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• 🌎 World famous CFO Secrets

• ✅ Done the deal… What now?

• 🗳️ Vote on the content for the next series

There are a LOT of new subscribers this week. Thank you all and welcome. You join us for the 30th edition of CFO Secrets. You can find the archive of previous posts at www.cfosecrets.io

And if that isn’t enough … we smashed through 20,000 subscribers.

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THE DEEP DIVE

Post Merger Integration: Now the Hard Work Starts

This is the final week in an 8 week series covering the corporate M&A process.

We’d pulled off an unlikely acquisition.

Underdogs from the start, but winners by the end.

It was the biggest deal I’d ever been part of. And still is today.

We were growing quickly, cash generative and profitable. But scrappy, and not corporate.

They were bigger, more ‘sophisticated’, and with a stench of institutional arrogance.

We were the buyer, they were the bought.

Now it was ours, we had to get this business working the way we wanted.

“We’ll cut through the corporate bull sh*t, and get this oil tanker moving like a speed boat again.”

Sounds great. Hard to do.

The truth was this.

Unless we moved fast and hard, this was going to end up a ‘reverse takeover.’

Where the buyer can’t digest the business it bought.

Like when an ambitious young lion tries to take down an elephant. But the lion ends up getting trampled.

I’m not talking about deal itself here. That is done.

I’m talking about the things that will make the deal a success.

Operations, process, systems. Culture. Especially culture.

The value here was all unlocked by getting SmellyBigCo to behave like us. Not the other way round.

I was excited. A young head of corp dev, getting to see a real life HBR case study up close. Here we f*cking go.

On the day after closing, a small team heads into the sparkly HQ of our favorite new toy. It’s the CEO, Chief People Officer + a couple of HR execs, and me. Odd mix I thought…

We didn’t carry a sink in, but if I could do it over again, I would.

Long story short.

After a brief meeting with the top 10 execs as a group, the CEO decided to fire all them.

Most had signed severance agreements by the end of the first day. It explained the HR heavy entourage.

Some of them were well known to be the best operators in the sector. Much more experienced than our current management team. Some of them, I’d been looking forward to working with. Surely their capability was part of what we’d bought? I was confused, and fascinated in equal measure.

I had to know, why.

After a couple of weeks of working closely with the CEO, I plucked up the courage to ask the question. Why had he bulleted ten experienced and credible execs of a business we didn’t yet know? And right when we needed them most?

His response:

“We need to change the culture. And I need the thousands of people in the business to deliver that. Every one of those people worked for one of those ten execs. When I met the ten of them, it was clear they hadn’t decided what they thought about us and our takeover. And until they’ve made up their mind, nothing will change. Or I could take them out. So, I did took them out … ya know, just in case.”

Brutal. But it was a stroke of genius.

By removing the top team, it exposed a layer of talent underneath. And created a burning platform.

By combining the best of ours, and the best of the CXO - 1 in the target, we had a young, hungry management team. Loyal to the CEO and the vision.

It accelerated culture change, system and process integration. And that was the key to hundreds of millions of equity value in synergies.

Today we round up the series, by talking about what happens once the deal is done.

But before we do, there is a 30% chance you joined us part way through this series on M&A. So lets recapped what you may have missed:

• Week 0 - Introduction to M&A

• Stage 1 - Before the Deal

  • Week 1 - Why Business Buy Other Businesses

  • Week 2 - How to Value a Business

• Stage 2 - During the Deal

  • Week 3 - How to Build a Deal Team

  • Week 4 - The Buy Side Process

  • Week 5 - Quality of Earnings

  • Week 6 - How to Sell a Business

  • Week 7 - Working Capital in M&A

And a reminder for new readers, this series focuses on corporate M&A (i.e. big deals).

If you would like to see how I approached an SMB acquisition, read about it here.

Back to today’s topic. Post Deal.

Known as Post Merger Integration (PMI).

Let’s go back to the stat we started this series with.

According to Harvard Business Review 70-90% of M&A fails to deliver its objectives.

This often gets attributed to a failure to integrate businesses following a transaction. Whilst that is overplaying it, it is true that integration is very important.

Businesses are like wet clay after an M&A deal. They can be molded.

But after a while that clay will settle and become brittle. Change will become harder.

So, it’s critical to focus on the right things in the right order.

How do you organize it?

Break it into five stages:

1. Day 1 Planning (Before Closing)

2. Safe Passage (Months 0 - 1)

3. Fast Synergies (Months 0 - 3)

4. Integration (Months 3 - 18)

5. Long Synergies (Months 12+)

Let’s go one by one

1. Day 1 Planning (Pre Closing)

The textbooks will tell you to get your full integration plan ready to deploy for day 1.

This is bullsh*t.

It takes some wild arrogance to believe you can write a full integration plan before you’ve set foot in the business you are integrating.

But you should have a good high level plan, covering:

• Desired End State

• Safe Passage Checklist

• Synergy Plan

• Integration Management

Desired End State

The vision is important.

There will be a bunch of confusion, politicking and nonsense amongst middle management. As they all scramble to win the inevitable p*ss joust for their position.

A deeply uncertain time. Manage it well, and that is fertile soil for change.

Manage it badly, and the distraction will ground performance to a halt. In both businesses.

Having a ‘True North’ to refer to whilst you build up the detailed plan will be important.

A couple of pages written by the CEO on their vision for the combined business will be useful.

You may not want to share this widely, as some content will be sensitive. But the writing process will be clarifying.

Plus it can inform the comms strategy.

Write the Safe Passage Checklist

‘Safe passage’ will be the priority on Day 1. More on this shortly.

It refers to the safe transition of ownership; legally, financially, operationally, practically. In all facets.

It will be pandemonium on Day 1. And even worse on Day 14.

Having a checklist your team are working down will stop the work growing arms and legs. It will control the politics too.

Synergy Case

Remember that acquisition business case you wrote for the Board, big dog? The one that said you could land $50m of synergies through putting the businesses together?

Time to put your money where your mouth is.

Your synergies should be broken into 3 categories:

• Cost (Procurement savings, Headcount overlaps, Closure of Redundant Facilities, etc)

• Capital (Supplier Term Negotiations, Combined Inventory Reductions, Reduced Financing Costs, etc)

• Revenue (Cross Selling, Pricing Power, Geographic / Brand Expansion, etc)

You should also sort them between:

• Fast Synergies; Things to get delivered in first few months. Low Hanging Fruit. Focus on cost and capital synergies. More certain.

• Long Synergies; Big money, but hard yards. Need an integrated business to unlock. Likely to be 12 months + away. Less certain but more upside.

You can categorize them into a 2 × 3 grid.

Each item needs an owner and target value. You are going to have to hold people to account to deliver their bit. You can’t do that unless you’ve agreed the owner, target, and how it will get measured. Sh*ts about to get real.

Note: Measuring synergies is an art and science, we'll dedicate a newsletter to it sometime.

Set Up the Integration Management Office (IMO)

To manage a PMI delivery, you need a great IMO. Oh yes, there is so much Corporate Lingo Bullshit Bingo in M&A

An IMO won’t do any of the Integration work. But they will make sure everyone else does.

You do not understand the value of good project management until you’ve seen it help you.

Your nice 2D to-do list will get 4 and 5 dimensional in double time. And with overlapping interdependencies. Complex stuff.

The job of the IMO is to manage that complexity. And make it very simple for people to know what they need to do and by when.

And then make sure they do it.

They will set up the tracking tools. They will likely suggest daily project calls for the first 30 days, settling into a weekly or bi-weekly rhythm.

Note this is not about complex software and tools. It’s about the people and the process. A simple spreadsheet tracking system works fine.

The tracking system should get built for the lowest common denominator. And the lowest common denominator is often a dumbass called Dave or something.

2. Safe passage (Months 0 - 1)

So it’s Day 1. You have the keys. Well done big dog.

But just because it says your name on the share purchase agreement doesn’t mean you have ‘control’ of the assets.

Control is earned.

The goal here is to keep the business running ‘as usual’. Whilst at the same time establishing your control over the assets of the business.

In the example at the start of the post, the CEO took a shortcut to control. By wiping out everyone he thought might make that difficult. I’m not advocating that approach, it’s one way to establish control. There are others.

There are a bunch of practical considerations too. You need to control the bank account mandate. What happens if the outgoing controller empties the bank account on Day 1? Sounds unlikely, but it does happen.

Communication and impact is huge on Day 1 too. Everyone will be watching your every move, and first impressions count. A bunch of management will likely decide by the end of the first day, whether its worth sticking round or not. Having a slick comms plan is vital.

But if you got the planning right, you should be just executing. Against that long checklist you wrote before the deal closed.

With daily monitoring through the IMO.

3. Fast Synergies (Months 0 - 3)

Here we go. Now we get the money to drop.

But this takes discipline.

There will be an avalanche of ideas and Helpie Helpersons all trying to make their name and impact. Every one will want to play with the new toy.

But right now, you want focus on quick win P&L and cashflow upsides. For most it's JFDI time.

The ‘Fast Synergies’ you identified in Day One Planning.

Get these landed and it will give you the oxygen you need to execute the rest of the plan.

Your finance team will need a robust way to capture, measure and protect synergies. People will try and slip away from targets, or spend your synergies on something else. Not in my house. And not in yours either. Those synergies are your oxygen remember. You gonna let someone take your oxygen?

Here are a few areas you will find fast synergies:

Procurement Synergies

9 times out of 10 procurement synergies are the biggest quick win prize.

Imagine company A are buying 1m units for $5 per piece, and company B are buying 0.5m units of the same for $6 per piece.

As a minimum you would expect to save $1 on 0.5m units.

But the power of combined volume should let you drive cost even lower. If you can get all 1.5m units for $4.50, that is a $1.50 saving on 0.5m units, and $0.50 saving on 1m units. Big money.

You should be targeting these savings at an item / category level. Order them from biggest $ to lowest, and attack them with the white hot fury of 1,000 dying suns.

No doubt there will be duplicate contracts too. You only need one auditor, one insurance broker. These savings all count.

Get this right, and you will have justified your deal on the grounds of cost savings alone.

Most aren’t disciplined enough though, and get distracted by more interesting things. Don’t be most.

Management Overlap

You should have a list of duplicated roles, and a ‘To Be’ org chart from your planning stage.

No excuses here.

Time to execute it.

Make the decisions quickly. It will save you money. But more importantly the clarity will speed up delivery of the rest of the plan.

Hiring freeze until its done.

Customer Pricing

Generally we don’t touch any revenue / customer synergies in the fast synergies stage.

But there may be some quick wins here.

One customer buying the same product from both businesses? If you can harmonize to best pricing you should.

Property Savings

With a smaller headcount, you could have some redundant properties you can close. If you can, you should. It makes a tangible statement of change too.

Be careful though, these projects can be complex. So if its not a straight forward exercise, save it for the long synergies stage

Loss Making Operations

If you have any whole operations that are loss making in the target. Unless you are 95% sure you can turn them to a profit inside the first 90 days, you should close them. This example in the first week of the series showed the power of this approach.

Payment Terms

Like the approach on procurement savings, and customer pricing. You should be able to harmonize to best payment terms on supplier and customer side. This is very valuable.

The cash inflow created can be rapid and large.

Following one acquisition, we once landed payment term improvements equal to 1/3 of the enterprise value of the deal, inside 90 days.

Net effect is a reduction of capital employed for the deal by one third.

Huge.

4. Integration (Months 3 - 18)

By this point you have:

• taken control of the business

• juiced out some quick win synergies

• got to know the business and its issues

The chaos has settled a bit. You’ve picked all the low hanging fruit.

But you still have two business, not one.

So, now the hard yards start of turning this thing into the singular vision you set out:

• Cultural alignment

• Operating model

• ERP systems

• Processes

• Integrating functions

The novelty of the deal has by now warn off, and it’s started to feel hard.

But you do have a better feel for what you have bought. What the issues are. What the barriers are. How you can unlock that vision.

You must keep going, or you’ll never get to those hard synergies.

Your IMO will be working over time.

I have heard so many CEOs and Board bemoan a legacy acquisition they never ‘properly integrated.’ It can plague a business for years.

This is a real leadership challenge. Clear vision. Organizational buy in. Change management. Tough decisions. Execution.

This topic merits a series in its own right. We’ll tackle it in more detail another time.

5. Long Synergies (Months 12+)

Once you have landed a successful integration, you can say you truly have ‘one business’. And you unlock a new world of opportunity.

If you’ve picked the right target, paid the right price, and executed well so far. You should now have a ‘whole’ that is worth much more than the two ‘parts’ that came together.

Now you can go after the more exciting upsides. Those enabled by the single stronger platform.

If your ‘fast synergies’ protected the downside, i.e. the purchase price. Then your long synergies unlock the untapped upside.

This is where you get after revenue synergies and mop up any harder cost savings (often linked to IT)

All those great ideas for new products, new geographic expansion, growth opportunities. NOW, they are relevant.

Time to leverage the combined capability of your original vision.

When Facebook bought Instagram it had 13 employees and no revenue.

But Zuck saw the potential to expand the Facebook Ad Network across Instagram. At first he had 18 months integration, and Wall Street wondering why he'd paid $1bn for a photo app with no revenue. Instagram placed its first ad in November 2013 and the rest is history.

One of the greatest examples of shareholder value creation in history.

And on that note. We have finished our series on M&A.

I had a blast writing it. I hoped you liked it.

You can vote on the topic for my next series at the bottom of this email.

THIS WEEK ON SOCIAL MEDIA

This was pretty cool! The ‘zone of believable fiction’ was a concept I came up an hour before I sent the post. A lot of people said it resonated.

Last week’s post got featured on yesterday’s My First Million pod. Check out Minute 14-21.

That was pretty cool, so I thought I’d show Mrs Secret CFO.

“This is it”, I thought. I’ve been telling her I’m becoming kind of a big deal on the internet. So far, she has just laughed in my face. And told me to behave like the middle aged man I am.

Grounding.

But now I had a proof point. I showed her the clip.

To cut to the quick, she was still unimpressed. But did announce she now has the hots for Sam Parr.

Backfire.

FEEDBACK CORNER

A review from last time:

Great to hear the insights I’ve cobbled together over the years do stand up to scrutiny!

CASHFLOW TIP OF THE WEEK

Anyway …

That’s all for this week. As always you can find me here:

• CFO Secrets

• Twitter

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• Threads

There will now be a two week break whilst I get started on the next series of CFO Secrets. I do have a proper job remember.

Anyway … vote on the topic for the next series:

See you on October 14th.

Stay Crispy,

The Secret CFO

Disclaimer: I am not your accountant, tax advisor, lawyer, CFO, director or friend. Well, maybe I’m your friend, but I am not any of those other things. Everything I publish represents my opinions only, not advice. Running the finances for a company is serious business, and you should take the proper advice you need]