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Closing the Deal is Not the Finish Line: Navigating Post-closing Integration

posted 12 months ago

What happens after the deal has closed? How does one ensure that the key objectives behind the deal are met once the dotted line is signed? Here, lawyers Prasenjit Chakravarti and Nitish Goel discuss the importance of a watertight post-closing integration plan.

The finish line, the chequered flag, the summit – as is the case in sports, reaching the ultimate goal and completing an important task puts us in a celebratory mood. Naturally, the same victorious fervour is felt at the completion of a large business deal as well. Getting a deal to completion consumes a lot of energy ranging from drawing up of completion checklists, allocating responsibilities and monitoring completion of all actions within the agreed timelines. Hence, it is fairly easy to get distracted after a successful closing and take the eye off the ball after completion. However, the initial period after closing is crucial for putting together a roadmap to integrate the businesses and create synergies to ensure that the key drivers and objectives behind doing the M&A deal are met.

Deal done! What next?

Every M&A deal has its own unique business and operational challenges and therefore, a one-size-fits-all approach for post-closing integration should not be adopted. All of the issues which are relevant to the target business may not be flushed out during the due diligence exercise as the buyers are increasingly moving towards a ‘red flags only’ review of a target rather than a detailed due diligence. This is so since the buyers are usually eager to complete a deal as expeditiously as feasible and thus, rightly so look at the “big picture” issues rather than getting bogged down with granular or housekeeping issues. It is, therefore, important to build a customised and a comprehensive strategy to consolidate the target business with an aim to integrate the businesses and unlock maximum value.

Since the internal management team and employees of the target will continue to focus on day to day affairs of the company, professional experts should be engaged for drawing up a transition plan and entering into appropriate documents to ensure that the parties have appropriate protocols in place to achieve their desired objectives.

Below are some of the key focus areas which the parties should be mindful of while designing a post-closing integration plan:

  1. Post-closing obligations: These obligations are usually set out in the acquisition document. They are in the nature of rectifying any discrepancies arising from the findings of the due diligence exercise as well as reporting requirements under various statutes due to change of control or management of the target business. These obligations are usually cast on the seller. However, the buyer should ensure that these are met in a timely and satisfactory manner since any liability arising out of a non-compliance may fall on the target company which is consequently a loss for the buyer.
  2. Corporate Governance: An M&A deal typically results in change in the composition of the board of directors as well as senior management of the target business. Adopting a set of corporate governance principles can greatly influence the behaviour of all internal stakeholders. A well-defined structure can be put in place to avoid any situation of conflicts, ensure transparency, conducting transactions with integrity and fairness and timely and effective disclosures to all concerned stakeholders. This should be monitored by setting up appropriate board committees and continuous evaluation of the performance of key decision makers such as executive directors and C-suite employees.
  3. Operational matters: The buyer should consider revoking all prior authorisations and putting in place a well-defined authority matrix relating to general representation of the company, authority to sign documents, authorised signatories for banking transactions etc. This will ensure that the target is not bound by any agreement which has not been properly authorised. If the transaction structure is such that the existing contracts (e.g., in case of business or an asset transfer) are required to be novated or assigned, then the parties shall enter into appropriate arrangements with the contractual counterparties for the same.
  4. Employee matters: Human capital is perhaps the most important asset for any successful business. A buyer should draw up a detailed organisation plan which lays out reporting lines and affixes accountability. Also, it is important to ensure that the terms and conditions of the employment agreements and the personnel policies of the target business are aligned with the buyer. It is imperative to ensure that the management team and the key employees of the company get behind the buyer and strive to create synergies between the businesses. The legal experts can help in revising templates of employment agreements to build watertight provisions as well as align the human resource policies in compliance with applicable labour laws.
  5. Marketing and communication: The acquisition document usually contains a restriction that the parties should not make public announcements regarding the transaction without each other’s approval. Therefore, it is important to agree on the manner and text of the announcements so as to ensure that the intended message is sent out. Also, it is important to ensure that an apt announcement regarding the transaction is made to the important stakeholders of the business such as employees, customers and suppliers. The legal and marketing experts can be engaged for drawing up such communication.
  6. Transition service agreement: In certain cases, the buyer may require seller’s assistance in certain areas and accordingly, it may be advisable to enter into a support services or a transition services agreement. Such an agreement can help in delineating the roles and responsibilities of the seller, and the buyer can feel secure that the target business will continue to run seamlessly and  get same level of support in such areas for a foreseeable period of time until the business is fully integrated. There are various aspects of a transition services agreement which should be thoroughly examined such as the length of the agreement, which depends on the nature and extent of services required from the seller. The seller should not agree to more onerous responsibilities as it is not in the business of providing support services and does not have any long-term incentives. The buyer should build robust confidentiality obligations to ensure that confidential or sensitive business data is not misused by the seller. A legal advisor can play an important role in drawing up such an agreement which meets the expectations of the parties.
  7. Anti-trust concerns: In a joint venture scenario, if the parties are also in a competing business, they have to be careful to ensure that the integration and operation of the business is in compliance with anti-trust laws. The parties may be prevented from sharing competitively sensitive information such as pricing of products, sharing of raw material costs etc. The legal experts can help in establishing clean teams to ensure due compliance.

The road ahead…

Many compare a merger/ acquisition to an arranged marriage – the similarity being that both parties must work together long after the wedding is over in order to build a stable foundation for the years ahead. If realistic objectives are framed, proper attention and priority is given to the post-closing integration plan, implementation is fully supported by the management of the target business and periodic review and assessment is carried out, the likelihood of accomplishing the targets of an M&A transaction can increase manifold.

The onset of COVID-19 pandemic has made it difficult to monitor compliance of a post-integration plan for various reasons including due to restrictions in terms of mobility and reduced engagement with employees. Businesses are struggling with mitigating demand and supply side challenges and may not have sufficient time to prioritise integration of target businesses. Buyers are also under tremendous pressure to demonstrate value creation in undertaking inorganic growth.

It is therefore now more important than ever to develop a precise, quantifiable and relevant action plan to successfully integrate businesses after an M&A transaction and achieve the goals set prior to undertaking the transaction.

Khaitan & Co – Prasenjit Chakravarti and Nitish Goel

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at [email protected].

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