Though dealmakers admit certain lethargy of the global M&A activity in most sectors recently, 2023 brought some hope, with mergers and acquisitions in the middle market showing some positive movements. Thus, 55% of dealmakers expect more middle-market deal activity in 2024, according to ACG’s survey.

In this article we explore the current M&A middle market, outline its potential challenges, and try to predict its performance in 2024.

The rise of middle market M&A

Before delving into trends in mid-market mergers and acquisitions, let’s first recap what kind of M&A deals sit in the middle market. 

So what are the key trends of the current M&A market, and how do middle market transactions take the lead? This is what PwC’s M&A 2023 report states about this:

  • Compared to record-breaking M&A activity in 2021 and those of pre-pandemic levels, global deal values dropped 50% to $2.5 trillion in 2023. Deal volumes also declined by 17% from about 65,000 deals in 2021 to nearly 55,000 deals in 2023. 
  • The number of megadeals fell by almost 60% — from 150 transactions in 2021 to less than 60 deals in 2023.
  • At the same time, mid-market transactions stood up and showed certain improvements. This is because such finance deals are easier to conduct during a global financial crisis and geopolitical tensions, and dealmakers now follow a strategy of making a series of small deals when seeking transformation and growth.

Malcolm Lloyd, Global Deals Leader and Partner from PwC Spain, believes that global deal-making shows signs of rebounding and has promising potential in 2024:

Market signals are more positive, and we’re seeing a willingness among dealmakers to find creative solutions to get deals done and accelerate transformation. I believe these factors — and pent-up demand — have created a tipping point, and we will see an upswing in M&A in 2024.

2024 opportunities in mid-market M&A

According to Dykema’s M&A Outlook Survey, 57% of respondents expect the M&A market to strengthen in 2024. 

Source: Dykema 19th Annual Mergers & Acquisitions Outlook Survey

At the same time, most respondents predict a deal volume increase in middle and lower markets in particular: 43% of surveyed dealmakers expect a rise in middle market deals and 52% believe a boost will take place in lower markets.

Source: Dykema 19th Annual Mergers & Acquisitions Outlook Survey

So, let’s now discuss the main signs of the middle market’s potential to keep rising in 2024 and the key trends in this process.

Hopes for potential M&A activity improvement

M&A practitioners have largely positive expectations for the economy in 2024. The above-mentioned Dykema survey indicates that 50% of surveyed dealmakers have a positive outlook for the US economy over the next 12 months, while only 17% have negative expectations.

Source: Dykema 19th Annual Mergers & Acquisitions Outlook Survey

Positive anticipation is also seen from the PwC’s 27th Annual Global CEO Survey, where 60% of CEOs state they plan to make at least one acquisition in the next three years. 

3 sectors are likely to take the lead

When it comes to business sectors, M&A practitioners and business leaders expect the most middle-market investments to be seen in the energy, financial services, and healthcare areas.

At the same time, PwC specialists predict that M&A recovery in financial and healthcare services might not be as rapid as in the energy sector.

Interest from private equity firms continues

During recent years, the quantity of dry powder was increasing while investors remained selective. In 2023, dry powder reserves in the private equity industry hit $4 trillion.

Such a large amount of dry powder speaks volumes about the high possibility of private equity firm investors stepping into the market and putting this money to work. Considering global trends and overall cautiousness, the investment choice might fall on the lower middle market and middle market companies, as they’re more agile and can adapt to tense economic circumstances, and thus, present less risk to investors.

Note: Read more about different types of business acquisition financing in our dedicated article.

Challenges in navigating middle market M&A

While mid-market M&A transactions are likely to rebound in the next 12 months, such deals also face certain challenges that may significantly impact deal value, cost savings, and overall outcomes. 

Let’s briefly review the three main challenges for middle-market M&A deals.

Lack of experience

90% of middle-market companies that were sold or merged and 70% of middle-market companies that made an acquisition in the last three years had little or no previous M&A experience. This leaves them more reliant on advisors and makes it more difficult to avoid mistakes and ensure a smooth transition.

Quick tips: 

  • Create a thorough middle market acquisition strategy, paying special attention to outlining deal targets and expected outcomes.
  • Engage experts, such as M&A advisors, investment bankers, or consultants who can provide valuable insights, guidance, and support throughout the entire M&A process.

Incorrect assessment 

41% of buyers and 43% of sellers from the middle market companies admit they find it very difficult to perform a correct valuation of the business they’re buying or selling. This can also relate to the lack of experience in M&A activities.

Quick tips:

  • Conduct comprehensive due diligence covering all aspects of the business, including financial, operational, legal, and cultural factors.
  • Engage experienced professionals and specialized teams to perform due diligence, ensuring that all potential risks and opportunities are identified and properly evaluated before proceeding with the transaction.

Integration challenges

Another significant challenge mid-market M&A practitioners may face is complications during the integration process. 

According to research, 44% of buyers and 44% of sellers believe that post-merger integration (both technical and cultural) is a major challenge during the M&A process.

Quick tips:

  • Develop a detailed integration plan that outlines specific goals, timelines, responsibilities, and milestones for each aspect of the integration process.
  • Involve key stakeholders from both companies early in the integration planning process to ensure alignment and buy-in.
  • Ensure transparent and regular communication to address concerns, manage expectations, and foster a collaborative and cohesive organizational culture.

Note: Explore the major types of general mergers and acquisitions risk in our dedicated article.

Best practices for successful middle-market deals

To ensure successful middle-market M&A activity in 2024, dealmakers should consider the following recommendations:

  • Prioritize strategy

Having a thorough M&A strategy is as important as having a business model for a business to work. According to the Deloitte 2024 M&A Trends Survey, 44% of corporate executives name M&A strategy as the key aspect in achieving deal success. Read more about mergers and acquisitions strategy in our dedicated article.

  • Mind the digitalization impact

There’s a high chance that in 2024 dealmakers will target companies that successfully implement AI capabilities in their operations. As a result, middle-market businesses need to prioritize digitalization and find ways to integrate AI into their services to stay attractive to potential investors.

  • Engage third-party experts

Considering the fact that middle-market dealmakers typically lack expertise in M&A activities, having experienced professionals involved in the deal process might increase its chances of success.

Key takeaways

  • Despite the overall lethargy of global M&A activity, M&A practitioners see signs of a rebound in the middle-market M&A sector. 
  • Large volumes of dry powder reserves predicted reductions in interest rates, and an overall need for businesses to adapt to global financial crises and geopolitical tensions could provide growth opportunities for M&A activity in 2024. 
  • M&A experts predict positive improvements in the middle market since such deals are easier to conduct and dealmakers now follow a strategy of making a series of small deals when seeking transformation and growth.

Poorly planned post-merger integration is a common reason for deal failure in mergers and acquisitions. According to one study, cultural differences between two companies that occur during the transition phase lead to deal failure in 41% of cases.

The solution to this challenge is to implement effective post-merger integration change management.

In this article, we focus on the basics of M&A change management and suggest best practices to carry out this process effectively. 

The essence of M&A change management

Change management is an important part of the post-merger integration phase. It’s the process that involves the implementation of certain tactics and approaches to manage the change the merging companies face.

Essentially, M&A integration change management is the process of ensuring a smooth transition after the transaction. It involves managing employees’ expectations, winning stakeholders’ buy-in, and orienting them through the transition. 

As stated by PwC’s 2023 M&A Integration Survey, Fortune 1000 management teams named the following elements as the key drivers of their change management programs: 

Source: PwC 2023 M&A Integration Survey

The function of change management in M&A

The key function of change management during M&A is to ensure that the acquiring and acquired companies successfully merge and achieve expected synergies. The process must consider factors such as existing cultures, operations, communications, and leadership structures.

A recent Deloitte survey found that effective change management was ranked as a critical factor for successful post-merger integration.

Source: Deloitte. Critical factors for effective post-merger integration

Mergers and acquisitions change management is an integral part of the post-merger integration plan as it helps to:

  • Minimize disruptions

A thorough change management plan enables a company to avoid the risk of disruptions in day-to-day operations, as well as the overall negative impact on employees’ productivity and morale.

  • Manage resistance

Employees can often be resistant to a new corporate culture or operating model, as the change can cause feelings of uncertainty. Change management helps to overcome this issue by including a resistance analysis that identifies potential problems and how to address them.

  • Preserve culture and values

During the transition process, there’s a risk for companies (often, the target company) to lose their unique culture or to have it diluted. Change management helps to prevent that by preserving and strengthening organizational culture and ensuring transparent communication at all levels.

  • Maintain customer satisfaction

The transition phase can disrupt or negatively impact customer service. Change management helps to preserve an uninterrupted customer experience and maintain general customer satisfaction and loyalty.

  • Ensure efficient integration

Change management provides a structured framework for planning, executing, and evaluating the integration process, making it more efficient and reducing problems.

Preparing for change in the main 6 steps

So, where to start with M&A change management? Let’s discuss the main preparatory steps to be taken before the process rolls out.

1. Define the change objectives

Transition planning starts with the understanding of what goals you want to achieve. This will help all the participants and responsible parties move in the same direction when managing change and have a clear vision of what results they have to achieve.

Define the objectives of the change management program, outline desired outcomes, and specify how success will be measured. 

2. Assess current state

To define the key areas for change, there first has to be a change readiness assessment. This is the process of evaluating how ready and prepared the entire organization is for change.

Additionally, the current state of the organization’s affairs should be assessed. This also helps determine what actions should be taken in each area of business operations to achieve desired change objectives.

3. Identify key stakeholders

A stakeholder analysis helps to identify all stakeholders that will be affected by the change. It includes employees, the senior leadership team, customers, suppliers, and all other relevant participants of the transition phase. 

To ensure a smooth integration and effective change management, you should understand their perspectives, concerns, and potential resistance to change. 

4. Communicate the need for change

All stakeholders should be aware of the upcoming changes, how they’re going to impact the current operations, and what to expect in the company’s future.

For this, create a comprehensive communication plan, that involves communication strategies, communication channels, and the list of stakeholders. Doing so will help to win stakeholders’ buy-in and minimize resistance. 

The main reason behind a well-developed communication plan is to inform all the relevant parties about the need for change, the purpose behind it, and its potential benefits. 

5. Establish a change management team

A change management team or integration management office is an assembled team of people who are responsible for overseeing the change management process.

The team typically consists of employees from different departments and levels within an organization to ensure that diverse perspectives are considered. It’s a mistake to put this responsibility solely on the HR department.

6. Develop a change management plan

Finally, develop a comprehensive change management plan that outlines the findings you have after conducting previous steps.

It should include specific steps, timelines, resources, and responsibilities associated with the change initiative. Additionally, it should address potential risks and conflict resolution strategies. Such a plan should provide all the parties involved with a clear vision of the direction they should move to, guiding the entire combined organization through the change process.  

Developing the right change management strategy: 6 main components

An effective change management strategy should address the following components: 

  1. Assessment and planning
  2. Communication plans
  3. Leadership alignment
  4. Employee engagement initiatives
  5. Training and development
  6. Measurement and evaluation

Let’s now take a closer look at what each of these components involves.

1. Assessment and planning

  • Conducting a thorough evaluation of the need for change, including the reasons behind it, potential risks, and expected outcomes.
  • Developing a detailed change management plan that outlines the scope, timelines, objectives, resources, and responsibilities for the change management process.

2. Communication plans

  • Creating a comprehensive communication plan that specifies how information about the change will be delivered to stakeholders and other relevant parties.
  • Identifying key messages, communication channels, and frequency of communication to keep stakeholders informed and engaged throughout the entire transition process.
  • Tailor communication strategies to different audiences: employee groups, customers, clients, suppliers, leadership teams, and other stakeholders.

3. Leadership alignment

  • Specifying the tactics that will help to ensure alignment among senior leadership teams and key decision-makers regarding the vision and objectives of the change management process.
  • Engaging leaders in the change management process and providing them with the necessary support, resources, and training to effectively lead their teams through the transition phase.
  • Fostering a culture of open communication among leadership teams to facilitate decision-making and problem-solving during the change management process.

4. Employee engagement initiatives

  • Ensuring employees’ engagement early in the change process by soliciting their feedback and ideas for improvement.
  • Providing employees with opportunities to engage in decision-making and contribute to the change management process at the relevant levels.
  • Implementing such employee engagement initiatives as town hall meetings, surveys, focus groups, and feedback mechanisms to ensure that all the change information is communicated, and employee concerns are heard and addressed.

5. Training and development

  • Identifying any skills gaps or training needs that might occur in the process of change and developing target training programs.
  • Providing employees with the necessary knowledge and resources to help them adapt to the new culture, processes, and operations.
  • Offering ongoing support and training to help employee groups navigate the change effectively. 

6. Progress measurement and evaluation

  • Defining the key performance indicators (KPIs) and metrics to measure the success of the change process.
  • Regularly monitoring and assessing the progress of KPI completion and making relevant adjustments if necessary.
  • Regularly collecting feedback from stakeholders to evaluate their perception of change and identify areas for improvement.

Note: To learn more about winning strategies for M&A read our dedicated article.

The role of effective communication during M&A change management

Transparent communication with employees during a transition period is among the most crucial factors for post-integration success.

According to Leadership IQ’s survey, only 15% of employees always understand the rationale behind their leaders’ strategy. Such findings can result in a loss of motivation among employees and cause some of them to leave the organization. This, in turn, can lead to a talent retention problem.

Note: Explore the general risks of mergers and acquisitions in our dedicated article.

The importance of effective communication is also proven by WTW’s research, which shows that very successful deals typically have one thing in common: they pay great attention to clear and effective communication with employees during the transition.

Source: WTW Global Pulse Survey. Common element successful transactions share

Best practices for leadership and culture alignment

Research by Culture Amp found that mergers and acquisitions negatively impact employees’ perception of decision-making, alignment, and motivation. 

At the same time, culture clashes are the reason for 30% of failed post-merger integrations, based on Deloitte’s findings. 

This shows the importance of ensuring leadership and culture alignment during the transition phase. To do so, consider the following recommendations.

Conduct one-on-one interviews and focus group sessions

This helps to bring a more human aspect to the whole transition process. 

Ensure that a responsible change manager  conducts one-on-one interviews with senior employees (or with particular focus groups) to assess their readiness to change and learn about their fears and worries. This will help to identify ways to address those concerns and mitigate potential resistance risks.

Carry out surveys

Another way to evaluate leadership and employee perception of the whole change process is to conduct surveys. 

Unlike one-on-one meetings, where employees might hesitate to share their thoughts openly, surveys allow for gathering honest feedback without putting a respondent under stress with face-to-face conversations.

Conduct a potential resistance analysis

Similar to one-on-one meetings, a potential resistance analysis helps to uncover how employees are feeling about change. The key focus here is to search for a “them and us” mentality, which prevents people from embracing change as a positive thing.

Present findings to stakeholders in a comprehensive report

The assessment’s findings should be presented in a well-drafted report, with key gaps and areas for improvement specified. 

What’s more, it has to include calls to action and responsibilities assigned to relevant stakeholders.

Note: Discover the overall M&A best practices in our dedicated article.

How to measure the success of change management initiatives?

Here’s how you track the progress of the change management initiatives and assess their effectiveness:

  • Ensure key KPIs are specified

Measuring success is only possible when there are clear KPIs in place. This way, you know what results are expected from the changed operating models. KPIs can include employee engagement levels, customer satisfaction levels, productivity, revenue growth, and cost savings.

  • Establish regular monitoring and tracking

Continuously monitor and track the identified KPIs throughout the change management process. This allows for real-time assessment of progress and early identification of any issues or challenges that may arise.

  • Collect feedback

Perform a change impact analysis and gather feedback from stakeholders and all the relevant parties to assess their perception of change and its impact. This can be done through surveys, focus group sessions, one-on-one meetings, and other feedback-sharing mechanisms.

  • Compare results to goals

With the results of the assessment ready, the change management team can then compare them with the predetermined KPIs and overall change objectives. This allows for identifying success areas and those where certain challenges or obstacles have been identified.

  • Conduct a root cause analysis

To understand the underlying factors contributing to the observed results, perform a root cause analysis. This helps to identify all the barriers and gaps that prevent the merging organizations from achieving predetermined change objectives.

  • Make adjustments

Based on the findings, make the necessary adjustments to the change management process. This could involve refining strategies, providing additional support or training, and revising timelines.

  • Communicate changes and progress

To ensure a transparent process, communicate all the changes and progress to stakeholders. This will keep them informed about changes or improvements and help to foster their trust and confidence in the change management process.

Key takeaways

  • M&A change management is the process of implementing certain tactics and approaches to ensure a smooth transition during the post-merger integration phase.
  • The key function of change management is to ensure that existing cultures, operations, communications, and leadership structures of two companies successfully merge in a way that helps the combined company achieve expected synergies.
  • The main components of the right change management strategy include assessment and planning, communication plans, leadership alignment, employee engagement initiatives, training and development, and measurement and evaluation.

The valuation of equity interests in private companies, especially those with significant leverage, presents many challenges and intricacies. 

A detailed case study, in line with the Financial Accounting Standards Board (FASB) and Accounting Standards Codification (ASC) 820, sheds light on these complexities, offering key insights for valuation practitioners. 

The case study, or example, provides a clear illustration of the impact of change in control provisions and the importance of considering the time horizon and investment strategies in valuation.

Framework for equity valuation in leveraged: 9 key considerations 

  1. Fair value measurement and market participant perspective: Central to the valuation process is the measurement of fair value from a market participant’s perspective. This involves estimating the price at which knowledgeable and willing parties would agree to transact, ensuring that both buyer and seller act in their economic best interests and possess complete information about the asset.
  2. Complexity in valuation of leveraged companies:The valuation intricacies of companies with a mix of debt and equity are highlighted. It’s crucial to consider both the rights and obligations of debt and equity holders, inclusive of any specific terms such as change in control provisions.
  3. Impact of change in control provisions: There are significant effects of change in control provisions in debt agreements on equity fair value. These provisions, often entailing prepayment penalties, can diminish the net sale proceeds, thereby influencing equity valuation.
  4. Time horizon and investment strategy considerations: The expected duration of equity holding and the associated strategies play a pivotal role in valuation and can considerably sway the value of the investment.
  5. Calibration to transaction price and subsequent adjustments: Valuations commence by calibrating to the initial transaction price, followed by adjustments in later periods to mirror changes in expected cash flows and market conditions. This method ensures that valuations stay attuned to market dynamics.
  6. Diverse valuation approaches and scenarios: There are many valuation methodologies, including direct cash flow assessments and indirect approaches like adjusting enterprise value for debt. There is also the need to explore different scenarios, such as immediate sale versus longer-term holding, each leading to distinct fair value estimations.
  7. Incorporation of market liquidity and risks: The liquidity of the equity position and associated investment risks, both market-related and specific to the company, are essential in the valuation. They influence the required return rate and, by extension, the valuation.
  8. Probability-weighted scenarios in uncertain conditions: In cases with regulatory or financing uncertainties, the use of probability-weighted scenarios is demonstrated. This method considers the likelihood of various outcomes and their impact on valuation.
  9. Bid-ask spread and fair value determination: The concept of bid-ask spread is employed to show the range in which fair value might reasonably fall. The selected fair value should represent the most realistic value within this range, considering current market conditions and inherent uncertainties.

Case study – 100% of equity held within a single fund (single reporting entity)

This breakdown explains the process and considerations the fund goes through in valuing the company’s shares they purchased, considering the market conditions and specific terms of the deal.

The context

  1. December 31, 2019 Purchase Details:
    A fund buys all (100%) of a company’s shares. The total value of the company (called “enterprise value”) is $500 million. This $500 million is made up of $200 million from shares (equity) and $300 million borrowed from others (third-party debt). The borrowed $300 million must be paid back in 5 years. If the company is sold within these 5 years, the debt must be paid back with extra charges: 10% more in the first year, 5% more in the second year, 3% more in the third year, 1% more in the fourth year, and no extra charge in the fifth year.
  2. What is being valued (unit of account) and assumed future sale: The focus is on the value of the shares the fund owns (100% equity). It’s assumed that these shares might be sold to someone else in the future, based on what a typical buyer or seller would pay under normal market conditions.
  3. How the fair value is determined: The fair value (the price that would be agreed upon in a normal sale) is based on what’s expected under usual market conditions at the time of valuing. This value isn’t based on a rushed sale, selling during tough times, or when the company is in trouble.
  4. Checking if the purchase price was fair: Next, it’s checked whether the $500 million paid was a fair price. This involves three parts: 
  • The company was bought for $500 million 
  • $200 million was for buying all shares, 
  • $300 million was for taking on the company’s debt. 

To see if this was fair, they checked: Was it not a deal between family or friends? Was the deal not forced? Does the $200 million for shares match with the value of all shares the fund now owns? Was this the usual kind of deal in the private equity market?

  1. Confirming fair value and using market assumptions: The fund concluded the $200 million was a fair price for the shares. When deciding the value of these shares, they consider what typical buyers and sellers in the market would think, not just what the company believes. If there’s better information available, they would use that to adjust their assumptions.

Valuation models alignments

In summary, the passage explains how the fund adjusts the valuation model for their investment to match the price they paid and how they regularly update this model. It also describes how the fund considers the viewpoints of other potential investors, especially concerning the debt and its terms, to ensure the valuation aligns with their initial strategy and expectations.

Ramifications of a change in control on the measurement date

  • “Day 1” Sale impact: If the investment (the company bought by the fund) is sold immediately after purchase, it activates the ‘change in control’ clause in the debt agreement.
  • Change in control provision: This clause includes a prepayment penalty, which is an extra cost for paying off the debt early.
  • Financial consequence: The prepayment penalty increases the debt repayment amount. For example, if the company is sold right away, the debt repayment would be $330 million instead of the original $300 million because of a 10% penalty.
  • Effect on equity value: This increased debt repayment reduces the money that would go to the equity holders (the fund in this case). So, instead of getting more money, the equity holders end up with $170 million.
  • Inconsistency with initial assumptions: This outcome doesn’t match what was initially expected when the company was bought, as it goes against the usual thinking of market participants, who usually aim to avoid immediate losses.

Expected time horizon for the investment on the measurement date

  • Measuring equity value: When determining the value of the equity interest, it’s assumed that other investors (market participants) would think about how long they plan to keep the investment.
  • Day 1 Fair value determination: If we consider selling the equity right after buying it, its value is thought to be $200 million. This value includes the effects of the change in control provisions.
  • Knowledge of change in control provisions: Both the equity and debt investors knew about these change in control conditions when they decided on the price for the equity ($200 million) and the debt ($300 million). Therefore, this $200 million value already considers what other investors would think about the chances and timing of a change in control and what return they would expect from this investment.
  • Overall deal context: Typically, investors agree to such a change in control conditions as part of a larger negotiation, which also involves discussing other terms like the interest rate on the debt, how much debt is allowed, and various rules or restrictions (covenants).

Summary in numbers

  • Total Enterprise Value: $500 million
  • Value of Debt (for calculating equity value): $300 million
  • Fair Value of Equity: $200 million

In simple terms, this part of the passage explains the financial effects of selling the company immediately after buying it, especially due to the extra costs from the change in control clause in the debt agreement. It also describes how the value of the equity is calculated, considering the expectations and knowledge of investors about the future of the company and the terms of the deal.

Calibration

Valuation model adjustment: The value of the investment (the company bought by the fund) needs to be adjusted or ‘calibrated’ to match the price paid for it.

Using the income approach

  • Estimating cash flows: The fund predicts how much money the investment will make in the future while they own it.
  • Determining rate of return: They figure out the rate of return they expect to get from this investment, starting from the day they bought it.
  • Regular updates: This calculation isn’t done just once. As time goes on, the fund updates their predictions about future cash flows and the return they expect, based on what’s happening in the market.
  • Market approach consideration: This kind of thinking (looking at future money made and required returns) is also used in other valuation methods, like the market approach.

Analogous situations

Comparison with other dituations:

  • Change of Control Provision: The way the fund thinks about the ‘change of control’ clause in the debt (extra costs if the company is sold) is similar to how they would consider other kinds of restrictions or limitations.

Measuring debt value for equity valuation:

  • Considering market participant views: When figuring out the value of the equity (the part of the company the fund owns), they also look at the debt’s value from the viewpoint of other potential investors or market participants.
  • Expectations and timing: This includes thinking about how likely and when a change of control might happen, and what kind of return these other investors would want considering these conditions.
  • Consistency with original transaction: This method of estimating the equity’s value is in line with the original plan and the interests of the fund when they first bought the company.

Situation two years later 

After two years, the company faces significant problems.

  • Debt payoff value: The value needed to pay off the debt has increased to 103% of the original amount, which means paying off the debt would now cost $309 million.
  • Fair value of debt: The market value of the debt is now lower, at 80% of the original amount, or $240 million. This is based on how much the debt would sell for in the market, considering the expected cash flows from the debt and the current interest rates.
  • Enterprise value: The total value of the company, if sold now, is estimated at $350 million. This considers the cost of capital for a new buyer who might use different debt.
  • Equity value: The value of the company’s equity is calculated to be $80 million. This takes into account the cash flows that would go to equity holders and the required return on equity in the current market conditions.
  • Comparison of equity value: This $80 million is more than what would be left after selling the company and paying off the debt at $309 million, but less than the total value if a new buyer could benefit from the existing debt conditions.

Considerations for valuing the equity

  • Focus on equity enterest: The main focus is on the value of the equity interest held by the fund.
  • Assumed sale to market participant: It’s assumed that the equity would be sold to another investor who would keep it for a while, based on what such investors typically expect and would pay for it.
  • Fair value measurement: The value is based on a hypothetical orderly sale, not in a forced or distressed situation. This valuation considers the current market conditions, the investment risks, and how easy it would be to sell the investment.

Change of control feature and fair value—Detailed analysis:

  • Expectations of market participants: The value of the change of control feature in the debt (the extra cost for early repayment) depends on whether investors think the company will change ownership soon or closer to when the debt is due.
  • Valuation model calibration: Initially, models were used to figure out what returns investors would want, considering the chances and timing of early debt payoff. Over time, these models are adjusted to reflect changes in what investors expect regarding a change of control.
  • Differing assumptions for equity and debt: Investors in equity might think differently about the value of the company and the debt compared to those who are just looking at buying or selling the debt. This means the value of the debt when estimating equity value might be different from its standalone market value.

Ramifications of a change in control on the measurement date

  • Triggering change in control provision: If the investment (the company bought by the fund) is actually sold, a special rule in the debt contract (change in control provision) gets activated.
  • Effect of change in control provision: This rule means that if the company is sold, the debt must be paid back at a higher amount than its current worth (a premium), which would reduce the money received by the equity holders (the fund).
  • Immediate loss for equity holders: This situation would result in the equity holders getting less money than they would if they held on to the investment for the planned time, leading to an immediate loss.

Expected time horizon for the investment on the measurement date

  • Fair value measurement based on time horizon: The fair value of the equity interest (how much the equity is worth) is estimated by considering how long the fund plans to keep the investment.
  • Income approach for valuation: Under this method, the fund thinks about the money it expects to make from the investment (cash flows) until it decides to sell (liquidity event). The fund uses this information to adjust (calibrate) its model for calculating the investment’s worth, based on the initial purchase price and any changes in value up to the current date.

Calibration – Cash flows to equity

  • Valuation on December 31, 2021: On this date, the fund updates its expectations about future profits from the investment (expected cash flows) and considers how much return investors would now require, given the current market conditions.
  • Determining fair value of equity: Based on this updated information, the fair value of the equity interest is calculated to be $80 million. This value assumes that if the equity were to be sold to another investor, they would expect to get value from the investment over the time they plan to hold it.
  • Factors included in valuation: This $80 million valuation takes into account the profits the company is expected to generate in the future and the return that investors would demand in the current market situation.

In summary, the passage explains how the sale of the investment can trigger specific provisions that affect its value, how the investment’s value is calculated based on how long it will be held, and how the fund updates its valuation over time, considering expected future profits and current market conditions.

Calibration – Net equity value (contractual debt payoff)

  • Debt repayment at contractual value: The debt holders can be paid back $309 million as per their agreement. This is the amount they are owed.
  • Selling the company and paying off debt: If the company is sold on the valuation date, the debt would be paid off at this $309 million amount.
  • Resulting equity value: After paying off the debt, the value of the company’s equity (the part owned by investors like the fund) would be $41 million.
  • Inconsistency with market participant assumptions: However, selling the company immediately and paying off the debt like this might not align with what typical investors (market participants) would do. They usually wouldn’t sell the asset right away if it meant getting less value.
  • Lower bound of equity value: So, this $41 million can be seen as the lowest possible value of the equity under these conditions.
  • Higher required rate of return: This situation also suggests that the return investors want from this investment, given current market conditions, might be higher than expected. It might be reasonable in some cases to sell earlier for less money if the risk of waiting longer is too high.

Calibration – Net equity value (fair value of debt)

  • Valuing the company and subtracting debt: Another way to find the equity’s value is to first calculate the whole company’s value ($350 million) and then subtract the debt’s fair value ($240 million).
  • Potential fair value of equity: Using this method, the equity could be worth $110 million if the company were sold on the valuation date and the debt paid off at this lower fair value.
  • Upper bound of equity value: However, this $110 million might be the highest possible value of the equity. This is because investors might not want to pay this much due to the equity being less liquid (harder to convert into cash) because of the change in control provision in the debt agreement.

In simple terms, these paragraphs discuss two different ways to calculate the fair value of the company’s equity. One way considers the contractual payoff amount of the debt, leading to a lower equity value. The other way uses the fair value of the debt, resulting in a higher possible equity value. These values represent the lowest and highest potential worth of the equity, considering various market conditions and investor expectations.

Calibration – Net equity value (negotiated debt payoff)

  • Negotiating debt payoff: The equity investor (the fund) might talk directly with the people who lent the money (debt holders) to agree on paying back the debt at a price that’s lower than the official amount due but higher than its current market value.
  • Benefit of negotiation: This would be good for both the equity investor and the debt holders because they can end the investment earlier than planned.
  • Example calculation: Let’s say they agree that the debt will be paid back at $270 million instead of the full $309 million. Then, the value of the equity (what the fund owns) would be calculated as $80 million.
  • Estimating values: This method assumes you know the total value of the company ($350 million) and the negotiated debt value ($270 million). The equity value is found by subtracting the debt from the company’s total value.
  • Practicality of the approach: It’s often easier to use this method because information about overall costs (like interest rates and returns) is more available than specifics just for the equity.

Calibration – Net equity value (fair value of debt), adjusted for illiquidity

  • Adjusting foriIlliquidity: When estimating the equity value, the method first looks at the company’s total value minus the current market value of the debt. However, it then reduces this amount to account for the difficulty in selling the equity quickly (illiquidity).
  • Calculation example: The company’s value is $350 million, and the debt’s market value is $240 million. So, the equity value before adjustment is $110 million. But because it’s hard to sell quickly, this might be reduced by $30 million, making the equity worth $80 million.
  • Reason for illiquidity discount: This discount is because investors can’t easily get the full value of the company minus the debt unless they keep the investment for a while. They might want a higher return for this risk and difficulty.

Overall Summary

  • Different valuation methods: The passage describes various ways to figure out the equity’s fair value, considering how much return investors want and how long they plan to keep the investment.
  • Bid and ask price concept: The lowest value (bid price) for the equity might be $41 million (if the debt is paid off fully at $309 million). The highest value (ask price) could be $110 million (based on the company’s total value minus the debt’s market value). The fund chose $80 million as the fair value, which fits within this range and is based on expected profits and required returns.
  • Importance of specific transactions: The actual fair value might be more if the fund can negotiate an even better deal for paying off the debt (like paying $265 million instead of $270 million).
  • Market conditions and rates of return: The fair value of the debt ($240 million) reflects current interest rates compared to what the company offers. This affects the overall cost of the company and, therefore, the equity’s value.

In summary, the passage explains different ways to calculate how much the equity in a company is worth, considering negotiations, market conditions, and the challenges in selling the equity.

Four years since buying the company:

  • Market recovery: Two years after the last valuation (four years since buying the company), the market conditions have improved.
  • Sale agreement: The fund has an agreement to sell the company for $800 million, expected to close in three months.
  • Chance of deal falling through: There’s a 25% chance the sale won’t happen. If it doesn’t, the company is estimated to be worth $700 million.
  • Debt repayment: If sold, the debt would need to be paid off at 101% of its original amount, totaling $303 million. If the sale doesn’t happen, the debt’s fair value would be its original amount, $300 million.

Evaluating the unit of account and the transaction

  • Focus on equity interest: The valuation considers the entire equity interest held by the fund.
  • Type of transaction considered: The valuation assumes a transfer of the equity interest to someone else, planning to keep it for only three months if the sale happens.
  • Prepayment penalty: If the sale happens, the fund must pay a penalty for paying off the debt early, affecting the equity’s value.

Fair value calculation

In summary, this section describes how the fund evaluates the worth of its equity in the company, considering the likelihood of a sale happening soon and its impact on the value of the company and its debt. This calculation takes into account both the increased value if the sale goes through and a lower value if it doesn’t, along with the associated debt in each scenario.

  • The valuation looks at two scenarios: 
  1. If the sale happens (for $800 million) 
  2. If it doesn’t (value drops to $700 million)
  • Debt value in each scenario: If the sale happens, the debt payoff is $303 million. If not, the debt value is $300 million.
  • Equity value calculation: 
  1. If the sale happens, the company’s value ($800 million) minus the debt ($303 million) equals an equity value of $497 million
  2. If the sale doesn’t happen: The company’s value ($700 million) minus the debt ($300 million) equals an equity value of $400 million
  • Probability-weighted value: Since there’s a 75% chance the sale will happen and a 25% chance it won’t, the fair value of the equity is calculated using these probabilities. This results in a weighted value of $464 million.

Conclusion

The journey of understanding the complexities of equity valuation in leveraged, privately held companies underscores several key takeaways for valuation practitioners. 

I navigated through the intricate details of fair value measurement, considering market participant perspectives and the nuances of dealing with leveraged companies. 

I also delved into the necessity of calibrating the valuation model to the transaction price and adjusting it according to changes in market conditions and expected cash flows. The exploration of different valuation approaches and scenarios highlighted the versatility required in equity valuation. Moreover, the incorporation of market liquidity, risks, and the use of probability-weighted scenarios in uncertain conditions emphasized the depth of analysis needed for accurate valuation.

The bid-ask spread concept served as a reminder of the range within which fair value might lie and the importance of selecting the most representative value in given circumstances. 

The insights and methodologies discussed herein equip valuation practitioners with the tools to tackle the challenges inherent in the valuation of leveraged, privately held companies. 

In the business world, the debate rages on: Do mergers and acquisitions truly drive shareholder value?

As M&A appears to be regaining its footing, some leaders might be tempted to stay on the sidelines. Yet, history has shown that those who embrace the game with skill and precision are the ones who emerge as winners.

While academics and professionals often debate the value of M&A deals, many companies see value in M&A, as evidenced by more than 90% of S&P 500 companies having engaged in public or private acquisitions in the last decade, according to an EY analysis.

When organic growth falls short or moves too slowly, acquisitions step in to propel companies forward, optimizing costs, refining capital structures, and acquiring invaluable intellectual property and capabilities.

Breaking down the numbers: a tale of two approaches

Our analysis unveils intriguing insights:

  • Companies undertaking smaller acquisitions tend to thrive, with an uptick in total shareholder return (TSR) as they increase deal volume.
  • Conversely, those embarking on larger-scale acquisitions find higher TSR when they opt for a more selective approach.

Building on prior EY research, we delved into the data of S&P 500 companies engaging in buy-side transactions valued at more than $1 million between April 2014 and April 2023. The results were striking.

A closer look: tuck-in vs. transformation

  • For companies focusing on tuck-in or bolt-on acquisitions or smaller-sized transactions, the formula for success is clear: more deals, more TSR. These savvy players enjoy an annualized TSR outperformance of 2%-5% over their counterparts.
  • On the flip side, companies venturing into transformational acquisitions or deals adding up to more than 50% of a company’s market capitalization tread a different path. Here, fewer deals lead to an annualized TSR outperformance of 4%-6% as opposed to companies doing more large deals, signaling a focus on quality over quantity.

In a landscape where S&P’s average returns hover around 9.2%, these margins are nothing short of game-changing for both investors and stakeholders.

Average annualized total shareholder return (TSR) for S&P 500 companies

Unraveling the success stories

In the realm of tuck-in acquisitions, champions emerge. Fortune 500 giants, executing over 11 acquisitions for less than 10% of their market capitalization, saw a staggering 15.9% year-over-year TSR growth.

Meanwhile, the cohort completing 4–10 acquisitions achieved an impressive 14.4% year-over-year TSR. Among these, a payment card services powerhouse stands out, having orchestrated eight tuck-in acquisitions. This strategic move not only expanded their service offerings, but it also catapulted them to a +7% year-over-year TSR lead over non-acquiring S&P 500 counterparts.

Regarding transformative deals, based on data, we see that 10 Fortune 500 companies did between one and three transactions with a deal value of more than 50% of their market capitalization. 

This group gained 8.2% year-over year TSR, which is significantly higher than companies that did more mega deals or deals representing greater than 50% of their market capitalization. One of those companies, a health care insurance provider, generated a return of 14%. It closed three public acquisitions during that time, including two small deals and one that was transformational. 

This is a prime example of a company being strategic when executing a transformational deal and thoughtfully considering the time and resources necessary for a successful integration.

The engine of success: key factors at play

The secret sauce? 

  • Seasoned corporate development teams
  • Fortified M&A infrastructure 
  • Agile leadership capable of navigating risks swiftly. 

It’s this blend of experience, muscle memory, and adaptability that allows these companies to integrate seamlessly while maximizing deal value.

Navigating the future: recommendations

For those in the tuck-in and bolt-on acquisition arena, success is built on a few fundamental principles:

  • Foster a robust M&A “muscle memory” for streamlined integration and synergy maximization.
  • Stay proactive in the M&A market, seizing opportunities and keeping a watchful eye on competitors.
  • Recognize that integration is an investment; institutionalize, learn, and refine for long-term success.

In the realm of transformative acquisitions, a focused approach is the linchpin to success. Embrace these recommendations:

  • Dedicate top-tier talent to the integration process for maximum value realization.
  • Engage in transparent, frequent communication to foster a sense of pride and achievement among all stakeholders.
  • Allow ample time for businesses to adapt, evolve, and flourish post-acquisition before embarking on the next endeavor.

The key to shareholder returns lies not in a one-size-fits-all approach but in the astute deployment of strategy and execution. With the right moves, M&A can be a powerful catalyst for not only growth but also for delivering sustained shareholder value.

Co-authored by Lukas Hoebarth, Markus Neier, Mitch Polelle, and Adam Altepeter.

The views reflected in this article are those of the authors and do not necessarily reflect those of Ernst & Young LLP or other members of the global EY organization.

The dynamic nature of mergers and acquisitions inevitably impacts the levels of compensation for professionals who are involved in transactions. Besides, there are lots of other factors that influence M&A specialists’ pay ranges.

In this article, we figure out aspects that form the merger and acquisitions salary, explore its different levels based on the position and location, and provide information on how global M&A activity in the coming year can impact compensation levels for M&A professionals.

Factors affecting mergers and acquisitions salaries

A merger and acquisition salary can differ greatly, depending on many factors. Let’s review the main of them below.

Line of business

The compensation range for M&A professionals can vary greatly based on the line of business they work with. 

As simple as that, M&A professionals who are involved in high-profit lines of business are more likely to get a higher base salary and better bonuses than those who work with low- or medium-profit lines. 

However, it’s not always the case. The M&A salary can also depend on the priority the certain line of business has at a time in overall business operations.

Specialization

Naturally, the level of M&A compensation greatly depends on the specialization of an M&A professional and the seniority of a position they assume. For instance, the salary of an M&A analyst is likely to be lower, since this is an M&A specialization of entry levels. While M&A directors are most likely to get a higher compensation since this job presupposes having more experience.

Additionally, the track record of successfully managed and completed deals counts as well. 

Note: Learn more about M&A management best practices in our dedicated article.

Compensation agreements

This relates to the agreements of the bonus vs. salary ratios an M&A professional makes with an employer. 

M&A salary typically consists of base pay (a fixed sum paid monthly) and bonus pay, that’s why their ratio is a discussion point during the hiring process. For example, a company, investment bank, or advisory firm can offer a particular M&A professional a rich bonus package and the base pay in this case might be relatively low. 

On the other hand, a higher base pay might exclude the possibility of getting a rich bonus package. 

Company of employment

The salary of an M&A professional also differs depending on their company of employment: corporation or investment bank. 

Normally, an average M&A manager salary is considered to be higher in an investment bank, while M&A professionals working in corporate finance get a bit less.

Deal nature

Depending on the complexity or the scale of the deal, the mergers and acquisitions manager salary will vary.

For example, M&A professionals who advise on such large deals as the Activision Blizzard and Microsoft merger ($69 billion deal value) can get a higher M&A advisor salary than those who manage smaller deals worth millions of dollars.

Market conditions

Though not obvious from the start, the current state of the M&A market and economic conditions in general can significantly impact the salary range of M&A specialists.

Naturally, when the market is flourishing, there’s a higher demand for M&A professionals such as M&A managers, associates, or analysts. As a result, such a demand boosts the rate of compensation in M&A sector. For instance, such a rapid M&A market as it was in 2021 is more likely to offer higher salary levels for M&A specialists.

Note: To understand the industry and its peculiarities better, read more about mergers and acquisitions definition in our dedicated article.

Bonus and incentive structures in the M&A job market

The compensation of an M&A professional typically consists of base pay plus bonuses. While it’s all clear with the base pay, bonuses can be different:

  • Annual bonus

M&A managers often receive an annual bonus based on their performance and the success of the business deals they work on. Such a bonus is often directly tied to specific target objectives or plans an M&A specialist should achieve. Usually, such bonuses are also significant add-ons to the base pay.

  • Profit sharing

Sometimes, M&A managers may participate in profit-sharing programs when working on the deal. It means that they can get a share of the company’s profits related to M&A activities and business acquisition financing. Further, it also aligns their interest with the company’s financial success.

  • Stock options

As a part of compensation, companies sometimes can also offer M&A specialists stock options or equity grants. This gives an M&A manager a stake in the company’s performance and future growth.

  • Signing bonus

Sometimes, companies may offer a one-time payment in the form of a signing bonus to attract new and experienced M&A specialists, when they’re joining an organization. 

  • Retirement benefit

As a part of a compensation package, M&A managers can also receive contributions to their retirement plans, such as a 401(k) plan.

  • Health and insurance benefit

Some companies can also provide M&A specialists with health insurance coverage as a part of the compensation package. Sometimes, such a benefit also includes dental and vision plans.

Role-specific M&A job salary analysis

Let’s now take a closer look at how exactly an M&A professional like an analyst, associate, manager, or director can make per year on average, based on the Glassdoor statistics.

As seen from the comparison table, there are different levels of compensation for different jobs in the M&A labor market. However, M&A directors normally get about 61% higher compensation than M&A analysts.

Average acquisitions’ manager salary by location

Often, the location of your M&A job also matters. Inside the United States alone, some states are known for higher M&A professional income statistics, while others usually pay less.

Let’s take a closer look at the comparative data on how average M&A salaries of similar job titles differ in terms of site connection depending on the city or state.

This is how the distribution of annual M&A manager salaries looks like in different US states.

Source: Zippia

The most high-paying US states include: 

  • Connecticut ($118,478)
  • District of Columbia ($116,830)
  • Maryland ($115,236)
  • Virginia ($115,154)
  • Pennsylvania ($110,890)

The lowest-paying US states include:

  • Colorado ($75,295)
  • Oklahoma ($75,508)
  • Alabama ($76,371)
  • South Carolina ($77,217)
  • Tennessee ($78,580)

The future outlook for M&A salary

As pointed out above, M&A salary growth or decrease significantly depends on many factors, and the state of the current M&A market is one of them. 

Let’s analyze M&A compensation trends based on the general industry trends and insights: 

  • Overall M&A activity

The global M&A activity has been in relative lethargy during recent years, with 2023 showing a 6% and 25% decline in M&A volumes and values compared to the prior year. However, despite that, M&A experts feel more positive about the coming year, anticipating the M&A market to start rebounding. This will more likely positively impact the M&A specialists’ salaries as well.

  • Leading sectors 

PwC’s report states that M&A activity is starting to recover mostly in the technology, energy, and pharma industries, while other sectors, such as banking and healthcare, remain slower. Such an activity can also speak about the rising demand for M&A professionals in recovering industries, which, in turn, can also positively impact their compensation rates.

  • Geopolitical turmoils

Ongoing conflicts in the Middle East, Russia-unleashed war in Ukraine, and export controls on China keep having a heavy impact on global deal-making. This also puts M&A activity in/with those regions under threat, which, in turn, can negatively impact levels of M&A specialists’ compensation there.

  • Cybersecurity concerns

Security of data remains the major priority for deal-makers, with more deals occurring in the IT sectors. M&A practitioners are also in need of specialists who can ensure a secure proceeding of all M&A process steps. This creates an M&A opportunity for managers with cybersecurity expertise, and, as a result, they might be among higher-paid professionals in the coming year.

Key takeaways

  • Merger and acquisition salary greatly depends on such factors as education, experience, location, company size and industry, deal nature, and overall market conditions.
  • M&A salary usually consists of a base pay and bonus pay. Bonus pay can include such benefits as an annual bonus, profit sharing, stock options, signing bonus, retirement benefit, and health insurance benefits.
  • The average pay range of M&A salary can be from $151,000 to $423,000 per year depending on the position. 
  • The most high-paying US states in terms of M&A salary are Connecticut, the District of Columbia, and Maryland. The lowest-paying are Colorado, Oklahoma, and Alabama.

The mergers and acquisitions process doesn’t end with the deal closure. Moreover, the post-merger integration process that happens after has even more impact on the deal’s success. 

The post-merger integration is the process of combining two businesses and their assets, people, resources, and technology into one in a way that creates the most value for the future of the company and accelerates synergy realization. Without having a post-merger integration phase well-planned and all the possible post-acquisition challenges addressed, a deal is at risk of failure. This is especially true considering the high rates of deal failure, which is up to 70%-90%, as stated in some resources.

So what are the key challenges of post-merger integration, and how can they be addressed? We’ll figure it out in this article.

Top 8 common post-merger integration challenges

Let’s review 8 most common post-merger integration issues and challenges and possible ways to mitigate them:

  1. Cultural differences
  2. Technology integration
  3. Operational alignment
  4. Organizational restructuring
  5. Talent retention
  6. Leadership issues
  7. Communication challenges
  8. Customer retention

1. Cultural differences

Cultural integration is one of the most critical parts of the successful integration process. To be precise, difficulties in cultural alignment are the reason for 30% of failed deals. This is because employees of both companies have different work styles, communication methods, and general values. And ruining them for one of the sides could lead to overall employee concerns and result in a huge loss of talent. 

Combining two distinct corporate cultures into one is a complex task and requires particular attention from integration teams. That’s exactly why 60% of businesses already make a cultural assessment an essential part of the due diligence process.

Interesting fact: One of the biggest M&A deals in history, the $350-billion AOL and Time Warner merger, failed due to huge cultural differences.

How to mitigate?

  1. Conduct a thorough cultural assessment of both companies before the deal to detect similarities and differences in corporate cultures.
  2. Assemble a dedicated integration team that will be responsible for managing the cultural integration process.
  3. Ensure transparent and timely communication across employees during each transition stage.

2. Technology integration

The process of combining two companies into one also includes IT systems consolidation.

Both the acquirer and acquired company use different tools and have different IT processes built. For successful integration, all these services should be carefully merged into one without loss of efficiency and disruptions in operations.

Interesting fact: Technology integration issues are one of the reasons why the eBay and Skype merger failed in 2009 since Skype’s technology wasn’t compatible with eBay systems.

How to mitigate?

  1. Conduct a thorough IT due diligence, assess all the available IT systems, and decide which ones you’re going to keep or implement.
  2. Have a dedicated IT integration team assigned, with core IT leaders defined.
  3. Create a detailed IT implementation roadmap with key goals described.

3. Operational alignment

Just like with IT systems, merging companies also differ in operational styles. It concerns different supply chain management, customer service, manufacturing practices, and other types of operations within a business.

Not addressing these post-merger challenges can lead to customer dissatisfaction, disruptions in operations, and other problems that could negatively impact operational synergy.

How to mitigate?

  1. Perform a thorough operation due diligence, assessing the operations of both companies and defining what aspects to keep and what to omit.
  2. Develop a comprehensive integration strategy with key operational strategic objectives defined. 
  3. Have a dedicated operation integration team assembled, with key roles and responsibilities assigned.

Pro tip: For a better understanding of post-merger integration objectives and addressing the most common challenges, develop a detailed post-merger integration playbook.

4. Organizational restructuring

The transition of two business entities into one presupposes combining their organizational structures into one as well. This comes with lots of peculiarities and challenges, since all the reporting lines, decision-making processes, as well as roles and responsibilities should be aligned. 

Failure to address this integration issue can lead to confusion among the employees, which, in turn, can significantly impact the overall staff effectiveness and even cause a pause in operations.

How to mitigate?

  1. Before the deal closure, assess the organizational structures of both companies, define areas that overlap and those that don’t, and think of possible improvements.
  2. Create a streamlined organizational structure for the new entity, with all the reporting lines described. 
  3. Ensure clear and transparent communication about the organizational structure among all employees so that everyone understands their responsibilities and objectives. 

5. Talent retention

Key talent retention is one of the biggest M&A integration challenges. First of all, massive layoffs are always a part of the M&A process. For example, as a result of the $44 billion Elon Musk’s acquisition of Twitter (now X Corp.), about 6,000 people were laid off, while only 1,500 employees were kept. What’s more, rough statistics state that about 30% of employees are deemed redundant when two businesses in the same industry merge.

Additionally, the integration process is sometimes stressful for employees due to the number of changes that take place during the merger. This can also impact their motivation and lead to resignation.

How to mitigate?

  1. Ensure transparent communication among all employees during each stage of the transition. Everyone should clearly understand their responsibilities and opportunities when achieving overall company goals.
  2. Develop comprehensive talent merger and acquisition strategies that define all the key roles that should be kept and also suggest incentives for hiring new talents.
  3. Offer development opportunities and training that will help employees with adaptation to the changing environment and develop the required skills for the company to achieve expected synergies.

6. Leadership issues

For companies to successfully undergo the integration period, a strong and reliable leadership team is required.

A leader, or senior management, is responsible not only for defining key goals and strategic objectives but also for driving change and establishing the desired motivation among all the employees. 

Leadership challenges can result in a loss of momentum and wrongly defined objectives, which, in turn, can lead to deal failure. 

How to mitigate?

  1. Have a structured steering committee defined, with the key roles assigned and responsibilities described.
  2. Clearly describe reporting lines and ensure a steering committee has regular meetings for discussing integration updates.
  3. Ensure key stakeholders’ engagement.

7. Communication challenges

Based on PwC’s 2023 M&A Integration Survey, 59% of respondents indicate communication as the main driver of the change management program in the M&A integration. Indeed, poor communication during the transition can lead to massive confusion and uncertainty among the employees. This, in turn, can result in the loss of motivation, an effectiveness decrease, and even a pause in the company’s operations.

How to mitigate?

  1. Establish clear and transparent communication with all employees at all levels. 
  2. Ensure that all managers have regular meetings with their teams that help to keep staff informed about all the essential processes and check their state.
  3. Have a dedicated human resources team assembled that will be responsible for maintaining clear communication among the organization during all the transition stages.

8. Customer retention

The PwC’s survey on the consumers’ satisfaction with companies that undergo M&A shows that 17% of customers do less business with a company that’s in the merging process or even stop any business with it. This speaks volumes about the importance of customer retention during the integration process. 

Such a rollback in the number of customers directly impacts the company’s revenue, and thus, merger success.

How to mitigate?

  1. Keep all the customers informed about the ongoing and planned changes and establish clear communication at each transition stage.
  2. Maintain an excellent customer service team that will manage customer experience.
  3. Assess the products and services of both companies, define what to keep, what to improve, and what new to implement to preserve current customers and attract new ones.

Note: Learn about the main risks of mergers and acquisitions in our dedicated article.

Maintaining employee morale during integration

Culture Amp’s research on how M&A impacts the employee experience reveals that both mergers and acquisitions negatively impact employee’s perception of decision-making, motivation, and alignment. At the same time, employees feel more negatively when undergoing an acquisition rather than a merger.

This is because during an acquisition, an acquirer absorbs the target company, and it ceases to exist. And because of such a process, employees from the target company can often lose their sense of connection to the current company (as it’s soon to be dissolved into the new company), and thus, lose motivation to contribute to the new company operations.

Naturally, such a loss of motivation and uncertainty can lead to a significant drop in staff effectiveness, which, in turn, impacts overall company operations and thus, post-acquisition integration success.

So, how to change that?

  1. Communicate. Establish transparent communication with employees during each transition stage, hold regular one-on-one and general meetings, explain company-wide and inside-team decisions, clarify general objectives, and ask for feedback. In short, involve employees in the post-merger integration support process.
  2. Recognize. It’s also essential to notice all the efforts and each employee’s input in the integration process. Provide regular feedback, reward good work, and ensure a culture of collaboration at all levels.
  3. Empower. Establish an atmosphere of trust within the organization. It’s crucial that every employee feels a sense of belonging and that they’re an essential part of the organization. Provide a certain level of autonomy for everyone and ensure the manager’s support of goals.
  4. Train. For employees to feel needed and have the required skills for achieving expected merger synergies, roll out regular training sessions and draft a development plan for each role. This also helps in managing expectations of the post-integration process outcomes.

Key takeaways

  • Post-merger integration is a process of combining two businesses and their assets, resources, people, and technology into one business entity in a way that creates the most value for the future company and helps to realize expected synergies.
  • The most significant challenges of post-acquisition integration include cultural differences, technology integration, operational alignment, organizational restructuring, talent retention, leadership issues, communication challenges, and customer retention.
  • Post-merger integration also has a huge impact on employee’s morale and motivation. To maintain high morale and productivity, deal-makers should ensure clear communication across all the teams, recognize everyone’s efforts and input, establish a certain level of autonomy for each specialist, and ensure quality training and development plans for all roles.