4 key takeaways for successful M&A
In a recent seminar on the topic of insights for successful M&A, co-hosted with Ämplify, seasoned professionals shared their most important learnings from complex M&A, IT Day 1 and post-merger IT integration projects. We have summarized their key takeaways below.
Guest speaker Petri Malmelin from Ämplify provided insights from a business perspective, whilst our IT experts Arto Linnervuo and Maiju Klemola, and M&A professionals Jouni Salmi and Wiljami Siitonen, covered the legal perspective. The speakers also provided useful tips and concrete tools and ideas to the audience when considering similar projects in the future.
1. Focus on the preparatory work and start as early as possible (applicable to the sell-side)
When planning a structured sale process, it is of the utmost importance to start the internal preparations as early as possible. Planning carve-outs and creating a standalone target company, defining the transaction perimeter, internally aligning trading relationships between the seller and the target post-closing and entering into related discussions with relevant internal stakeholders, and carrying out any clean-up measures should be commenced several months (depending on the size and complexity of the transaction) before the launch of the sale process to potential buyers. As a general rule, it is not recommended to leave the carve-out and separation work to the period between signing and closing as this often leads to difficult re-negotiations of already-agreed terms of the transaction and therefore may even affect the deal certainty. Consequently, in many cases, these steps should already be implemented prior to the launch.
Well-prepared carve-out and separation work often facilitates a successful sale process. For example, the target’s critical IT systems and their continuity, as well as potential post-closing TSA services, should be clearly defined and described in the marketing materials to potential buyers. This allows the buyers to seek potential synergies, and any integration discussions can be kicked off earlier (subject to any potential competition law restrictions).
2. Have a clear picture of what is being sold (applicable to the sell-side)
The aforementioned preparatory work, such as sell-side VDD and carve-out planning, will significantly increase the seller’s understanding of what is in fact being sold or transferred. The VDD, for example, will not only support the buy-side but also make the sell-side better positioned to negotiate and make informed decisions. In order to facilitate the seller’s understanding of the target, the internal team preparing the carve-out and the transaction should also include operative level knowledge of the seller’s and the target’s critical IT systems. A “strategic review” disclosure should be considered to enable the engagement of a broader deal team to support the carve-out and transaction process. Ensuring that the right people, i.e., those who actually know the business on an operative level, participate at an early stage in the preparatory phase will in most cases increase the level of preparedness as well as clarity on the transaction perimeter, intra-group trading relationships and dependencies, which can in turn have a highly positive impact on the timeline, value, execution risk and liability/TSA tail.
3. Reserve enough time and resources for planning the IT separation and integration
The scope of the IT separation and integration planning depends on the transaction type. IT separation work is carried out to separate the pre-transaction IT entity in such a way that it can operate as an independent company post-closing, whereas IT integration planning refers to the period post-transaction when the IT systems of the buyer and the target are integrated. Typically, IT separation and integration planning is more time-consuming and burdensome than decision makers might expect and, therefore, a sufficient amount of time and resources should be reserved for the groundwork.
As a first step, the seller should identify the IT systems that are critical for its and the target’s business and assess the continuity of such systems to ensure the transferring entity’s standalone capabilities to continue using the relevant systems and applications for its business after closing. Mapping and analyzing the related IT contracts should be completed during the preparatory phase of the transaction, and any necessary amendments to the agreements need to be agreed prior to Day 1 (post-closing) to avoid any post-transaction contract disputes, termination notices, increase in IT costs and unexpected claims for additional fees or other claims from vendors due to the IT separation. Further, it should be ensured that any pending contract negotiations will not be adversely impacted by the transaction but would rather benefit from the plans.
4. Plan to ensure a successful IT integration
IT integration should be considered as a marathon and not as a sprint, as in many areas it can take up to three years to complete. The Day 1 preparations are just the beginning and typically comprise only approximately 5-10% of the total integration work.
IT integration is commenced only after closing, but planning can be initiated before that where only limited input from the buyer is needed. In order to save costs and gain synergies, when planning integration it is important to (i) analyze potential contract breaches which may arise as a result of the integration; (ii) ensure that the agreements that have to be renegotiated due to the IT integration take into account earlier negotiation wins and beneficial clauses that the entity to be integrated has agreed to earlier; (iii) identify options for early termination; (iv) potentially align contracts with the new organizational structure; and (v) ensure that key agreements secure necessary options for future purchases and corporate restructurings.
To summarize, when planning successful IT integration, the key things to remember are to (i) have an experienced yet compact core team with clear roles and responsibilities and the right level of discipline; (ii) agree at an early stage on the must-do changes for Day 1 (ahead of the more comprehensive integration) and manage effectively the business expectations in this regard; (iii) plan and visualize a successful Day 1 realistically beforehand and define clear priorities for Day 1 and the full integration timeline; and (iv) remember that IT integration is a marathon not a sprint and the people involved also need rest during the process.