[00:00:00] Speaker A: The best leaders, through day one and through integration, put themselves in every employee's shoes and say, how does my life look differently today than it did?
[00:00:07] Speaker B: Culture drives value. Culture drives synergies. And the people are at the core of that.
[00:00:15] Speaker A: Welcome to the next imperative, a podcast hosted by a and m energy leaders tackling key issues and trends in the industry.
[00:00:24] Speaker C: Hello, and welcome back to the next imperative. My name is Jeff Angulo, and I'll be your host and moderator. Joining me for today's conversation are my Alvarez and Marsal colleagues, Mark Clevenger, Jay Campbell, and Andrew Burns. Gentlemen, welcome.
[00:00:40] Speaker D: Thanks for having us.
[00:00:40] Speaker B: Thank you.
[00:00:41] Speaker A: Thank you, Jeff.
[00:00:41] Speaker C: You bet.
Today we're going to continue on our m and a series, and we're going to talk about the period, post close or after day one. And our vernacular. Day one is the day of closing of the transaction, when ownership changes hands. Specifically today, we want to talk about integration, execution, synergy, capture. I think we can all agree that actually capturing the synergies that are promised in a transaction announcements are critical for the market to proceed the transaction as a successful one. And we want to talk a little bit about that and a little bit about the execution and how you actually get the two companies to combine as smoothly and seamlessly as possible.
With that, why don't we jump into the conversation? Mark, can you kick us off with your thoughts on what a company needs to be ready to do on day one when the transaction closes?
[00:01:25] Speaker D: Yeah, sure, Jeff.
When a transaction closes and you come to day one, there's often a misconception that you have to have everything done and that you got to operate as a combined entity or two separate companies, whatever the transaction is.
And that's really not the case. You don't have to have everything done on day one. There's a lot of things you can't even start doing before day one, but there are some really important things that you do need to be prepared to have to do. And the first is around your people and engaging them. While employee engagement really starts at deal announcement, when it becomes public knowledge that the transaction is going to occur, the real recruiting has got to happen.
At closing, folks are trying to decide, do I want to be part of this organization or nothing. They're evaluating leadership, they're evaluating culture, they're evaluating their colleagues and their role. And so being able to clearly communicate those items and bring them into the fold is really important. And so dealing with people issues, including payroll and benefits and insurance, and having those ready to go at day one, when the prior companies programs may end is really important.
I also think about things that have to convey at close and that there may be some requirements around, you know, contracts that need assignments or have payments associated with change in control.
So dealing with those things, they come to immediate attention.
[00:03:02] Speaker C: Andrew, what do you think?
[00:03:04] Speaker A: Yeah. The other thing that I would add to that is oftentimes at close, the focus is on internal and what do our people need? What does our organization now look like? How are we going to take care of everybody? But the element that you can't forget is that external communication as well, as soon as a transaction closes, you're going to get questions externally, whether it's from suppliers, whether it's landowners. You're also going to have to start reporting to the board on progress. And so all of those things are important to start considering at closes. You may not need to communicate right away to those parties, but you should definitely have answers to questions that are going to come.
[00:03:40] Speaker D: You expect the inbounds, right. They're going to. They're going to come even if nothing is changing, because you may not, it may not change how a supplier invoices you or how they contract with you on day one, but they're going to be asking those questions. So have answers for them, and in best case, proactively put those answers out there.
[00:04:00] Speaker C: That's right. Let them know nothing's changing, or here's how it's changing, and here's what you need to be running. Jay, what can you add?
[00:04:06] Speaker B: Yeah, as I think about that, I want to go back to the people comment because this is all in a lot of ways about the people.
When you walk in and go to close on day one, you're typically going to announce, here's what our new structure is going to be, and people start to think about, what does that mean for me on a daily basis? How does my role change?
What are the implications of that? How do the processes change? And I think that can get easily overlooked because people, leadership will often think, well, they just know that they're going to do the same thing that they did the day before. Nothing's changed.
Well, that may be true, but that's not what they think, because in their world, everything is changing and there's so much uncertainty. So the more clarity you can provide on day one of what? What do I do differently today or not do differently will help to really nail down and make people feel more comfortable in the transition.
[00:05:01] Speaker C: You're welcomed and part of it.
[00:05:02] Speaker B: Welcomed and part of it. And you've thought about them, I think is a key part?
[00:05:05] Speaker D: Well, it helps them understand what their role is going to be, which helps them get comfortable. I want to be part of this organization or I don't.
[00:05:11] Speaker C: Andrew, what are the most critical activities that you see to ensure integration? Success?
[00:05:16] Speaker A: First and foremost, you have to have safe operations. And so making sure that your folks out in the field know that if there's an incident, here's where I go, here's who I contact. It may change day one, it may not. If there is a change. Clarifying who those key contacts are is critical. We cannot have any interruptions to the business because of a safety event on day one or otherwise.
The second is around people. We talked about that a lot, but really understanding where people fit in the new organization.
As Jay said, a lot of the communication is around. Here's your new role. Here's your new manager, here's your new title. But what you don't think about is what happens on the day to day.
How do my individual activities change? How do my tasks change? Where do I fit in this much bigger organization than the one that I was part of before?
The best leaders through day one and through integration, put themselves in every employee's shoes and say, how does my life look differently today than it did?
The other thing I would add is, post day one, it's about making sure that the organization and processes are stable. There's oftentimes this perception that we have to rush to optimize, but you have to focus on stability first. So making sure that the building blocks are in place to build the foundation of the new organization, which will have hiccups, but making sure that that foundation is strong before you start tweaking, changing and optimizing processes.
And then I would say, most importantly, is an eye on synergies.
After the transaction closes, all eyes are on those synergy targets. Where are they going to come from? How are we going to get them? When are we going to get them? And who is going to get them? So, having a clear plan around synergies and having the team and the new organization rally behind those targets is critical to post day one success.
[00:07:10] Speaker C: And you need to track them, too, to make sure they're actually doing it. It's not just a day one thing. And, okay, they're going to go do this and make the assumption. You've got to make sure that it's actually happening.
[00:07:18] Speaker A: That's right. It's really easy to get bogged down and just getting to day one, but the work doesn't stop there. The work really starts there, right there is so much to do, so many eyes on those synergy targets.
[00:07:28] Speaker B: Yeah. And I think another interesting thing that actually feeds into the synergy point as well is the cultures, for the first time, start to actually interact. And so no matter how much you've thought about the culture side, no matter how many surveys, employee surveys you've done, culture surveys, the way you've talked about, these are our core values. This is how we're going to operate going forward. It's not until day one that actually, the two companies coming together start to realize, wait, we do things differently, and it feels different. And that feeling different causes distractions, and it can impact safety, because when people are thinking about a bunch of things, that's not day to day job activities and making sure they're being safe on the every single day, and they're distracted, whether it's distracted while driving or just not thinking about what I'm doing, when I'm turning wrenches, safety incidents happen. And so the more you've thought through and help communicate and help the organization know how to transition through, that cultural side is going to be an important part of it as well.
[00:08:30] Speaker D: How many times have we seen a management team say, our cultures are the same, we're agile, we're lean, it's the same thing. But when you get into actual business processes and thinking and how decisions are made, they're vastly different. And you're like, yeah, we're lean. We make decisions.
Well, how long does it take to allocate 50 million a capital? Oh, six months.
We did that every week. Right? I mean, like, they're just see it time and time again. And so I think you're right, Jay. It's like, when we start actually working together, that's when we find out what. What our culture really is.
[00:09:13] Speaker A: It is so easy to brush similar cultures under. Under the rug. And my key piece of advice to clients here is find those folks from the company that you've acquired of that are your cultural conduits. That is so important to understanding the inner workings of the company prior to when you're taking it over. And if you have those folks that you can really lean on to understand, hey, we're making this decision. How is it different from how you guys would traditionally do it? If you can start to understand those differences in how folks operate and how they think about the day to day decisions, it will go a long way in bringing those cultures together.
[00:09:51] Speaker B: Yeah. One of the things I'm going to start getting us into synergies with this conversation. I know that's where it's going to go.
[00:09:58] Speaker C: What's the next question? So perfect.
[00:10:00] Speaker B: That works out well. So the thing that I'm thinking about is the three of us actually worked on a merger together. And in that process, yes, cultures, their values, they did a mapping, they did it all and said, hey, we're actually pretty similar. But there was an underlying question of, we don't know these people, we don't know their capabilities. We don't know, can we trust them? Just not. Not in a bad way, but just they've never worked with them. It's hard to automatically say, andrew, I trust. I've never worked with you before in my life, but I'm going to trust you to make all the right decisions.
[00:10:35] Speaker C: Or trust you with my life, or trust.
[00:10:36] Speaker B: In a field, trust is earned. And there needs to be ways to accelerate. How do we build trust? How do we build those working relationships in a way where we can accelerate the cultural integration? And we did an activity that was called a sprint. And we've done it really around cost takeout in a number of ways, different situations before.
But what was interesting in this case is we brought the teams together, we focused them on a singular objective around a synergy target number, and we ran an exercise where they had to come together in a very short period of time to deliver results that they never thought they could achieve themselves. And what happened is they had no choice but to work together. And the comments we heard from that was, this was amazing. I now have a much broader reach of my network than I've ever had before. I've worked with these people. I now know their capabilities. I know the skills they bring. I have a great appreciation for what they bring to the table, and we're ready to go now. As a company, we have integrated in a lot of ways, culturally, in ways that we would have taken.
[00:11:49] Speaker D: And I think that effort turfed up a number of areas where we needed to put more glue in holding the organization together, where the integration plans weren't probably not tight enough because there was just oversight.
[00:12:04] Speaker B: And by the way, the synergy number was great.
[00:12:09] Speaker C: Formed a team, did it well.
[00:12:11] Speaker B: This was. What was so amazing is we had set a pretty aggressive target, what we thought was a pretty aggressive target by we, the collective integration team that was leading the effort on synergies, and they ended up doubling the synergy target. And the executive team of that company went out and announced an increase in the synergy number to the street.
[00:12:33] Speaker C: Wow.
[00:12:34] Speaker B: They went public and they are on track to actually deliver on that number. That they, the increased higher number, now they're still tracking to that same number.
[00:12:42] Speaker C: What a fantastic outcome.
[00:12:43] Speaker B: It was a great outcome. Cultural integration, synergy, capture, everybody working together.
That whole team did an amazing job on synergies.
[00:12:54] Speaker C: Jay, what do you typically see? What are the most common synergy categories you find in these transactions?
[00:12:59] Speaker B: The typical ones everybody's aware of is your GNA, your opex, your capex, and then your financing costs. Financing costs is always the easy big one. You can go get your three basis points and mark down your 30, 5100 million dollars of savings. That you can get to GNA is obviously the most painful one. Cause that's really what we're talking about, is your organizational headcount reductions, your opex and your capex. At the opex, we're talking about field operations, how you run in your field, how are you maintaining your equipment, how are you maintaining your wells, how are you leveraging the supply pace? And then on the capex, it's really capital efficiencies. How am I making decisions on the capital that I'm deploying? And so when I kind of step back and say, look at just synergies overall, typically what we see is the focus gets to be about, well, we're going to consolidate our supply chain organizations, we're going to have greater buying power, and that's how we're going to get some of our savings. That's going to get you a few percentage points, and you're going to hit some numbers. And that is absolutely lever. But the real savings comes from doing things differently. And we have to rethink how we do things. And we have to think about our portfolio overall as it sits now. And look, how do we optimize this portfolio going forward to drive step change in our cost structure and not just fix things around the edges?
And that comes back to, and I keep hitting this as culture, because culture drives value, culture drives synergies.
And the people are at the core of that.
[00:14:40] Speaker A: And really where you see the biggest uplift from a synergy standpoint, and again, this ties back to culture, is you have both companies really willing to listen and to operate differently when they're willing to sit across a table from their new counterpart and say, hey, I do it this way. How do you do it? There's going to be opportunities there because we're not going to operate the same way. And so whether you bucket it under culture, you bucket it under how we approach synergies, being willing to have those conversations and not saying our way is the right way, is where you're going to see the uplift.
[00:15:12] Speaker D: I mean, listening to you guys, it sounds like synergies make sense and the market's going to reward them. When there's industrial logic behind it, it's like we're not really rewarding you for refinancing, for getting a few points on GNA, but for putting together a combination of businesses that make more sense together than they do apart. Because there's industrial logic, because there's vertical integration that unlocks commercial synergies that we can redirect flows into more profitable markets or control the value chain in a different manner that we couldn't do separately and extract more value.
And to do that requires the team to agree. I can sit across from each other. We see that industrial logic. And so I think that really falls down onto leadership of painting that vision of why did we put these organizations together and how are we going to create more value together than we could apart.
[00:16:12] Speaker B: I think that's important, because when the street reacts to the synergies, there's obviously the synergy number that's announced at the transaction announcement, and the street will value that and say, do we believe this to be makes sense in basin operations?
That's pretty simple. When you're looking at an oil player, in a gas player halfway across the country, markets don't tend to see the linkage there as much. But when you're looking at in basin, it makes sense. Then the next question they're going to ask is, do we believe that the organization can get those numbers, and do we believe that those numbers are big enough to reflect reality? And I think the first number that typically comes out is a number that, and rightly so, that the operators believe is doable like this. We believe we're going to be able to pull this one off.
[00:17:08] Speaker D: P 90.
[00:17:09] Speaker B: A p 90.
I'm gonna say it's in the bag. We can get this. We have clear line of sight on how to do that. And that's what the market expects. That's what Emmer does, and rightly so, because they haven't had the interaction, they haven't really been able to spend all the time digging. They've been playing in data rooms. Right? And so that first number, by its nature, is going to be a lower number.
Then you come back and you make an update and say, here's what the new synergy number is and the market is looking for. Have they done due diligence? Do we believe it? And do we think that there's clear line of sight for them to actually execute and deliver on it? And will we be able to see it show up in the financial statements, or is there going to be just a bunch of hand waving? We hit our numbers.
[00:17:55] Speaker D: That synergy number is always going to be discounted and conservative until we get the teams working together and convicted around what the art of the possible is of the. The combined entity and why we put the two companies together. And so I think that was why the sprint was so powerful, is you assembled a team around a common goal that was aspirational at best, and it forced them to really work together and build that level of trust and understand each other's business and operating ways to go. These are the things that we can do better together than we. Than we could apart.
[00:18:32] Speaker C: Mark, a lot of these integrations fail to meet the original goals and expectations. Can you share some insights as to why that happens?
[00:18:40] Speaker D: Yeah, I mean, one of the common issues that we come across in integrations that don't go well or fail to meet their goals is a failure to appoint the right leaders at the onset.
A great integration leader has really a wide breadth of knowledge and understands the organization and how it operates and where it makes money and where the critical cost drivers are. But they also have organizational capital in situational awareness. They're great change agents. And so putting together the right integration team, and in particular, pointing the right leader is very critical.
You can't underestimate it. It's not a tactical task. I think having the right governance around integration is important and making sure that we have the right mechanisms to escalate issues and resolve them in a manner that keeps us focused on synergies, but also moving through the integration transition as quickly as possible. The last piece that I think is this relentless focus on synergy capture and knowing what the number is, having aspirational targets, knowing what activities you need to do to get to those targets, in a relentless focus on tracking and reporting those, so that when you're behind, you know where to deploy resources to go, go after them, you know how to make up for things that. That aren't on track, and you're putting people behind the right issues.
[00:20:21] Speaker B: I think one of the big issues that I typically seen is that when the integration is really focused around getting the data and the systems up and running so you can run financials on day one, and they view that as this is the integration is making sure one that we've got somewhat of an.org slammed together, and that our data is in the right place and we can start processing transactions the issue with that is when you do that, to Mark's point, you're not really focusing as much on synergies. You may have done some additional analysis and come up with some better estimates and have some better clarity of how you can get the savings, but you haven't really done the deep legwork to drive the alignment within the organization on. We're going to do things differently, like you were talking about.
We're going to really figure out how do we bring cultures together. We're going to figure out how do we bring processes together.
And then we're going to have people tasked with and make sure there's a governance in place to make sure all that is happening. Those are what drive the long term value.
It's hard work. It takes a long time.
But when those don't happen, what ends up happening is you maintain the subcultures of each of the different companies.
And it's not uncommon for us to walk into especially we're seeing all the time in these mergers that we're doing right now.
We're joining two companies together, and there's still two or three subcultures within the acquirer and the acquired company, and they never actually went through the process of let's get all lined and on the same page and let's become one company.
[00:22:08] Speaker C: And every transaction is a new opportunity to do that.
[00:22:11] Speaker B: Yep.
[00:22:11] Speaker C: Andrew, any additional thoughts on the topic?
[00:22:13] Speaker A: One more thought is we talked about having the right leaders in place to drive the integration. But where do integrations fall apart? If you lose key people from the company you're acquiring? That is the easiest way to have an integration fall apart. I came off a recent transaction where we didn't really focus a whole lot on retention of key folks because the mindset was they want to join. They're going to be part of our company because they have to be. And all of a sudden, you see people raising their hand saying, hey, I want out. And if you have folks with a lot of respect in the legacy organization raising their hands and saying, I want out, well, guess what? That's a domino effect.
[00:22:54] Speaker C: Yeah.
[00:22:54] Speaker D: It's not just the executives.
[00:22:56] Speaker A: Exactly. And so it's making sure you have a plan in place to retain those key people because you are inheriting a new business. And yes, you may understand EMP really well, but there's going to be unique opportunities, nuances to the business you're inheriting. And you can't run it without the folks who know the asset, who know the business, who know their way around the legacy organization.
[00:23:19] Speaker C: That's right. And that really needs to start happening before close, kind of at the beginning. Once the transaction is announced, that's when you need to start recruiting those people to stay. As you say, you can make the assumption that they've got a good job, they've been happy in their job, why would they leave? You still need to actively encourage them to stay and make them feel welcome and happy about it.
[00:23:40] Speaker B: Yeah, Jeff, that's exactly right. Point. And that's a great example that you just talked about with that integration specifically, recruiting starts on announcement day, and your highest performers in the organization are going to start dusting off their resumes as soon as that announcement is made.
[00:23:57] Speaker C: And getting calls from recruiters.
[00:23:58] Speaker B: Getting calls from recruiters. And the question that they're going to be asking themselves from the first time the acquiring CEO comes on the into the, into their office or out to the field, do I like them? Do I trust them? Do I think this is a valuable place to work? They're going to be making those judgments. Every town hall you have, every communication message you make, every time, how you're making decisions, how you're engaging people in decisions is all going into the fact base of do I want to come work here or not? And in cases where that integration planning isn't worked really well and hasn't been a thoughtful how do we engage the acquirer and your employee base? Because the same thing's happening with your employee base.
If you're not engaging them well, then you could have a pretty big run on your employees and they just start going out the door fast.
[00:24:57] Speaker C: Great point. And that's a great transition into our next topic. Andrew, kind of what are your thoughts on the importance of change plans? Change management as part of making a transaction. Excuse me, a transaction as successful as it can be.
[00:25:09] Speaker A: Yeah. When I think about change management, the best and smoothest transactions that we've all been a part of, change management is really a part of the integration management office. I view it as either a core part of that office or an extension of that office. You have to have somebody or a group of people dedicated to manage the change. Yes, it starts before close, but after close is when you really have to dial up the support in that change management office. And really, what does a good change management office looks like? You have a lead from either a third party, you have leads from both companies, but then you have change resources embedded with each of your teams that really understand the ins and outs of the teams, how the processes work, who the right people are to contact, and so it's about standing up rigor with that change management office as an extension of the integration management office to make sure that everybody is in sync and we're really dialed into the changes. That change management office should be going through all the blueprinting or whatever you used to really dissect the differences between how company a and company b do things. They should understand those changes and be developing plans to address those changes. They're going to have a lot of rigor that they're going to put around training and communications, and that office is very busy right on day one and even before.
But whether employees are new to the organization or they're existing, there is going to be something that's changing for them. And so having change at the core of your integration management efforts will serve you really well.
[00:26:40] Speaker D: Yeah. Having that common change office that sits at the integration management level is critical because there's change happening all across the organization. Everything from how do I log into my email to accessing printers to how do I file an incident management report, to posting AP. I mean, it just is happening in every function, right? And so if you don't coordinate them at the core, it creates confusion. And you can get where you have so many messages and so many things going through the organization that it dilutes itself and then nothing gets gets heard.
[00:27:22] Speaker C: Why don't we wrap up with some real life examples of where A and M has helped our clients identify and achieve, and in many cases exceed the synergy targets?
[00:27:32] Speaker D: Well, Jay mentioned a recent engagement where we utilize the sprint concept to really far exceed the targets that were initially put out there. And common thing I see there is, it's that relentless focus, continually reporting on them, having a plan and a forecast of what you're going to achieve and then tracking progress against it, just like you would your operational budget or your capital project. What's the progress against the plan? And then taking actions proactively to close gaps. The other element is viewing synergies from the eyes of the investor. Investors are going to measure your success and value the, the transaction on what's happening to earnings. And so being able to communicate. These are what the synergies are doing in terms of run rate and bridging earnings pre close to post close. And what came from market driven factors, what came from changes in the business and what came from the transaction, well, will give you the boost that you're looking for.
[00:28:40] Speaker B: So I'll use an example of a, a real life example where three companies came together over a very short period of time, about a year or so. And they did the typical jam it together, just get it up and running and let them operate as is. So we came in after the fact and effectively did post merger integration. And what we had to do is we had to redesign the, let's get everybody on the same, we had to look at where are the cost opportunities, all the standard levels you would think about, whether it's opex or capex financing had already been done and identified some pretty significant opportunities, developed a plan to go execute, executed those synergies. Some of those synergies we executed as a sprint concept and that also had the same concept of the same result of bringing cultures together and stabilizing the new culture, but some of more standard sourcing type of approaches and so forth.
But then what was done is we didn't stop there. We put processes and standard processes and systems in place to make sure that the results that they had achieved would be sustainable. And I think that's a key part, too, when you're looking at synergies, is it's a lot of fun to go get the synergies, go negotiate the new rates, talk about all the things you're going to do, tell the field leadership, go make these changes, and then walk away and say, we've done it, we achieved it. The reality is you need to have all the processes in place and structures in place to make sure that the behaviors and the activities are actually changing. And so we just wrapped that one up and had great success with that one. Yeah.
[00:30:29] Speaker C: Fantastic. Gentlemen, this has been a great conversation. I appreciate your keen insights to our audience. Thank you for watching. We hope you've enjoyed the conversation and we look forward to, forward to you joining us on a future episode.
Thank you.
[00:30:47] Speaker A: Thank you for listening. Make sure to subscribe to the next imperative so you never miss a new episode. Also visit our
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