriented company. Studies show that companies with multiple brands providing similar industrial services have a lower shareholder return than those with one brand.
2. Information transparency
Obtaining timely and accurate business information from an acquired organization is necessary to ensure compliance and operational efficiency. It is not good enough to integrate general ledgers so a single balance sheet, income statement, and cash flow statement can be generated for stockholders. That only provides high level financial information, nor critical information that drives behavior.
Developing a process for defining and gathering critical information from operations, finance, and sales will drive transparency to critical information. Companies need to identify and develop performance measures that can be captured consistently and leveraged across the company. Once the measures have been defined, a well-controlled reporting process should be implemented to allow management to monitor critical business activities.
3. Functional accountability
A key strategy for achieving the planned efficiencies by integrating the new organization is through standardization of processes. One simple way to help accelerate the adoption of these processes is to implement a functional reporting structure. This could mean that Division Controllers have a solid line reporting relationship to a Corporate Controller instead of the Division Operations VPs. A dotted line relationship to the Division Operations VPs can remain for operational accountability. This dual reporting structure helps these critical positions adopt and implement standardized processes across the company more rapidly.
4. Infiltrate the organization
One of the most significant integration challenges is getting people to understand and accept that they are part of a new operating model. One of the quickest ways to do this is to assign the best resources to positions throughout the organization, ensuring the right cross-pollination of ideas and culture.
The new organization benefits through the formal and informal network in which the “infiltrators” operate. When questions arise, the “infiltrators” can quickly reach into their network to get answers or share the historical perspectives that drive how the acquired company should be operating. When best practices are identified, they can be shared quickly through the network.
5. Our way or the highway
Resistance to the new organization’s ways will occur from those who don’t like change. The source of this resistance could be within either of the companies involved in the acquisition. If this resistance cannot be overcome by certain staff, they should be sternly encouraged to find opportunities elsewhere. In our research, we have found more than 80% of executives in post-merger situations wish they would have acted more decisively with the resistors.
If these individuals are not won over or re-tasked quickly, they can easily pollute the well and make it difficult to create and sustain the right culture for the new organization. It is often better to find an exit path for naysayers than to try convincing them things are better now than before.
None of these steps are easy. However, they are necessary to help ensure an acquisition-oriented industrial company obtains the benefits of new additions to the organization. Otherwise, the acquisition-oriented company may face unnecessary challenges with employees, customers, vendors, and shareholders.
At this point, you likely know integration comes with challenges. Continue reading to learn about the realities of integration and how you can prepare.
Stop Playing the Glad Game: Facing the Reality of Integration
by Peter Purcell
“Pollyanna” is a best-selling novel written by Eleanor H. Porter in 1913 whose title character had an optimistic outlook no matter how dire the circumstance. Whenever Pollyanna found herself in a negative situation, she played the glad game and found something good in it. Companies commonly have a Pollyanna-like outlook when an integration is announced.
The integration glad game starts immediately.
The buyer convinces involved parties the integration will be simple because both companies use similar systems, share accounting practices, and have similar cultures. Enthusiastically touted are new opportunities to cross sell, the prospect of sharing a highly motivated sales force, and the potential cost savings associated with a smaller back office staff.
The buyer tends to look for the positives without planning for the real issues.
Reality is much different. Synergies are overestimated and pro-forma financials are rarely achieved. Companies find surprises once the acquisition or merger takes hold:
1. Customers may not continue to do business as expected
Customers often perceive doing business with a company in the middle of a merger as difficult. Interaction with sales, operations, and accounting can be confusing as those organizations are integrated. Familiar faces are replaced and relationships need to be rebuilt.
Loyalty is especially tenuous when customers perceive quality differences in the brands for similar items. Customers will assume the lowest common quality denominator.
The integration team should develop and implement a strategy to ensure customer interaction remains transparent and positive.
2. Financial incentives are not enough to keep the best and brightest from leaving
Competitors will be eager to poach high performing sales and operations staff from both companies. Recruiters highlight the confusion that will stem from integration activities and play on fears that one organization or the other will win out from a staffing perspective.
Offering retention bonuses to high performers is not enough. Rumors need to be addressed immediately. High performing employees should be involved in the integration activities, and their future role within the merged organization should be clearly defined and shared. Poor performing employees should be terminated as quickly as possible.
3. Aligning systems and data is more difficult than expected
No two companies share the same systems with the same configurations, and most integration advantages will not be seen if the companies remain on separate systems. Getting an accurate view of inventory or sales would be difficult at best. Even if both companies have the same software, data is never clean or ready to convert.
Arguments break out in defense of each system, and re-implementation is often required. A well-defined system implementation approach with a realistic budget should be developed and included in the integration plan. Initially, the two companies will need to run separately with manual financial consolidation. But once integration efforts are well underway, the new system should be implemented.
4. Organizational roles differ more than expected
Buyers assume the easiest integration efforts will be around the back office. But no two companies structure or run back office functions the same way.
Accounts Receivable in one company is responsible for handling claims, but Sales takes on that role in the other. And the list goes on. Tension between organizations will rise as responsibilities are reassigned. Customer service will suffer as employees focus on protecting their turf.
A clearly defined organization chart with roles and accountabilities needs to be developed and deployed. New, fit-for-purpose processes, policies, and procedures should be shared across the new organization.
While we do advocate positivity and optimism, we also know how to plan for reality. Trenegy helps companies successfully manage integration and realize the expected profits by establishing an Integration Management Office and developing and communicating a clear vision for the future state. We help our clients prepare for growth and change quickly and relatively painlessly.
To ensure a successfully integration, strong leadership is crucial. Read on to learn more.
M&A Success: 4 Traits Your Integration Leader Must Have
by William Aimone
Theodore Roosevelt’s legendary character traits left an indelible mark on his legacy. His metaphorical quotes such as, “The buck stops here,” and “Speak softly and carry a big stick,” are intertwined in many management and leadership discussions. Teddy Roosevelt is famous for identifying and completing impossible initiatives, from organizing the Rough Riders to completing the Panama Canal and creating the Navy’s Great White Fleet. Roosevelt’s traits are a model for selecting the right executive to lead a complex change initiative in an organization. The most complex is the merger or acquisition integration process.
The selection of the right acquisition integration executive could make or break the integration. Trenegy’s research has revealed four core traits an integration executive must have for merger integration success.
Roosevelt accepted accountability by announcing, “The buck stops here.” The chosen integration executive should have the authority to make the final call on any and all decisions regarding the integration, regardless of popularity with the other executives. This may include overriding other officers in the organization. It is not unusual for the target company to hold on to legacy processes, and a strong executive leader will immediately force the acquired company to adopt new processes. A strong leader needs the ability to carry a big stick. It should not be an interim or contract executive—it’s difficult for outsiders to have the authority needed for success.
2. Infectious optimism
Roosevelt’s optimism can be encapsulated in his quote, “Believe you can and you are halfway there.” Integration efforts are tough. Inevitable bumps in the road and seemingly never-ending issues can cause project teams to fall into a trap of negativity and hopelessness. The leader of a successful merger integration celebrates successes while encouraging optimistic problem solving. Moreover, the leader’s optimism should be reflected when providing integration team updates to the executive team and board of directors. When the integration team has encountered multiple failures and work seems endless, leaders should take heed. Scheduling an unexpected outing, such as bowling or paintball, can reinvigorate the team and enable fresh thinking.
Although an avid hunter, the legendary story of Roosevelt’s compassion for a black bear led to “Teddy” bear becoming a household name. During a merger, people can easily get burned out or quit when the going gets tough. The integration executive should be willing to listen when work-life balance issues arise and be willing to budget for supplemental resources. Good leaders will budget an extra 10% in the integration G&A budget for potential resource needs. This budget line item should be above and beyond any contingency in the integration budget.
Theodore Roosevelt’s respect from foreign leadership enabled the United States to be elevated and highly respected. Likewise, the integration leader should be well respected within the organization. Respect helps in diplomatically negotiating and resolving challenges among executives. Further, the respect of the integration executive should translate to respect for the integration team. Requests from integration team members should garner immediate attention throughout the organization. This ensures accelerated decision-making and a more thorough transition process.
This is not an exhaustive list of all the Acquisition Integration Executive traits needed for success. However, an executive’s traits are more important than their title or role. Many organizations automatically slot their CAO or CIO for the role. However, we have seen many clients fill the integration executive role successfully with internal audit and operating vice presidents.
Even with solid leadership, an integration will require change—new processes, new organizational structure, consolidation, and more. Read on for guidance in managing these changes.
Integration Best Practices
Honey, I’m Moving In: Managing Acquisition Integration
by Justin Gibson
Ask any married couple about first moving in together and you’re certain to hear everything from, “He kept a hideous couch from his bachelor pad!” to “She commandeered the bathroom!” The funny highlights are a welcome respite from tough, emotional decisions: Whose furniture goes to Goodwill? Who parks in the garage? Toilet paper roll up or down? Couples have to make countless adjustments.
Organizations often struggle to effectively integrate newly acquired companies. The rude awakenings encountered by newlyweds are amplified in a corporate union involving multiple stakeholders and millions of dollars. The most successful organizations follow these integration rules:
Don’t Dismiss the Ratty Couch
Employees will be uncomfortable in the early stages of integration and are susceptible to other opportunities. It’s important to identify the departments and employees critical to the new organization during integration planning. Pick the best from each company, taking advantage of integration activities to eliminate ineffective departments or employees. Evaluate enterprise projects in the same way—determine which should continue and which should be eliminated. Use a combination of retention bonuses, clearly communicated long-term HR succession plans, and employee involvement to reduce the chance of losing critical resources.
Forget Who Used to Park in the Garage
The new organization must operate under a single set of business processes across similar functions to maximize shareholder value. Don’t assume the processes from one organization will always be better than the other. Both sides will have to compromise and adapt. Decide which business processes to use going forward and make the way clear. Create a realistic plan for rolling out and communicating standardized processes after the new organizational structure is established. Provide training and resources for employees whose roles are changing. It is likely that one group may need to pause to allow the rest of the organization to catch up. Not everything has to change at once.
Postpone Account Consolidation Until Ready
Every newlywed couple must decide whether to consolidate bank accounts. Consolidation involves more pain up front while separate accounts and accounting software require more long-term maintenance. Similarly, organizations must decide when to combine systems and information by using a consolidation tool or by migrating to a single environment. A consolidation tool can work well for a period, but a new system can be used as a catalyst for change and drive process consistency. A consolidation tool should be considered as an attractive short-term solution during reorganization. Once reorganized, the new company can take on a significant systems integration effort.
Surprise! I Like Toilet Paper to Roll from the Top
Even the most effective integrations will produce surprises six months to a year after completion. Nuisances are more obvious after the honeymoon phase ends. The merger and integration team must plan and budget for surprises. Typically, customers don’t do business as expected, financial incentives don’t keep the best and brightest from leaving, systems and data cannot be easily aligned, and organizational roles for similar functions are different than expected. Keep the integration team together to address these issues as they arise.
Well-planned acquisition integrations include a thorough examination of organization, processes, and tools. Identify critical resources, standardize business processes, select a common ERP system, and plan for surprises.
Acquisitions will require a large amount of effort from HR and Finance. Read on to find out how these departments can collaborate for maximum effectiveness.
Opposites Attract: 4 Ways for HR and Finance to Collaborate
by Rachel Claggett
Human Resources and Finance are often perceived as complete opposites. HR deals primarily with softer skills, relationships, and human interaction. Finance is focused on the numbers, and team members are known for analytical thinking. High performing organizations have strong collaboration between HR and Finance. Why?
HR and Finance must work well together because they steward the primary components of every company’s ability to do business—people and money.
Insurance and Risk
Finance has an excellent grasp of the costs/benefits and financial implications of certain risks. Risks are inherent with benefit and insurance programs, which are typically administered by HR. Finance needs to be involved when considering benefit risks and the financial implications. HR decides which program to use and Finance must understand costs, interest, policies, and processes for various providers. Likewise, HR must understand the financial implications before the right choices can be made.
Self-insurance is an old concept, yet providers sometimes encourage companies to self-insure. In the short-term, self-insurance could save money since a certain amount is simply set aside for employee coverage. Unfortunately, the true savings are less than insurance providers would admit.
Self-insurance causes a high amount of risk when considering the economy, employee demographics, and claim fluctuations. A large amount of cash is tied up in self-insurance funds and companies have less wiggle room when the economy goes bad. If more than 50% of Company A’s employees are females between 25-35 years old, statistics say most will start families relatively soon. Demographics could result in very high amounts of short-term healthcare spending. If several employees require major care in a short time frame, employers can have a difficult time funding self-insurance programs. HR and Finance must communicate to assess qualitative human risk factors with potential quantitative cash impacts.
Wages are always considered when evaluating the cost of doing business. Factors such as geographic location, government regulation, and market demand all have impact on competitive wages. HR compensation groups typically work closely with legal to keep up with labor laws and industry trends, yet Finance must be involved when wages—both salaried and hourly—are determined and set. Compensation and profitability are closely tied since labor is usually a large part of the company cost structure.
Project-based companies, for example, rely heavily on wage information when generating project bids. Finance and commercial groups often work together to calculate optimal bid structures to remain profitable. Payroll costs play a large part. Building a new manufacturing plant tends to be costly, not because all materials are particularly expensive, but because of the highly skilled labor required to ensure quality. Highly educated and experienced engineers are needed to design the facilities and plant layout, taking into account the most efficient flow of operations and integration of shop floor automation systems. The lion’s share of the price tag is in skilled labor required to successfully finish the project, pay the employees, support the back office, and profit from the venture. The Finance department is instrumental in projecting the costs and how projects should be priced accordingly. HR provides the compensation guidelines and benchmarks used in the calculations to Finance.
When it comes to retirement, Finance and HR departments should agree on company contribution amounts. Is offering a pension feasible? If so, at what rate should contributions be made? Does employer 401K matching begin to vest on day one, or after a year of employment? HR must consider that beginning contributions after a year could help with employee retention but also may turn people away from job offers. Finance would be a proponent of a wait period since delaying certain vesting of benefits improves cash flow. It’s a delicate balance between taking care of employees and managing costs.
A small manufacturing company acquired a much larger company, resulting in a headcount jump from 4,000 to 14,000. Prior to integration, the smaller of the two companies contributed 3% to its employees’ 401Ks regardless of whether or not the employee contributed. If the acquired company only contributed 1.5%, a decision had to be made when the two companies became one. Prior to the integration, HR and Finance must work closely together to evaluate both contribution strategies and determine the optimal path forward. Increasing contributions for 10,000 new employees from 1.5% to 3% could have a significant financial impact. Not changing either plan could cause employee attrition. To come to the right conclusion, HR should provide Finance with headcount information, start dates, and other necessary information. Finance will run several scenarios, and ultimately, leadership from both departments should sit down to hash out the best course of action. Once a choice is made, Finance will be responsible for projecting financial impacts of the changes and HR will manage employee communications and relations.
In the above scenario, an intelligent, well-informed decision could not be made by HR or Finance alone. The two departments must be closely aligned on major decisions impacting both people and money if positive results for both employee and company are to be realized.
Many organizational KPIs are people-related, such as employee turnover, cost/FTE, and performance ratings. They contribute to LTIs, stock options, and other performance-based incentives, all of which have a financial impact. HR manages distribution of incentives yet must work with Finance to understand implications of bonus plans on the bottom line. HR and Finance should collaborate to ensure LTIs are used correctly on the balance sheet and match up with EBITDA targets. Reporting KPIs is often performed by both departments, but the reports often contain different sets of data. Finance naturally excels at numbers and can perform the calculations based on assumptions and metrics provided by HR. HR should administer performance rewards and Finance should help to ensure the calculations are correct and perform accruals and booking. Collaborating ensures each department utilizes their strengths to provide the most benefit to the organization as a whole.
HR is charged with managing employee relations and tracking performance management. Finance is good at measuring KPIs, managing data, and identifying financial impact. A close combination of the two is critical to understanding and optimizing performance.
As HR and Finance are optimally collaborating, acquisitions require another key department—IT. Read below to learn more.
Don’t Overlook IT Infrastructure During Acquisition Integration
by Jenna Howe
When planning mergers and acquisitions, it’s easy to forget about IT because most executives are focused on financial reporting and operations. It’s easy to take email access, working phone lines, and software applications for granted. However, without diligent planning and project management, merging IT infrastructure can cause huge disruptions in daily business. An organization undertaking an acquisition can ensure critical business processes continue without interruption by adhering to these four principles:
1. Network cutovers must adhere to a timeline
The network is the core of office communication. It is the way field employees and data communicate with the corporate office, whether it’s sending an email or transmitting production data. For example, if a foreman is trying to upload well data into ProCount but has no internet connection, production data cannot be reported. Without up-to-date production data, the corporate office can’t report well revenue and costs in an accurate or timely manner.
Network equipment like routers, switches and circuits, must be available and installed before the cutover can take place. The network architecture must be finalized before critical business processes, such as turning up SCADA, can happen. At this stage, it’s crucial to review resource availability, internally and with vendors, to adhere to a firm deadline.
2. SCADA transfers happen in parallel with the network cutover
SCADA data, or automated production data, is among the most important company data. Replication servers that are usually found in data centers function as a backup and must be reconfigured and tested to ensure they communicate with onsite servers. SCADA must be communicating with the new network before the old network is cut off. If this order gets reversed, there’s a risk of losing important data.
In an ideal world, the whole company would be on a standard SCADA system with identical system architecture and equipment between sites. It’s important that an internal resource has functional experience with the SCADA system and has the working knowledge to support and troubleshoot it.
3. Hardware updates affect the physical equipment employees will be using
Merging offices will require upsetting people’s daily routines to establish new ones. Computers need to be reimaged with new company standards, covering everything from desktop images and printer drivers to software applications like WellView and ProCount. When possible, use remote login to take inventory of applications in use at field offices. This will help determine what applications will be used going forward and if there is additional software that must be added to the company portfolio.
4. Testing is the final step in cutting over an office
Bring internal resources to branch offices to check each user’s ability to connect to the internet, place calls, and connect to printers. Face-to-face service builds relationships between IT staff and remote office employees. Onsite internal resources give employees access to immediate help should issues arise with opening or submitting data through new applications. It’s also an opportunity to provide one-on-one end user training and reference materials to employees.
Once it’s confirmed that all new systems are functioning and everyone can complete their daily activities, the office has successfully been cut over to the new network. While it may seem like small potatoes in relation to the operational and financial integration that takes place during a merger, IT integration is the foundation for bringing in new employees and data.
As you can see, there are many moving parts during acquisitions. Read on to learn how to address them in an E&P company, specifically.
Oil & Gas Integration
E&P Company Acquisitions: Avoid These Pitfalls
by William Aimone
Exploration and Production (E&P) companies face unique data challenges when integrating newly acquired assets. The sheer volume of land ownership, working interest, market contracts, and well information crossing multiple functions requires extra time and effort to clean up during the integration. Therefore, many E&P companies avoid much of the necessary clean-up work during integration. They may state, “We will clean up the data later,” and find themselves unable to make time for cleanup afterward. Avoiding cleanup causes inefficiencies in processing revenue, regulatory reporting, and land administration. Often, the result is material weaknesses, joint venture audit exposure, royalty owner lawsuits, excessive prior period adjustments, and delays in financial reporting.
Avoid the integration exposure by planning accordingly and paying close attention to these three areas:
Revenue and Land Decks
To process revenue accurately and eliminate manual revenue calculations, land and revenue decks must have complete information. However, royalty and working interest data from the acquired company is frequently incomplete and inconsistent across various business functions. This happens when critical information is housed in different places, often in spreadsheets. The effect is exacerbated when data updates don’t happen concurrently across the business, leaving a wake of inaccurate data.
Set expectations for a deck analysis and cleanup effort to ensure all interest and ownership is complete and accurate before the integration is complete. If a company mistakenly integrates assets with inaccurate working interest data, accounting staff will continue to build revenue calculations and maintain reports outside the system.
For example, an E&P company found a significant number of royalty interest and working interest burden discrepancies between the land and revenue decks. The company realized the deck information set up by the legacy company was not sufficient to process revenue. The company conducted a lengthy research and reconciliation process to align working interests, which allowed the revenue process to be automated and integrated in the new company.
Take the time to understand what information is required in an acquisition. Armed with that knowledge, begin the cleanup process.
E&P companies often find the acquired company’s well master data is incomplete or contains a mix of completions, gathering points, storage facilities, and other cost centers. Moreover, the information describing each of the wells or completions may be inconsistent. Each well or completion has dozens of assigned attributes in the well master database for reporting and analysis. Attributes include spud date, production status, bottom-hole location, API number, impairment group, etc.
Depending on the size of the acquisition, a significant well master design and cleanup effort must be included in the integration plan. Any manual processes to report and analyze well information outside the systems should be eliminated as a part of the integration process.
Well information is stored in various systems and departmental databases within an E&P company. This includes land, revenue, production, economics, drilling, AFE, reserves, and accounting. The challenge is integrating well information across each of these systems and departments when an acquisition occurs or a new well comes online, changes status, or is plugged and abandoned.
For example, the well lifecycle process often starts in accounting when initial expenses are allocated to the well. If property accounting assigns a cost center to a well which is not cross-referenced to a well in the production system, consistent production and revenue reporting will be an issue. Similarly, during an acquisition, the well lifecycle process begins again in the new company.
A clearly defined well lifecycle process is a must, regardless of whether or not the sharing of well information is automated. The integration process should be an integral part of the well lifecycle process.
Read below for guidance on achieving integration success as an oilfield services company, specifically.
3 Ways to Achieve Integration Success in Oilfield Services
by Nicole Higle
Oilfield services companies who grow through acquisition immediately expect revenue growth and cost savings. These expectations are rarely met because acquisitions are never completely integrated. Purchasers take the easy route of creating a subsidiary company, slapping on a new logo, and hoping for the best.
As the two companies expand, costs grow exponentially. During the inevitable downturn, the board puts pressure on the management team to cut costs by completing the integration. Oilfield services can achieve integration success by using a combination of top-down and bottom-up approaches to standardize terminology, standardize data capture at the field, and rationalize positions.
1. Standardize terminology
Companies make a big mistake by failing to standardize terminology during the initial integration process. It may sound trivial, but establishing a company-wide vernacular is critical to speaking the same language and managing consistently across service lines and areas of operation.
Companies fused together in a hurry may use terms like trucking, transportation, hauling, and logistics services interchangeably. These terms are easily interpreted in verbal communication, but translation is lost when accounting is required to book revenue. An accounting clerk will create new account codes for trucking, transportation, hauling, and logistics, resulting in a messy and duplicative P&L. This reporting nightmare can easily be prevented by consolidating the vocabulary used to describe trucking operations.
This same scenario applies to combining asset ledgers. Companies should define a consolidated asset register with company-wide naming conventions. Failing to standardize will cause confusion with operational areas who classify assets differently.
Oilfield services companies undergoing acquisition should utilize a bottom-up approach to standardize terminology to measure similar lines of business and fixed assets during post-integration discussions.
2. Standardize data capture at the field
Many services organizations struggle to push reporting demands down to the field. Standardized data is critical and the easiest way to start is at the field ticket, straight from the source of revenue. The most important data to field service organizations are equipment, billing details, and employee time, which all depend on operations capturing it at the well head. It’s important to not establish this as a corporate-driven initiative. Pushing ownership to the field creates buy-in to the data capture process, which is imperative to capturing accurate information.
Companies that start at the well head and use the bottom-up approach are much more effective. Be consistent with customer-facing documents and establish a cross-functional team to define a standardized field ticket. This will provide a variety of perspectives, which will yield far better results than a bunch of office employees who are disconnected from operations.
After the data captured in the field is standardized, the organization can focus on improving the processes which support field data collection at the well head. Mobility tools or tablets can help automate manual data collection and integrate easily with accounting and reporting tools.
3. Rationalize back office functions
Tone at the top ultimately drives decisions for strategy and people placement. Services companies buy a similar business and retain the full staff of both companies. The more, the merrier, right? Not necessarily. Wiping out the entire staff of an acquired company is harsh, but it’s important to rationalize back office functions to cut unnecessary costs.
Clearly define roles and responsibilities across the business and avoid creating new positions to keep the peace. Personnel who don’t buy in to the acquisition or vision of the growing organization are prone to becoming disruptive, which can easily transgress to peers and direct reports.
Oilfield services companies are not in business to employ people, they are in business to make money. Search for places where duplicate positions can add value and pose the question: Is there a place for this person in the new organization?
Integrating organizations is complex, but oilfield services companies can make it easier by standardizing terminology, standardizing field tickets, and streamlining back office functions in the organization.
GE Oil & Gas and Baker Hughes Merger: Opportunities for All
by William Aimone
The GE Oil & Gas acquisition of Baker Hughes will create tremendous opportunities for new GE, the existing regional or specialized oil and gas services companies, and the companies yet to exist. The U.S. Justice Department required GE to spin off its Water and Process Technology Division. The creation of a new company generates new opportunities. Regional and specialized services companies competing against the new Goliath will find themselves at a competitive advantage. Going forward, they are competing on agility and responsiveness with one less Goliath in the oil patch.
Newly created and current regional players will be ripe for success. But why?
First, company spinoffs continue to outperform the market. The Guggenheim exchange-traded fund CSD focuses on investing in six to 30 month-old spinoff companies. CSD has outperformed the S&P 500 by almost twofold in 2013. Spinoffs provide a unique opportunity for a company to start fresh. The new company’s executives are no longer under the directives of the mother ship and often experience a sense of optimistic liberation.
Second, regional players are more agile than the massive Goliaths in the market. The regional and specialized players can quickly respond to customers’ needs, slipping in as the replacement service provider. The larger company GE Oil & Gas staff may find themselves encumbered with checking their every move for compliance with the new corporate handbook.
We have worked with spinoffs and specialized service companies to achieve outstanding results by focusing on the following five core principles:
1. Eliminate waste
A new spinoff or specialized service provider aiming for success will simplify business practices and eliminate waste. Targets for simplification include back office administrative tasks. Simplifying budgeting and reporting is usually the first target to reduce any unnecessary administrative burden on operations.
In practice: We helped a large oilfield services spinoff eliminate more than 100,000 hours per year by overhauling the legacy budgeting process. The fallout was an elimination of more than 100 reports and spreadsheets containing mounds of CYA data.
2. Shed excess information technology
In the immediate term, the spinoff organization typically has no choice but to use the former parent’s ERP environment under a transition service agreement (TSA). Moreover, the specialized services company systems are fit for operational purposes instead of fit for the often bureaucratic parent. One of the first priorities is to shed this expense as quickly as possible by moving to a fit-for-purpose ERP.
In practice: A mid-sized oil and gas spinoff was under a $10 million per year TSA agreement for ERP and systems support. When the spinoff implemented an ERP that closely reflected their business needs, the cost was less than half of the annual TSA support fees. The new ERP annual administrative support cost was less than 10% of the TSA annual fees. The return was realized in less than one year.
3. Choose people for success
The newly appointed spinoff executive team is positioned to handpick management. Typically, the former parent company will attempt to slough off dead weight and move poor performers into the spinoff organization. Do not allow this to happen.
The specialized services companies have an opportunity to handpick talent from the newly merged Goliath. Highly talented engineers and sales professionals often find the new larger bureaucracy is not for them.
In practice: The shrewd spinoff executive team from a newly formed chemical company resisted the pressure. The spinoff CEO and CFO halted the random assignment of employees and began an intentional selection process for management positions. The spinoff was marketed as an avenue for people to be a part of something new and exciting. Positioned properly, the best and brightest can be attracted to the spinoff.
GE Oil & Gas has an opportunity to gain global market share, but the new company must go through some level of realignment of people, processes, and technology to remain lean and nimble.
4. Reorganize the corporate structure
Combining two organizations always involves the integration of two different organizational structures. The priority is setting the structure of operating units.
In practice: A global oil and gas drilling company merger allowed our client to examine the differing corporate structures and pick the best of both. The company completely reorganized global operations. Following the change in operations, the finance, human resources, and information technology functions followed suit. A 30% reduction in general and administrative costs was achieved, and the company outperformed analysts’ profitability expectations.
5. Rationalize business processes
A merger creates an opportunity to streamline and simplify business processes. Rationalizing business processes should start at the corporate office.
In practice: We worked with one of the largest energy company acquisitions and helped the company completely overhaul the planning, forecasting, and reporting processes. The new process cut thousands of hours out of the planning process and reduced the mountains of reports by 50%. Operations could focus on execution instead of never-ending corporate planning meetings.
For GE Oil & Gas, regional specialized players, and the spinoff companies that result, the months to come will be an interesting time. Make the most of the coming opportunities.
Acquisition Integration: What We Learned During the Pandemic
by William Aimone
Getting the most value out of an acquisition requires harvesting the best of both companies for long-term value and speed of integration. At the core of any integration is the goal of companies operating together as one. One of the most time-consuming and labor-intensive steps is combining both companies’ systems and data into a single streamlined IT environment.
In March 2020, the COVID-19 pandemic caused nearly all businesses across the country to transition to remote work. Our IT integration teams and clients moved to a work from-home-model, which was a significant change that threatened all integration timelines. The teams were accustomed to working in large conference rooms and walking down the hall into managers’ offices to get issues resolved. We all had to pivot to a new work environment overnight.
The 2020 pandemic had the potential to thwart several of our client’s plans to achieve their integration goals. The right combination of people, project management tools, and governance processes were required to stay the course and achieve synergy goals.
People, Communication, & Project Management
Working in our favor, the joint Trenegy and client IT integration teams already implemented strong project management practices. The teams were using tools to communicate remotely since they were working across multiple client offices prior to the office shutdown. Furthermore, the scarcity of specialized resources required a few of the out-of-town technical resources to work remotely.
The teams immediately scheduled twice-daily check-ins for each of the team leads using Microsoft Teams video calls. Having the twice-daily calls let everyone know how important the integration work was to the client staff involved and helped keep lines of communication open.
The project and task activities were managed in Asana where anyone could see who was working on what, what was behind schedule, and what was completed. Asana also automated the status reporting process. From the start, we minimized time spent updating PowerPoint status reports and focused on getting real work done. The integration teams relied heavily on Microsoft Teams chat for online communication via their laptops or smartphones. We could see who was available for a meeting and when people were busy. Microsoft OneNote was used to track issues and open items.
In addition to the project management leading practices, we worked with our clients to establish a well understood IT governance process to keep the integration scope under control. A key component of establishing the governance structure is mutual trust and open lines of communications between IT, operations, and finance. At the same time, our Trenegy team had to remain flexible and stand ready to pick up any work that fell through the cracks. Rapid problem-solving techniques were used to make sure issues did not cause integration delays.
Another contributing factor to our clients’ integration success was gaining quick wins with an early integration of the systems with a smaller footprint. This also gave the IT integration team a cadence and governance model for going live with future systems.
Our client integration projects were completed on time and within budget. Looking forward, we are equipped to help any organization with an acquisition whether in person or remote. To learn more about how Trenegy can help your organization with an upcoming acquisition, email us at email@example.com.
Why Do Spin-offs Continue to Outperform?
by William Aimone
Company spin-offs continue to outperform the market. The Guggenheim Exchange Traded Fund, CSD, focuses on investing in six to 30-month-old spin-off companies. CSD outperformed the S&P 500 twofold from April to October 2020 (the past six months). Does this imply former parent companies make poor decisions by spinning off high-return assets? Not necessarily.
Spin-offs provide a unique opportunity for a company to start fresh. The spin-off’s executives are no longer under the stranglehold of the mother ship and experience a sense of euphoric liberation. The liberation translates into eliminating any hints of what was previously hindering the company from decision making and competing effectively. We have worked with spin-offs to achieve outstanding results by eliminating waste, adopting fit-for-purpose ERP solutions, and only working with people who will make the company successful.
A new spin-off with eyes on success will rationalize or simplify business practices and eliminate waste. Targets for simplification include back office administrative tasks. Budgeting and reporting is usually the first target. A large energy spin-off was able to eliminate more than 100,000 hours per year by overhauling the legacy budgeting process and adopting a fit-for-purpose process. The fallout was an elimination of more than 100 reports and spreadsheets containing mounds of CYA data.
In the immediate term, the spin-off organization usually has no choice but to use the former parent’s ERP environment under a transition service agreement (TSA). One of the first priorities is to shed this expense as quickly as possible by moving to a fit-for-purpose ERP. A mid-sized oil and gas spin-off was under a $10 million/year TSA agreement for ERP and systems support. The spin-off quickly implemented the right ERP solution at an implementation cost of less than half the annual TSA support fees. The new ERP annual administrative support cost was less than 10% of the TSA annual fees. The return was less than one year.
People for Success
The newly appointed spin-off executive team can be in a position to handpick management for the new company. Typically, the former parent company will first attempt to slough off dead weight and move poor performers into the spin-off organization. The shrewd spin-off executive team from a newly formed chemical company resisted. The spin-off CEO and CFO turned the tables and halted the random assignment of people and began an intentional selection process for management positions. The spin-off was marketed as an avenue for people to be a part of something new and exciting. Positioned properly, spin-offs can attract the best and brightest.
Unfortunately, the former parent company is left with dead weight. Those who administer the legacy back office functions are now doing as much work for a smaller company. The parent company reabsorbs the expired $10 million TSA charge for ERP support, and much of the excess overhead remains with the parent company. To address the dead-weight issues, the former parent company must go through some level of re-alignment. Read more about how an organization can align itself for success here.
At Trenegy, we work with spin-offs to improve efficiencies and ensure the organization is set up for success. To learn more, feel free to reach out to us at firstname.lastname@example.org.
3 Secrets to Spin-off Success
by William Aimone
Amid uncertainty in the energy markets, companies are looking for more drastic ways to improve cash flow. Specifically, lenders and analysts want to see companies reduce their general and administrative (G&A) expenses. One way to cut costs is to spin off unique assets or lines of business.
The decision to spin off assets is complex and undertaken for reasons such as increasing profitability, refining product focus, or complying with regulatory requirements. The latter, regulatory compliance, has induced many energy industry spin-offs resulting from acquisition by major energy companies.
For a spin-off to be successful, the new company must have a clearly defined and differentiated offering, the right people in the right organizational structure, and fit-for-purpose technology.
For a parent company to spin off an efficient, high-functioning subsidiary, a clear product or service delineation must exist. Precise segregation grants the spin-off a singular focus on design and service delivery. A company that operates a pipeline and manufactures valves will have an easier time spinning off valve production in its entirety rather than spinning off based on geographic location. The delineation comes from what drives complexity within an organization, and complexity is typically derived from the product offered and how it’s delivered.
Similarly, an E&P company that operates both CO2 injection and high-pressure wells could potentially benefit from spinning off their CO2 injection assets as operating CO2 wells requires a specific skill set and specialized technology. Spinning off would allow the company to eliminate entire systems and resources specific to CO2 activities. Spinning off unique assets allows both companies to focus on core functions with the intention of improving profitability, quality, and service.
A spin-off’s executive team is charged with maximizing productivity using the most efficient organizational structure. Decisions such as the number of employees to which departments or functions will be outsourced are often based on capacity and risk management. It’s less risky to outsource payroll services than industry-specific accounting functions due to the universal nature of payroll as opposed to the unique nature of land, joint interest billing, and revenue accounting. Outsourcing considerations depend on which functions are unique to the business and which are universal across industries. Strategic functions are rarely the first candidates for outsourcing.
Organizations spinning off from parent companies will go through several iterations of change, allowing visibility into which positions are necessary and which can be combined. Once the organizational structure is finalized, invest in relocation and executive search services to ensure quality candidates and efficient hiring. Though it’s tempting to allow some employees to split time between companies, it’s important to assign employees to only one organization and be willing to let employees leave with the company that is spinning off.
There will be a transition period as two separate entities are formed. It’s tempting to assign transition activities to employees of the former parent company since they’re knowledgeable regarding business functions and data. In our experience, it’s better to include the new employees of the spin-off in the transition activities to familiarize them with new processes and help them become independent from the parent resources.
In most cases, a spin-off will be a smaller, more focused operation, which will significantly change business processes and data collection. Major technology—especially the ERP system used by the parent company—will likely be too robust or too specific to the requirements of the parent company’s structure. It’s important to analyze the current system and capabilities to assess other available options. Smaller, more financially feasible systems are available for companies with less data and simpler processes.
During the transition period, the spin-off will most likely be under a Transition Service Agreement (TSA) for use of the parent company’s technology until the spin-off can function on its own. Commonly, TSAs are more expensive than licensing a new ERP, so it’s beneficial to implement a new ERP as quickly as possible. Help from the system provider, outside consultants, and sufficient support from decision makers and internal resources will ensure a smooth and successful implementation.
Smaller systems outside of the ERP should be thoroughly assessed and consolidated based on business requirements and system functionality. Rather than using a robust document storage system, a new spin-off could use a cloud-based system such as OneDrive or Dropbox to share files. Rationalize the specific operations systems to decide which ones can be eliminated. In doing so, recent spin-off client was able to eliminate 35% of its operational systems and reduce G&A dramatically. As a result, the parent company discontinued all licenses associated with the new company and reduced its own recurring costs.
Spin-offs provide an unusual opportunity for a fresh start. A spin-off is most successful when the assets are unique, organizational structure and business processes are optimized, and systems are purchased or configured to fit the new organization.
For more information or to talk with the Trenegy team about spin-off success, email email@example.com.
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