Few things about the energy industry today are certain, but one sure bet is that industry mergers and acquisitions will continue. This restructuring may take the form either of acquisition or merger of an entire company, or it could entail the purchase or transfer of control of a set of specific assets (perhaps with relevant staff). The odds against success are high, if not overwhelming. At least one analysis estimates that less than half of major mergers outperform the relevant industry return to shareholders. Nevertheless, these combinations continue because the potential for superior returns is clear and attractive.
Leaders in the energy business have a great deal at stake in this latest wave of restructuring. Whether part of an acquiring team or of an acquired asset or business, one’s fiduciary responsibility is to find a way to succeed. Experience demonstrates that:
• Success is difficult.
• Success is possible.
• Certain measures improve the chances for success.
By taking a proactive approach to restructuring, and toward successful integration in particular, managers can enhance both the rewards to stakeholders and to their own careers.
My personal experience as the chief strategist for the major business unit of a large integrated energy company influences these observations. In the early stages of a surprise bid by another similarly sized energy company to take over our company, and with hostile barbs being exchanged at the corporate level, the CEO of our business unit decided to begin preparing for a major restructuring. We were clearly headed to a new place organizationally. This early warning gave us the luxury of more time than is typically available, yet we approached it knowing it was more than an academic exercise—it was a stroke of luck that few executive teams get.
The preparation process proved quite successful. The business unit survived largely intact, and several senior managers from our team moved to positions of greater responsibility in the newly merged corporation, at least partly on the strength of their performance during the integration phase.
Leaders should begin to prepare for this “adventure,” which almost every energy professional will experience at least once.
There are three major stages for a corporate restructuring:
1. Pre-deal
2. Transition
3. Integration
Each has its own characteristics.
If you are in the energy industry, it is time to begin pre-deal initiatives. During this stage, management needs to prepare a culture ready, willing, and able to accept change and to execute changes successfully. In our case, we adopted “change management” at several levels to help leaders throughout the company learn how to help employees cope with necessary changes. At the corporate level, there was formal annual training in change management. The vision of this program was to prepare for acquiring others. In the course of this training, we realized we were likely to be on other “shopping lists” as an attractive target, as well.
The pre-deal stage should address management preparation, environmental scanning, and leadership of the workforce. With regard to management preparation, managers can develop enhanced skills for addressing corporate change, thereby improving their comfort level with change. One particularly useful action is to conduct an offsite exercise for key executives to “experience” restructuring.
An active executive team could benefit from an encounter with restructuring at almost any time. The key is confidentiality: If your team has a tradition of honoring confidentiality, proceed as soon as possible.
The elements of this experience include:
• Setting the context for corporate restructuring;
• Sharing concerns and earlier experiences;
• Role playing; and
• Downtime discussions.
The context needs to be set in terms of the trends evident in relevant industries and an overview of the acquisition and integration processes. An outside expert can be helpful here. (Such a resource also may prove helpful in the background throughout the exercise).
A facilitated discussion among the executive participants constitutes another important element of this exercise. Most likely, some participants will have firsthand experience with a major corporate merger or acquisition. Sharing that experience with colleagues and then discussing the advantages and disadvantages of such transitions will mean much to the rest of the executive team.
Particular attention should be paid to the “lifers” who have devoted their entire careers to one company; they are likely to be particularly anxious. If the right lessons are drawn out of this sharing, all members of the team will begin to see that there is hope beyond the integration. This insight can provide an important foundation for each team member if struggles begin later.
The next important step is role-playing. The executive team should separate into groups of four to 10 people. Each team plays executive roles within either an acquiring entity or an acquired entity. Each team can address one or two cases, depending on time available and the size of the group.
The preparation involves creating four cases, two in which the organization acquires assets and two in which assets are acquired. Within the subsets, make one case a relatively attractive situation and one less so. In our case, we had targets we would have liked to absorb and we had organizations we admired; this made attractive cases rather easy to craft. The problematic cases require special attention; the CEO may want to fine-tune such cases.
The role-play process includes case preparation, summary case presentations, case assignments, case analysis by a team, team presentations of recommendations “to the board,” and follow-up discussions.
The role-playing helps get the worst fears front and center for all.
Senior management also needs to be scanning the industry environment. Trends, competitor analysis, and other M&A activity provide important insights to skilled observers.
In addition, management needs to lead. In general, the work force throughout the energy industry is anxious. If your company is “on the hunt” or “in play,”workers may be worried about their jobs. If they are not concerned about jobs, they are concerned about pensions. Managers must communicate frequently and effectively. This will help in the short term and even more when a restructuring hits.
The transition stage begins when an acquirer identifies a target to acquire (or a potential partner finds a potential match). Although many have traditionally thought of integration as an activity that begins after closing a deal, the specific planning and actions for a successful integration should start as soon as the target is identified. Execution of the integration plan also should begin during the transition stage, not after closing.
Early on, establish the purpose of the acquisition or merger. Specify, in black and white, the value proposition, and refer to this statement often. During the transition struggle, there will be times when emotions or egos will rise in influence and may push to move a deal forward when there no longer is a value-adding opportunity. Providing safeguards to avoid overpaying or “winning” at any cost is a sound investment at this stage. Many an experienced M&A veteran has said the best decisions they made were decisions to say “no” to potential deals.
Remember, money and time already spent are sunk costs. Focus on going-forward costs and remaining potential gains.
Once contact between the companies begins, it is important to gather insights on culture along with the standard finance, accounting, legal, compliance, technical, and environmental due diligence. Make certain that you have a few candidates in mind for the role of integration manager at this stage, and have each candidate participate in some aspect of due diligence or other information gathering. Having feedback from preliminary negotiations is particularly useful; make certain staff with high “emotional intelligence” are involved and that they report back frequently on how negotiations are going.
The public domain contains plenty of information about company leaders. As you determine a target, or an acquirer, gather this information to identify points of common interest, and disseminate this among senior management. A meeting to review this material can help to assemble a better sense of the “other” team, and can reduce tensions during visits between the firms involved in an acquisition.
Other important tasks at this stage include management of relationships with customers and suppliers at both entities, and addressing relevant regulatory issues (federal, state, or international). All these stakeholders have concerns, and you ignore their issues at your own peril. Prepare to get out to them as quickly as possible with a coherent story and useful, consistent facts.
Another critically important consideration is to make certain that communications do not violate Federal Energy Regulatory Commission (FERC) standards of conduct or related regulations. Information regarding jurisdictional transmission (power or natural gas) cannot be shared with affiliates or potential future affiliates in any unduly preferential way. Assessing such potential requires an understanding of the limits imposed by FERC regulations, in particular. Those unfamiliar with the restrictions may plan on value-adding deals and processes that may not be legal in the FERC-jurisdictional world. (This important topic could be an article in itself.)
Management should identify the integration manager as early in the transition stage as proves feasible. The selected manager typically will be a senior executive with experience on a large, complex transaction. The selected candidate needs to:
• Want the job (if there are family conflicts with the candidate being away or working crazy hours, find another candidate);
• Have the skills to address expected challenges (be respected, knowledgeable, and approachable, at a minimum); and
• Have the emotional intelligence/cultural awareness to work with the new colleagues and their organization.
Towards the end of the transition stage, the integration process begins to move to a much more public posture. When a deal is ready for announcement, the visibility of the integration effort increases significantly. Make certain to keep all stakeholders as fully informed as possible. Provide guidance to those who have been operating under restrictions, making it clear what remains restricted and what is now public information. It is usually impossible to undo the harm caused by a mistaken revelation.
As this stage approaches its end, the integration manager should have assembled a small core team. This team should have developed an inventory of the skills and other relevant characteristics for the managers to consider for the full integration team and have identified candidates to staff the team. Senior management of both entities should review the planned staffing of the integration team before closing. The staffing plan need not fill all positions; it should be adequate to identify essentially all working groups and set leadership for each task.
Closing of the deal completes the transition stage. Some celebration is in order; but make sure to include your new colleagues and to prevent any posturing that might be perceived as gloating. The more respect shown at this stage, the better the prospects for meaningful cooperation.
The closing is an important milestone that begins the life of the new entity. At this stage, the pre-work on integration should provide big payoffs in continued productivity, minimal distress for all workers, customers, and suppliers and contribute to success in many other ways. The historic approach to integration did not provide effective, timely actions, nor did it provide for effective, timely reactions to the inevitable and numerous surprises that occur post-closing.
The morning after the closing is the prime time for an all-hands meeting with a message from the CEO and an introduction of the integration manager and his core team. The team composition should demonstrate the commitment to being a new, cohesive entity formed from both sides of the combination. The location of the meeting(s) also take(s) on special significance for everyone.
Soon after the integration manager’s introduction, the manager should communicate several milestones to the new company, including when the full integration team will be in place, and when the team will complete the final integration plan.
The immediate post-closing message needs to convey that senior management has committed to implementing a coherent vision, that things will happen quickly, that the workforce will learn what is planned as soon as legally possible, and that everyone will be treated with dignity.
The major challenge at this stage is that two or more businesses need to keep running while the workforce is preoccupied with all the changes. At the same time, many key managers are on special assignments, and customers and suppliers are reconsidering what they will do in light of the restructuring.
There will be many meetings. Few of these meetings will contribute to improved productivity in the short run; nevertheless, they are essential. Reminders to everyone about “minding the store” and encouraging cooperation with new colleagues and sister companies all need to take place frequently and sincerely. Reminders about inappropriate communication also need to happen frequently. The head of communications needs to have a central role in both the integration team and the new executive team.
Avoid fluff. Treat everyone as adults. Employees of the acquired company know the controlling entity paid a premium for control of their firm’s assets and that savings and synergies need to be generated to pay for this premium of “goodwill.” The communications team should inform all as quickly and as fully as possible about the new organizational structure, savings and cash generation targets, and how the executives plan to achieve them. Silence only will generate anxiety and rumors.
In addition to broadcast communications, hold both working meetings and communications meetings. The communications meetings should address:
• Integration or separation of functions;
• Locations of functions;
• Customer relationship management;
• Supplier contact management;
• Compliance (policies and procedures during the integration period, as well as permanent changes); and
• Other human resources issues (e.g., how benefits will function during integration and what the new set of permanent benefit options will look like).
The teams to address these matters should have members from both prior entities. Team leaders need to convey the urgency of the assignments frequently. Teams should accomplish multiple “wins” along the path to completion, and the communications team needs to help note and celebrate accomplishments.
The implementation period typically runs 100 days. Release the 100-day plan with great fanfare. Track progress (if anything appears off-track, act quickly), and provide cause for “mini-celebrations” (excuses for mixing staff from each entity will help create bonds that normally form over much longer periods in the normal course of business).
If the “NewCorp” 100-day plan goes well, staff in the newly created company should start thinking of themselves as part of the new corporation about midway through the 100 days. As the 100-day period ends, it should be time for one last ceremony to acknowledge the contributions of the integration team and to announce the assignments of the remaining members.
Challenges directly attributed to elements of the deal likely will remain. Corporate finances, for example, often are highly leveraged to make the deal happen, and the cash flow implications can continue for quite some time. Nevertheless, the goal from the beginning of integration planning should be that official recognition of the meshing of the two entities into one new entity is completed 100 days after closing.
Work will need to continue on developing new, shared processes, practices, terms, etc. This work, however, will be performed by staff from “NewCorp,” not from either of the earlier companies.
Before you know it, the next restructuring will be ready for planning. Good luck.