This is a guest post from Ramsey Kazem, East Coast Vice President at Spark Compliance Consulting
The pre-transaction due diligence has been completed. The terms of the deal have been negotiated. The agreement has been signed. It is time to pop the champagne and celebrate the acquisition of a new entity that will grow your business, increase your market share, and strengthen your competitive advantage. The hard work is over . . . or is it?
The completion of an M&A transaction is certainly cause for celebration, but it does not mark the end of the work – it only signals the beginning of a new phase: Post-Merger & Acquisition Integration. Post-transaction integration is critical to the overall success of a deal – especially from a compliance and ethics perspective. A company must be proactive and strategic in assimilating a newly acquired entity and its employees into its culture and compliance program. Failing to do so can result in confusion, misunderstanding, and costly missteps (or ongoing misconduct) within the business of the newly acquired entity.
Moreover, in its June 2020 guidance, the Department of Justice stressed the importance of post-transaction compliance integration stating:
“A well-designed compliance program should include . . . a process for timely and orderly integration of the acquired entity into existing compliance program structures and internal controls.”
To meet this expectation, companies should implement a process for creating a Post-Transaction Integration Plan (“Integration Plan”) after the acquisition is completed. The following explains how such a process should be structured.
Developing a Post-Transaction Integration Plan
An Integration Plan is an effective tool to facilitate an organized, efficient, and effective integration of a newly acquired entity into the acquiring company’s compliance program and culture. Just as every merger or acquisition is unique, no two Integration Plans will be the same. However, a systematic approach to (1) evaluating a newly acquired entity, (2) identifying the integration activities to be performed, and (3) establishing a reasonable timeline will result in an effective post-transaction integration process.
New Entity Evaluation. An Integration Plan must identify and consider the unique attributes of the newly acquired entity. This evaluation should build on the pre-transaction due diligence and identify any gaps, inconsistencies, or differences in the new entity’s (1) business activities, (2) compliance program, and (3) company culture. Addressing each of these elements in turn:
Business activities. This element of the evaluation should analyze how the newly acquired entity’s business activities compare to that of the acquiring entity. Does the new entity operate in the same countries or regions as the acquiring entity? Does the new entity provide/perform the same or similar types of products/services or does it operate in a different marketplace? If there are differences in these fundamental business activities, does the acquiring entity’s existing compliance program and controls adequately address the associated risks with these new or different activities? Where are the gaps?
Compliance Program. Using the seven elements of an effective compliance program, evaluate the maturity and effectiveness of the new entity’s compliance program. For each program element – (1) risk assessment, (2) policies and procedures, (3) training and communication, (4) investigation and discipline, (5) monitoring, (6) due diligence and third-party management, and (7) program governance – determine whether the new entity has processes, procedures, or controls in place. If so, to what extent are these processes, procedures, and controls aligned with that of the acquiring company’s program? Are there any notable gaps, inconsistencies, or differences?
Company Culture. The last element that should be evaluated is the new entity’s company culture. How does it align with that of the acquiring company’s culture? The results of this evaluation will guide how quickly the integration plan can be executed. The greater the disparity between the culture of the two entities, the more slowly and gradual the integration plan should be implemented.
*The new entity evaluation should be documented in the Integration Plan.
Identify Integration Activities to be Performed. The new entity evaluation will necessarily determine the integration activities to be performed. That is, for each gap, inconsistency, and difference identified by the new entity evaluation, the acquiring entity should assign corresponding integration activities. For example, if the new entity does not have an existing third-party due diligence process (or the existing process is deficient), the corresponding integration activities may include: (1) implementing the acquiring company’s third-party due diligence process within the new entity, and (2) developing a risk-based strategy for screening the new entity’s existing third parties. Similarly, if the new entity operates in a high-risk region new to the acquiring entity’s business, the integration activities may include performing a risk assessment to determine whether the acquiring company’s compliance program’s processes, procedures, and controls should be expanded to address any new risks.
Common integration activities include:
Implementing the acquiring company’s Code of Conduct
Implementing some or all of the acquiring company’s compliance-related policies, procedures, and controls.
Delivering compliance-related employee training.
Addressing gaps in the new entity’s third-party due diligence processes
Performing due diligence screenings of the new entity’s high-risk third parties
Performing a risk assessment of the new entity or a specific department/business unit of the new entity
Auditing certain transactions, processes, or departments/business units.
After identifying all of the integration activities that will need to be completed, the acquiring company should assign a priority ranking for each activity. The priority ranking can be a simple 3 (e.g., low, medium, high) or 5 (e.g., low priority, recommended, necessary,
potentially critical, urgent) point rating scale. For example, if the new entity has an existing process or control that is “good enough”, the integration activity to better align it with the acquiring company’s program will be a low priority activity. Conversely, a gap in a high-risk area of the new entity (e.g., third-party due diligence) will be rated a high or urgent priority activity.
*Each integration activity along with its corresponding priority rating should be documented in the Integration Plan.
Establishing a Reasonable Timeline. Establishing a reasonable timeline for completing the integration activities is essential for an effective Integration Plan. For each integration activity to be performed, the Integration Plan should document a start and finish date in accordance with its priority rating. Integration activities should be completed as soon as is practicable. However, in preparing the timeline it is important to:
Prioritize the integration activities using a risk-based approach.
When certain activities are dependent on each other, ensure the predecessor activities are completed first (e.g., distribute the Code of Conduct before conducting Code of Conduct training).
Consider other onboarding activities/responsibilities the newly acquired employees are required to complete and avoid overburdening them.
Stagger activities to maximize impact, understanding, and effectiveness.
Avoid doing too much too soon.
*The start and end dates for each integration activity should be documented in the integration plan.
After the Integration Plan is fully implemented, the acquiring company should conduct a post-integration survey of the newly acquired employees to gauge their view on (1) whether the post-transaction integration activities were effective, and (2) identify areas where the integration process can be improved. The results of the survey should be used to improve the overall effectiveness of the post-transaction integration framework.
Post-transaction integration is critical to the overall success of an M&A transaction. To ensure an organized, efficient, and effective integration of the new entity, a company must apply a systematic process for developing a post-transaction integration plan. The key ingredients of such a process include (1) a new entity evaluation, (2) identifying integration activities, and (3) establishing a reasonable timeline for implementing the plan. Once all integration activities have been completed, the acquiring company should survey the new employees about the integration experience and use the feedback to improve the process.