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Read MoreIn the restructuring world, we see how today’s great investment thesis turns into tomorrow’s restructuring or bankruptcy. One perennial candidate for tomorrow’s bankruptcy is the roll-up strategy. In today’s world, there are heaps of “dry powder,” so the roll-up strategy is an attractive idea. Consolidate several, or many, similar businesses and benefit from the consolidation of overhead, input/raw material pricing, and other synergies. With few opportunities to achieve outsized returns, this strategy always seems to find followers. As an investment thesis, the roll-up strategy almost always works. However, integrating multiple independent entities is fraught with risk.
Inevitably, a significant portion of these roll-ups will fail, some leading to restructurings; others, to bankruptcies. Knowing the cause of failure (whether it was a failure from the beginning or due to exogenous factors) can help determine the best outcome in a bankruptcy proceeding.
This article explores the typical reasons integrations succeed or fail, along with lessons learned. When deciding whether to reorganize a company in total, sell it as a whole business, break it into parts, or liquidate it, understanding the drivers of the failure and whether they can be addressed or not provides a potential roadmap for value maximization.
The challenge in integrating and creating synergy is that many things need to go right with very little room for error, especially given today’s leverage levels. By understanding the key reasons why integrations fail, one can avoid the risks of a “chapter 22.” The authors have created the “Pillars for a Successful Integration” as a guide to help investors achieve clarity on integration, with the end result of unlocking synergies and maximizing returns.
While most of the pillars are in no particular order, the beginning is to always understand and keep the end in mind: the purpose. After that, the authors recommend that each of these areas be fully considered and understood when planning the integration and calculating attractive synergies during the ROI analysis, as some may not apply. Here are the “Ps and Cs”: people, process, platform, product, place/culture, communication, and purpose.
If there is one “P” that has a significant impact on integration and synergy creation, it is this one. People might be the apparent reason for failure or the clear driver for success. Many post-transaction integration and synergy-creation efforts fail to define simple elements such as overall leadership, roles and responsibilities, and who will lead the integration. Other times, the decision is made without thoughtful consideration of bias, impacts on culture, compensation implications, or organizational design. While there might be a clear choice for a leader, that does not mean that it requires less thought and energy. Even with a clear leader, anticipation of future-state organizational designs must be undertaken alongside thorough consideration of a balanced team. People drive integration and performance in creating synergy.
Process might take many forms: back-office, front-office, sponsor, manufacturing, or some other deal-specific process. If there is an area that is difficult to package in a bow under a nicely compartmentalized list of alliteration, this is it. The challenge for dealmakers and leaders is the subject's granularity. Unfortunately, some process failures often lead to unsuccessful integration and missed synergies, or to fractional value realization. Therefore, the authors believe that someone on the team should be focused on the detailed processes being undertaken, as this is where the rubber meets the road. Process is key to integration, traction, and value realization.
Not to be confused with an investment platform, this “P” refers to the elusive subject area of information technology (IT). Integration cannot be successful until disparate systems are effectively integrated. Imagine the good news when you discover a middle-market company with an above-average ERP system. Now for the bad news: there are still two of them. Sound familiar? From experience, the authors have seen the worst of this issue, and it is a serious constraint. As granular as process, all areas of IT should be considered: ERP, time-entry systems, telecom, networking and firewalls, security, payroll, employee portals, production-control systems, operational reporting and BI, HR systems, sales management/CRM, etc.
Even with lower-middle-market companies, one should not dismiss solutions as simple as spreadsheets. If it is holding data and a process together, you need to plan for it. Extending this further, middle-market and lower-middle-market companies typically underutilize data. IT integrations work not only to facilitate a common platform and process, but also to set the stage for better analytics to drive action — hence, a segue to even more enterprise value. Platforms facilitate process and enable analytic value.
Products are typically complex, depending on the investment scenario and the drivers of integration and synergy success. The complexity will depend greatly on the investment strategy at the outset: overlapping products, complementary products, distribution, common customers, supply chain, etc. Regardless of the scenario, a detailed integrated product strategy is a must. This will range from relatively simple to extremely difficult. Regardless, it is an essential component for successful post-transaction integration and helps drive clear messages to the marketplace in defining the newly combined company(s) (the “newco”). And yes, while “marketing” doesn’t start with a “P,” this is where a market-ing plan should be developed to help communicate the newco message. Product-marketing plans align your company and inform your marketplace.
This is an optional topic, depending on the situation, but if there are multiple locations for headquarters, service facilities, manufacturing/assembly plants, or sales offices, then a consolidation strategy and a clear execution timeline are required. This is often the single biggest failure to achieving those ROI-driving synergies, as execution often falls short. Consolidation might not be needed in every case, as there might be good reason(s) not to consolidate. In all likelihood, there is some synergistic value that depends on consolidation. A note of caution when determining who should make these decisions: in most cases, it is helpful to have an unbiased person or partner in the driver’s seat. Consolidating places facilitates integration.
Culture is typically the hardest concept for investors and management to truly quantify, as it is the most abstract concept. Although a company without a good culture can be somewhat effective, it usually will not sustain or optimize its effectiveness. Organizations with strong cultures have a way of enduring obstacles, which reflects good leadership.
Good leadership, with a positive culture, elevates the organization as a whole; it is a multiplier. For a strong, cohesive culture to exist, several dynamics influence it. These dynamics might include communication, HR policies, compensation and benefits, and organizational design. The point is that anything and everything that can affect the people of an organization needs to be addressed during the integration, while also offering a great opportunity to refresh or reaffirm a company’s culture. The fact is, employees do not like change, but you might be about to make significant changes, whether they like it or not. If you build it on positive cultural change, employees might just decide to like it. Culture drives organizational effectiveness.
Communication and culture feed each other. You must communicate extremely well if you want a new culture of trust. The authors’ experiences show that nearly all integrations suffer from insufficient effort in some areas of communication, and that an organization can never over-communicate. In the absence of clear communication, post-transaction planning is likely to fall short, regardless of the plans (Hint: “communication” was used in every sentence above). Communication is the core of a positive culture and successful integration.
The best is saved for last: purpose. Defining the collective purpose drives the integration strategy and execution. Whether it is to achieve cost savings, revenue lift, complementary product/territory, or some other element of “synergy,” the successful integration must start with a purpose that clearly identifies the objectives. You might ask the following questions:
In fact, these topics should be addressed and determined during due diligence. Purpose-driven planning is paramount. It is also likely to be the first element considered when situations have failed, and parties are attempting to understand their options: restructuring, bankruptcy sale, out-of-court, or a blend of strategies.
Given the “pillars of integration” discussion, the appropriate time to begin the integration plan and improve the chances of success is as early as possible, as part of due diligence. To be clear, it is neither during diligence nor in parallel to due diligence that the authors believe the pillars should be an integral part of the pre-transaction diligence. What better place to start planning for success than while the transaction is being evaluated?
When evaluating the best course of action for a restructuring, whether in or out of court, identifying where the investment thesis went wrong will help determine the best path forward. Has the consolidation of the people and organizations occurred? Is leadership clearly identified and consolidating its power? Have the company’s significant processes been integrated? Are there IT platforms and systems still segregated? Does newco have credible information? Have product offerings been streamlined and integrated? Are there cultural clashes within the organization? Are mission-critical employees leaving?
If these elements fail, it is highly likely that there will be significant costs in cash and time, increasing the risk to the newco's success as an integrated entity. This would create significant challenges to a reorganization plan that aims to keep the company intact, unless significant funding and cooperation are secured to address these issues.
It is more likely that the unintegrated elements will be sold, or the entire enterprise sold, to a strategic competitor best suited to address the critical failures and realize the potential of the newco. These considerations will likely lead to a maximization of the enterprise and reduce the likelihood of a “chapter 22.”
We would like to thank our colleagues Jim Fleet and Rodney Gayle for providing insights and expertise that greatly assisted this research.
James (“Jim”) E. Fleet is a Senior Advisor in J.S. Held’s Strategic Advisory practice, having joined J.S. Held in October of 2023 as part of J.S. Held's acquisition of Phoenix Management Services. Jim has over 30 years of experience in executive management and advisory services, covering the US, Mexico, Europe, and the Asia-Pacific region. He has led the Phoenix Management Services' Boston office since its inception in 2000. Jim’s advisory experience includes more than 150 engagements in which he managed or provided material guidance in turnaround/restructuring, investment banking—both M&A and refinancing assignments—and extensive transaction advisory assignments ranging from Quality of Earnings and Enterprise to cross-border, platform, and roll-up environments for all enterprise capital providers. He is an expert in executive leadership, having served as interim CEO, CRO, and CFO, and providing bankruptcy financial advisory.
Jim can be reached at [email protected] or +1 401 742 7553.
Rodney Gayle is a Managing Director in J.S. Held’s Strategic Advisory practice, having joined J.S. Held in October of 2023 as part of J.S. Held's acquisition of Phoenix Management Services. Rodney has over 30 years of executive experience in operations and technology roles across various industries. His expertise includes interim leadership, operational improvement, and turnaround/restructuring. Rodney is known for his pragmatic and metric-driven approach, combining strategic and tactical skills to drive positive change and optimize resources. Rodney's deep industry knowledge and hands-on leadership style enable him to provide clarity and actionable insights to client companies. He focuses on understanding complex situations and implementing lasting solutions. As a Lean Six Sigma Black Belt, Rodney leverages his technology expertise and financial acumen to deliver value in diverse settings.
Rodney can be reached at [email protected] +1 646 490 5062.
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