Your company has just made its largest acquisition ever and your Chief Executive Officer (CEO) says that he wants you to have a compliance post-acquisition integration plan on his desk in one week. Where do you begin? Of course, you think about the 2012 FCPA Guidance but remember that it did not have the time lines established in the recent enforcement actions involving Johnson & Johnson (J&J), Pfizer and Data Systems & Solutions LLC.
While there are time frames listed in these Deferred Prosecution Agreements (DPAs) are a guide of timeframes; many compliance professionals struggle with is how to perform these post-acquisition compliance integrations. An article from the Harvard Business Review, entitled “Two Routes to Resilience”, Clark Gilbert, Matthew Eyring and Richard Foster wrote about business transformation which speak directly to the compliance practitioner to help create post-acquisition integration game plan.
The authors, reviewed the situation where an entity must transform itself, leading to a transformation the authors call “establishing a ‘capabilities exchange’- a new organizational process that allows the two efforts to share resources without interfering with each other’s operations.” That is what a compliance practitioner must accomplish through a post-acquisition integration in the compliance context.
Anyone who has gone through a large merger or acquisition knows how terrifying it can be for the individual employee. Many people, particularly at the acquired company will be fearful of losing their jobs. This fear, mis-placed or well-founded, can lead to many difficulties in the integration process. The creation of a Compliance Capabilities Exchange process which allows “the two organizations to live together and share strengths” and will coordinate “the two transformational efforts so that each gets what it needs and is protected from [unwanted] interference by the other.” There are five steps in this process.
- Establish Compliance Leadership. While this may be the “simplest step but also the one most open to abuse.” The process should be run by just a few top people, which I believe are the Chief Executive Officer, Chief Financial Officer and Chief Compliance Officer of the acquiring company and a similar counter-part from the acquired company.
- Identify the compliance resources the two organizations can or need to share. Hopefully the acquiring organization will have some idea of the state of the compliance program before the deal is closed. It may be that there is some or all of a minimum best practices compliance program in place. If so, attention needs to turn to what can continue and how will need to be integrated.
- Create Compliance Capability Exchange Teams. In many “synergy efforts, everyone is expected to think about ways resources might be shared.” In Compliance Capability Exchanges, the responsibility should be “carefully confined to a series of teams.” Senior leadership should create compliance teams by assigning a small number of people from both entities with the responsibility of allocating resources used in the integration project.
- Protect Boundaries. This one is tricky as employees from the former target may not want to move forward with the integration; for fear of losing their jobs or some other reason. There may be internal disputes as to which group may handle an issue going forward. This area is tricky because it is important not to alienate new employees who might have good ideas on the integration or how to move forward. Once again, the Leadership Team must step in and referee disputes decisively if required.
- Scale up and promote the new compliance program. It is important to celebrate and promote the new entity to both the acquiring company, others in the company and even external stakeholders. It is important that markets and others in the same or similar industry see this evolution and growth. Take the time to publicize the integrated compliance function with the internal customer; IE., company employees. This would include all other compliance stakeholders, including third party representatives, both on the sales and supply chain side of the house and even customers. Finally, be sure to inform your management, Board of Directors and regulators, such as the Department of Justice (DOJ), as appropriate.
Whatever compendium of steps you utilize for post-acquisition integration, they should be taken as soon as practicable. The earlier you can deploy these steps the better off your company will be at the end of the day. In an Ernst & Young white paper, entitled “Increased Oversight of M&A: An Expanding Role for Audit Committees”, it stated “Failed M&A can destroy a company’s market value, destabilize its financial position and credit ratings, impair its strategic position, weaken the organization and damage the company’s reputation”. This is particularly true for failed M&A compliance. One need only consider the Latin Node FCPA enforcement actions where the acquiring company had to write off its entire investment.
Three Key Takeaways
- Planning is critical in the post-acquisition phase.
- Build upon what you learned in pre-acquisition due diligence.
- You literally need to be ready to hit the ground running when a transaction closes.
Have a post-acquisition plan in place before the transaction closes so you can hit the ground running.Click to tweet
This month’s podcast series is sponsored by Michael Volkov and The Volkov Law Group. The Volkov Law Group is a premier law firm specializing in corporate ethics and compliance, internal investigations and white collar defense. For more information and to discuss practical solutions to compliance and enforcement issues, email Michael Volkov at firstname.lastname@example.org or check out www.volkovlaw.com.