Integration Planning

What does integration planning mean?

Integration Planning (in German Integrationsplanung) describes the preparation and steering of the merging of an acquired company with the acquirer. It determines which functions, systems, processes and teams are combined, aligned or continued independently, in what order this happens and who is responsible for it. The aim is the synergies that the acquirer expects from the purchase, that is, savings or additional revenue that become possible only through the combination.

The principle resembles two households moving in together: before the removal van arrives, it is settled which furniture stays, which is sold and who gets which room.

Planning begins during the transaction. Findings from due diligence, the acquirer's review of the target company, feed into a first integration hypothesis and into the setting of the purchase price. The plan is worked out between signing of the purchase agreement and closing, at which the company actually passes; it is implemented after closing. Those involved are the acquirer, the management of the target company and often a dedicated integration management office. The results are a plan for the first day, a plan for the first hundred days and a synergy plan.

Integration approaches and steering

How deeply to integrate follows from the purpose of the acquisition. Three basic patterns can be distinguished:

• Full absorption: The acquired company is absorbed into the acquirer's organisation. Cost synergies are largest this way, and so is the risk for customer and employee retention.
• Partial integration: Finance, HR administration and IT are aligned, product and sales remain largely independent. The pattern is common in acquisitions of technology companies because their value depends on team and product culture.
• Standalone continuation: The acquirer confines itself to reporting, governance and financing. This is typical for financial investors who acquire a company as an independent platform for further add-on acquisitions.

The integration is usually steered through a steering committee of representatives of both sides, an integration lead and workstreams per function, such as finance, HR, IT, sales and legal. In larger transactions the integration lead is a full-time task and is filled internally or taken on through interim management.

From the first day to the first hundred days

Between signing and closing

In this phase the first day is prepared. This includes powers of representation and bank mandates, the registration of new managing directors with the commercial register, access to systems, the continuation of payroll and communication to employees, customers and suppliers. Customer contracts with change-of-control clauses, which give the contract partner a right of termination or consent on a change of owner, are recorded so that consents can be obtained in time. If the target company receives services from the seller, a transition services agreement secures operations after closing.

The first day

On the day of closing (Day One), the point is continuity, not change. Employees learn what changes and what does not, important customers are informed personally, payments and systems continue without interruption. Far-reaching changeovers on the first day increase risk without bringing any benefit.

The first hundred days

In the first months, decisions are made on organisation, leadership appointments and locations. Measures that can be implemented quickly, such as pooling procurement, are started, and the synergy projects receive owners and milestones. Longer projects such as merging ERP systems often take one to two years in practice and are in this period only planned and begun.

Limits before closing: the competition-law prohibition on closing

If the acquisition is subject to merger control, it may not be completed before clearance by the Federal Cartel Office (Bundeskartellamt) or the European Commission (Section 41 of the German Act against Restraints of Competition, Gesetz gegen Wettbewerbsbeschränkungen, GWB, and Article 7 of the EU Merger Regulation). Partial or de facto completion is also prohibited, called gun jumping in the market: influence over prices, customers, hirings or investments of the target company, merging sales teams or a joint market presence. Breaches can be punished with fines, and legal transactions made in breach of the prohibition can be invalid.

Irrespective of the notification requirement, the general prohibition of cartels restricts the exchange of competitively sensitive information between competitors until closing. Reserved matters requiring consent in the purchase agreement remain permissible for measures outside the ordinary course of business that protect the value of the target company, as does planning that does not touch the ongoing business.

Clean team

For planning steps that require sensitive data, such as customer-related prices, margins or contract terms, a clean team is formed. It consists of external advisers and selected employees without responsibility for pricing and sales and works on the basis of a separate agreement. The operating business receives only summarised or anonymised results. In this way synergies and planning for the first day can be prepared reliably without crossing the limits of competition law.

Synergy planning and retention of key people

The synergies on which the valuation was based are translated by integration planning into individual measures with owners, timetable and one-off integration costs. Controlling then continuously compares plan and actual of the synergies (synergy controlling). Cost synergies can usually be realised earlier and more reliably than revenue synergies; negative effects such as departing customers or resignations in the team must be set against them.

Key people are identified in due diligence and approached before closing. Common instruments are retention bonuses, new employment contracts and clear statements on future roles. In employment law, note that if the integration leads to an operational change, the works council has participation rights up to reconciliation of interests and social plan (Sections 111 et seq. of the German Works Constitution Act, Betriebsverfassungsgesetz, BetrVG). If operations or parts of operations change their legal entity, Section 613a of the German Civil Code (Bürgerliches Gesetzbuch, BGB) applies, with the duty to inform and the employees' right to object.

Worked example

A software company acquires a competitor. From combining hosting, procurement and administration it expects cost synergies of EUR 1.2 million per year in the target state. It estimates the one-off integration costs at EUR 1.0 million in the first year and EUR 0.4 million in the second.

• Plan with integration planning before closing: 25% in year one, 75% in year two, 100% in year three
• Realised synergies: 0.3 + 0.9 + 1.2 = EUR 2.4 million over three years
• Integration costs: 1.0 + 0.4 = EUR 1.4 million
• Balance after three years: 2.4 minus 1.4 = EUR 1.0 million
• Planning only after closing, delay of one year: 0% in year one, 25% in year two, 75% in year three
• Realised synergies: 0 + 0.3 + 0.9 = EUR 1.2 million with unchanged costs of EUR 1.4 million
• Balance after three years: 1.2 minus 1.4 = minus EUR 0.2 million

The delay of one year costs EUR 1.2 million of earnings in this example and turns the balance after three years negative. If the acquirer has already paid part of the synergies to the seller through the purchase price, its return falls further.

Distinction from related terms

• Post-merger integration: the implementation of the merging after closing. Integration planning prepares and steers it; in usage, both terms are often used together.
• Transition services agreement: secures services of the seller for a limited time after a carve-out. It buys the integration time but does not replace an integration plan.
• Synergies: the economic added value of the combination. Integration planning determines by which measures and by when it is to arise.

Common mistakes

• Planning only after closing. The first weeks are then spent on taking stock while customers and employees wait for clarity.
• Integration before clearance. Joint customer approach, coordinated prices or instructions to the target company before closing breach the prohibition on closing.
• Synergies without owners. Amounts from the valuation model to which no measure, no date and no responsible person is assigned are rarely achieved.
• Integration costs underestimated. Severance payments, duplicate systems in the transition period and external support are often missing from the plan and delay the point from which the integration pays for itself.
• Key people approached too late. Anyone who talks about roles and retention only after closing risks resignations of precisely the people on whom the valuation rests.
• Too much change on the first day. New systems, titles and processes all at once overwhelm the organisation and distract from the customer business.

Frequently asked questions

From when may the acquirer begin integration planning?

Immediately. Planning is permitted before closing, even during due diligence. In acquisitions subject to notification, only implementation is impermissible, that is, any influence over the ongoing business before clearance.

What information may the acquirer receive before closing?

All that is required for valuation and planning, but sensitive competitive data only through a clean team or in summarised form. This applies in particular where acquirer and target company are in competition.

How long does an integration take?

The basic decisions are made in the first hundred days; full integration often takes one to two years. The timetable is determined above all by IT systems, location questions and co-determination procedures.

What happens to the management of the acquired company?

That depends on the integration approach. With standalone continuation, the management generally remains in office. It is retained through retention bonuses or an earn-out, that is, a part of the purchase price that depends on later development. With full absorption, roles are redistributed. Clarity on this belongs in the period before closing.

The Roemer Capital view

In company sales, we support the selling shareholders. The bidders' integration plans matter to our clients for more than the future of the team. They determine which synergies a bidder sees and can share in the purchase price. They also decide whether an agreed earn-out remains achievable at all after absorption. We therefore ask about integration intentions already in the offer phase and compare them alongside the price.

Where competitors are among the bidders, we plan the data room in stages: customer-related prices and terms become accessible only late and only through a clean team. The competition-law assessment lies with the law firms; we handle the economic preparation and the coordination of the timetable.