Key Aspects of Successful M&A Integration

While the last step in most financial institution acquisitions is the closing or transferring of ownership from seller to buyer, several challenges remain before the acquiring company can fully stand the business up on its own. In our engagements helping integrate business lines or entire enterprises in the insurance, banking, and capital markets space, we have seen some common issues that most companies must address to make a successful transition.

Often, the acquiring company needs substantial transition time to:

• Move massive quantities of data in a way that allows it to properly ingest the data into its own ecosystems
• Find ways to align operations despite the two companies having their own unique cultural values, timelines, and cost constraints
• Complete intricate structured and unstructured data migrations
• Replicate necessary technical system builds within its own environment
• Develop crucial third-party vendor relationships

To ensure successful integration and close-out, companies should keep in mind the following key considerations for multi-year transitions.

Program governance structures

Identify the right people to head the transition work—Successful leaders address emerging issues effectively despite having imperfect or incomplete information. They must prioritize effective yet realistic decisions while completing the transition within budget and on time. No matter how well-prepared an enterprise may be leading up to an M&A transaction, unexpected circumstances can arise that require having the right leaders with the appropriate levels of authority to navigate them. Because each transaction will face unique issues, leaders should excel at working in an ambiguous, fluid environment.

Governance structures should be transparent, and project leaders should commit to regularly communicating with key stakeholders about the thought processes behind their decision-making. This helps build credibility with other internal leaders and people who are not familiar with the project team leaders. Proactively conveying their thought processes to illuminate the overall strategic direction can also improve their engagement with outside leaders and alleviate their concerns.

Implement cross-company and program resolution and communication frameworks—Through our work integrating a financial institution’s retirement business line, we found that using a cross-company, team-driven approach reduced the transaction’s economic and operational risks. The ideal form this takes is the implementation of a centrally monitored program resolution and communication framework that enables both companies to resolve issues and work through changes collaboratively and seamlessly. The goal is for management of the transition to be a team effort that fosters momentum in both companies without impeding its overall progress. This approach requires developing strong working relationships and being willing to provide accommodations on both sides.

At every level (workstream team, program team, and legal team), leaders within each company develop their own points of view and then collaborate to achieve the best decision or solution. If a decision acceptable to both parties cannot be reached, the issue should be elevated to the next level.

Define operational processes—It is ideal to define and align both internal and cross-company operational processes before the official start of a multi-year transition. Once defined, these processes should be centralized within the program teams, and service delivery should be regularly monitored. Four crucial operational process areas are performance reporting, invoicing/billing, change management, and vendor governance.

Risk mitigation scope and approach

To minimize data and security risks, it is important to establish a cross-company defined scope, approach, governance structure, and outline of potential risks before the transition period starts. Company leaders should strive for the most efficient, effective, and least risky outcomes by addressing the separation and migration of divested business data and information. Due to the inherent complexities associated with migrating data from one company’s systems to another, the selling and acquiring companies should work together to:

• Compile system and data inventories and validate them frequently with a focus on establishing ownership early on, avoiding the time-consuming task of dealing with items found late in the transition period that could derail an on-time separation
• Engage in comprehensive, cross-company discussions with technology and business teams to talk through such potential data risks as sharing non-related data associated with the acquired business and how to best mitigate them
• Evaluate risks associated with personally identifiable information moving to or remaining with the wrong entity, knowing that the degree of commingled data in a transaction will be related to the complexity of properly separating it between the acquiring and selling companies
• Establish a comprehensive documented approval process related to validating ownership of data to ensure that all migrated data is legitimately owned by the acquiring company

Cross-company program management and technology teams should align on the following three scope areas and consider implementing a strategy such as the one shown here to manage the separation and migration of divested business data and information.

Other best-practices tasks

Security access—Ensuring appropriate security access to both selling and acquiring companies as needed to continue business functions during the transition reduces the risk that restricted or confidential data may be inadvertently or maliciously shared between entities. A foundational analysis of all business-as-usual security controls and processes associated with onboarding, recertification, and offboarding should be conducted early on. With employees, vendors, and others requiring security access, additional steps or process modifications to mitigate project-specific risks and gaps may be needed. Program teams should also discuss options for ringfencing, access certification, and decommission/shutdown plans and records.

Billing or invoicing—Acquiring companies typically request supporting documentation such as invoices or extracts during the transition—but they will only want to pay for services that are necessary for continued operation of the acquired business. They will often take the position that certain supplementary services are no longer needed during the transition period. If a service is provided that includes expenses not identified by the selling company, they cannot be charged back to the acquiring company—resulting in stranded costs to the selling company. Because the selling company will only be able to charge the acquiring company for agreed-upon services, project leaders should develop a mutually satisfactory manual process with controls installed.

Vendor governance—While the acquired business’s records are still being kept on the seller’s systems during the transition, the seller’s vendors may be needed to support the business until all records have been migrated to the acquiring company’s systems. Project leaders can mitigate their legal and financial risks by:

• Understanding and tracking vendor contract renewal notice terms (such as automatic renewal and/or X days’ notice to terminate) to avoid unwanted renewals
• Creating vendor action plans based on a vendor contract inventory that includes such information as renewal dates, termination/non-renewal language, and fixed or volume-based expenses
• Using the vendor inventory to accurately forecast and negotiate vendor-related stranded costs, highlight areas of financial concern, and distinguish vendor relationships that the acquiring company does not have but might need post-transition
• Cataloging all vendors’ divested entity contractual rights, compare their terms to the transition period to ensure that the selling company does not breach any contracts, and extend them to align with the transition period

Planning for the concluding chapter

Due to the complexity associated with multi-year transitions, continued services may be required after all data migrations have occurred. During our cross-company workstream meetings, we have found it best to have information related to decommissioning processes, close-out, and post-transition activities centrally documented and agreed to by the selling and acquiring program teams. Documentation should outline required actions, knowledge transfer sessions, supporting processes, standard operating procedures, a clear definition of completion, and specific end dates. Once documented, a formal legal agreement should be drafted by the selling and acquiring legal teams to ensure that services are accurately represented and provided accordingly.

As the transition ends, workstream meetings can also be used to determine the expected impact to people, processes, technology, assets, vendors, data, and legal considerations related to the remaining businesses of each company. Some examples include the impact of re-platforming, making personnel changes, decommissioning technology systems, and making organizational changes such as moving functions or groups.

Transitioning an acquired business will always present issues, challenges, and previously unknown considerations that need to be managed. That is why it is imperative for the selling and acquiring companies to plan ahead and collaborate to execute as much work as possible in advance, enabling quicker reactions as situations arise. Through leveraging an approach to business integration that is team-driven across both companies, the likelihood of economic and operational risks can be reduced to ensure a successful transaction for both parties.