Publications

Global merger and acquisition activity has increased substantially over the last few years, and multinationals have continued to pursue M&A as a strategy to access markets and technology, improve margins, and reduce risks and threats to their medium to long-term futures.  However, accounting and business consulting studies continue to observe that more than half of all mergers fail to achieve the goals of the transaction. 

These studies cite unsuccessful post-merger integration as one of the most common factors leading to a failed merger.  These studies also show that early integration planning and a disciplined approach to merger integration are the most important factors contributing to success.  Given the increasing size and volume of M&A transactions and the larger premiums being paid in the market to secure a transaction, management's investment in an M&A deal hinges on successful planning and implementation of the post-transaction structure.

Legal Implementation Challenges

When one multinational group acquires another multinational group, the closing of the deal at the parent company level is only the beginning of the process.  Management of the combined group must develop a plan to bring the two groups together, streamline the structure, and eliminate duplicate entities in order to fully capture the benefits the transaction was designed to achieve.

Legal implementation is a key component of successful post-merger integration.  However, the merger process itself throws a number of challenges in the way of a multinational closing an M&A transaction.  These challenges include:

• Auctions and Transaction Process Controls - The increased use of auctions and controlled sale processes are designed to give sellers more control over the transaction process and limit the amount of pre-transaction planning in which a buyer can engage.
• Regulatory Issues - Antitrust and competition matters as well as other regulatory hurdles limit the flow of pre-closing information exchange, which would be helpful to integration planning. 
• Deal Frenzy - Management and the deal teams often focus on closing the deal itself, giving limited attention to integration planning.

Critical Success Factors

In order to capture acquisition synergies and streamline the post-acquisition structure, a purchaser needs quick and efficient legal implementation of the integration plan.  Speed is an essential factor to success, especially in transactions driven by cost-saving synergies.  Every month that the combined business is not integrated results in increased costs, eroding the business case for the transaction.

Managing disruption (and there will always be disruption) is another key success factor.  Employees will be transferred around the group, assets will be transferred to different companies and corporate entities will be eliminated.  IT systems will need to be in place and ready to handle these changes.  Anticipating and managing the disruption that is attendant to any post-merger integration process is critical in ensuring a smooth transition. 

As the group is realigned into an efficient post-transaction structure, there will be tax and other costs to put the new structure together.  Successful integration teams anticipate the tax costs of restructuring during due diligence and manage those costs as the integration plan is implemented. Post-merger integration often presents opportunities to improve the overall tax position of the combined group and provides a basis for tax planning going forward.

Legal Implementation Process

As noted, a disciplined approach to integration planning leads to integration success.  With respect to legal implementation, the integration process can proceed as follows:

• Establish a core integration team of internal and external legal, finance, HR, and tax resources;
• Determine the global structure objectives and confirm the desired structure on a regional and divisional basis;
• Develop country-level transaction plans in coordinating and cooperating with headquarters and local management;
• Determine the tax costs triggered by the transaction plan; and
• Execute the country-level plans.

Country Level Issues Drive Timeline and Decision Making

Finalizing and executing the country level plans will hinge on some key issues. These issues can delay implementation and increase integration costs.  For example, works councils  consultations and other labor issues must be addressed prior to implementing a country-level plan.  These consultations can be contentious, especially when reductions in force are anticipated. Managing this process takes time.

The form of an integration transaction varies by country.  Most European countries have a statutory merger procedure, which facilitates the combination of entities in the same country.  The EU Merger Directive also facilitates cross-border mergers within the EU.  The UK is a notable exception where an asset sale or business transfer is the typical structure.  In Asia and Latin America, mergers are less common and the preferred integration mechanism is an asset sale or business transfer.  A business transfer can be more time consuming than a legal merger as contracts will need to be transferred and change of control provisions addressed.

Determining the structure of the integration transaction and deciding which entity will survive the integration are often tax-driven decisions.  The transaction structure may depend on the tax consequences of the integration transaction.  Mergers can often be accomplished on a tax-free basis, but asset or business transfers are usually taxable.  One of the entities may have a tax attribute such as a net operating loss or local tax incentive, which needs to be preserved and this may force a decision on which entity survives the integration.  Transfer taxes may also force a particular integration structure.  In addition, the group may want to use the integration process to facilitate repatriation of overseas profits.   

Project Management

Implementing a legal integration plan requires a variety of resources, including corporate, legal, HR, tax, real estate, IT, and IP.  These resources must be marshaled on a global and coordinated basis.  Effective project management is essential.

Integration teams often use project management technology to manage the integration process.  This often entails creating an eRoom to manage timelines and the myriad of documentation that will arise as country level transaction plans are implemented.  The eRoom gives management visibility into the process and helps increase efficiency and reduce costs. 

Concluding Observations

Multinational companies make significant investments in mergers and acquisitions.  These are strategic "bets" on the ability to capture acquisition synergies and position the combined group for medium to long-term growth.  Anticipating the challenges in integrating a post-acquisition structure, engaging in effective integration planning, and working with an experienced legal implementation team are essential to making the deal work.