The Value of Integration
FAILING TO INTEGRATE YOUR BUSINESS CAN BE DEVASTATING TO YOUR INVESTMENTby Drew Lockard for Oil & Gas Financial Journal
AS RECORD LEVELS of oil and gas A&D activity in 2016 transition into a healthier 2017, the ability to identify, vet, and ultimately integrate acquisitions remains important. After the commodity price drops in 2014, many companies worked diligently to reduce debt (in or out of bankruptcy court) and slash operating costs. Now that prices have appeared to stabilize, companies that have grown, or are continuing to grow, through acquisition will need to focus efforts on integration for operational efficiency and a competitive edge.
There are various benefits to a successful integration, but to capture this value, business leaders must center on three key areas: due diligence process, planning and execution, and information technology. Consider the following tips for capturing the greatest value and to avoid costly mistakes that can be disruptive to the future growth of your business.
DUE DILIGENCE PROCESSWith roughly $50 billion to $70 billion of A&D activity on the horizon in 2017, it is critical that business leaders use the proper due diligence process. Often, many companies outsource the due diligence process to a third party, and while there is nothing wrong with this approach, it is important to assemble a team that has the industry expertise and will deploy a comprehensive and robust due diligence process. In today's world, simply focusing on financial data with a cursory review of the target's operations is just not enough. Expanding the due diligence process to review all aspects of the target helps determine integration efforts and uncovers potential future risks. One area often overlooked is information technology (IT). With the dramatic advances in technology over the past decade, technology platforms have and will continue to play a significant role in the long-term success or failure of business. When entering the due diligence phase, consider a team that has the industry experience along with the financial, operational, and technological expertise to ensure no stone goes unturned.
PLANNING AND EXECUTIONHistorical trends show that roughly half to two-thirds of mergers will not deliver on the original investment thesis. With more than $72 billion worth of A&D transactions having taken place in 2016 and in Q1 of 2017, failing to execute on a robust plan could be a significant destruction of value. That said, there are some significant benefits to integration; from cutting costs to creating synergies, integrating your acquisition can create and preserve a tremendous amount of value.
To accomplish this, you must have a thoughtful integration plan detailing each work stream, activity, and responsible party. In addition, support and buy-in from the senior leadership team is crucial. Too many times integration or change management projects fail due to lack of leadership and politics within the organization. To the extent there is potential for cultural and/or personnel issues, resolve them upfront to avoid any future distractions. Separately, keep focus on the original investment thesis of the acquisition. Holding each team member accountable by aligning specific deliverables, the project timeline and the overall return on the investment with an incentive program is a great way to ensure a fast and successful integration.
There is, of course, a cost to doing things better and faster. Be sure to invest in an implementation partner capable of delivering results without compromising the overall economics of the initiative. Lastly, starting immediately and adopting a steady weekly meeting cadence ensures targets are met and risks are mitigated before they become real problems. Basic disciplines such as these are integral to successful integration.
INFORMATION TECHNOLOGYThere are a variety of types of A&D deals out there and each one can have countless reasons for failure, ranging from poor execution to cultural issues. However, there are several cases where integrations have struggled due to IT complexity and complications with fusing disparate, cross-platform systems.
Today, many companies struggle with capturing, extracting, and ultimately analyzing operational and transactional data within their businesses. This is largely because, historically, businesses have rarely made technology a priority, relying on a primitive IT platform. Thus, when dealing with legacy and perhaps "homegrown" solutions, there are various challenges that arise when attempting to integrate. Additionally, many companies are experiencing data volumes that are growing exponentially and are held in disparate systems throughout the organization.
Per Tsvetana Paraskova with Divergente LLC: "The oil and gas industry has now started to use data analytics - comparing data from multiple sources - an approach that other sectors such as finance, for example, have been using for years. Unconventional fields…have too many wells on a limited acreage, each with its own specific production-type curves, cost of drilling, geological formations, leasing costs, and completions optimizations. And each of those factors is changing from well to well, location to location, or from one period to another…These variances make it difficult to compare assets."
The wave of technology is here and it is critical for business leaders and technology leaders to be aligned as they kick off the integration process.
CONCLUSIONIncreased volumes of A&D activity are expected to continue in 2017 and there will be several situations that will require integration efforts. To avoid disrupting the existing business and to capture the value of the original investment thesis, it will be important for business leaders to run a thorough due diligence process, develop a detailed plan and assemble the best team that knows all aspects of the business.
Whether you are a private sponsor or a strategic partner, failing to integrate your business can be devastating to your investment. Be thoughtful, assemble the right team or select the right partner, and start immediately.
ABOUT THE AUTHOR
Drew Lockard is a managing director at international energy consulting firm Opportune LLP. He maintains extensive management and consulting experience across a variety of industries in the areas of financial analysis, strategic advisory, program management, information technology and data analytics. Over the past 15 years, Lockard has led practice building efforts, guided numerous clients through complex high-impact situations, and managed large corporate turnarounds.