Preparing to avoid surprises: Post-acquisition integration in food company M&A.
By Megan Gess, Dan Malone, Joanna Pearce, Suzie Trigg
Headlines continue to talk about big-name, high-dollar mergers and acquisitions (M&A) activity in the food industry. In 2018 and 2019 alone, major players like Campbell’s Soup, Kellogg, General Mills, Hershey’s and Conagra Brands made multi-billion-dollar purchases within the industry. But what happens when the shine wears off and the company is left with what it bought? Not all investments are created equal, and with startup food companies continually pushing regulatory and legal boundaries with novel ingredients (e.g., cannabidiol, or CBD), products that might be misclassified as dietary supplements instead of conventional foods, or loose and informal manufacturing arrangements, preparing for post-acquisition integration is becoming more critical to the long-term success of the transaction.
What is Post-Acquisition Integration? It is the process by which a company integrates a purchased target company into its existing structure following a deal. The process can be lengthy and labor-intensive but the benefits – both financial and cultural – can be immense. Effective integration begins well before closing. Waiting until after closing to approach the integration process can yield disappointing results. Instead, the entire M&A deal process should be performed with an eye toward enabling efficient integration. This begins with due diligence, as the diligence stage of a transaction is where a purchaser can best detect, value and prepare for potential issues that could hinder the integration process after a transaction has closed.
Ultimately, conducting robust diligence sets the stage for a company’s success with integration. By performing detailed diligence with integration in mind, a savvy purchaser can identify potential synergies and workstreams while pre-emptively planning for how to best integrate them into its existing structure after closing. Purchasers who perform diligence with this forward-thinking approach will benefit immensely, as an integration-focused diligence process can prevent companies from wasting valuable time post-closing by creating an achievable path to effective integration and value capture.
Why Does Post-Acquisition Integration Matter?
Within the volatile world of M&A transactions, a purchaser’s ultimate goal is to maximize value. Pre-deal valuation expectations can be difficult to meet, which makes it critical that an acquisition deliver the value that made the deal appealing in the first place. While closing a significant transaction can certainly create a host of benefits, successfully integrating an acquisition can be the difference between missing and achieving financial targets that often serve as the underlying rationale to pursue the opportunity.
This is where effective integration becomes pivotal. Cohesively integrating a purchaser and a target can create valuable synergies by consolidating complementary aspects of each business to lower costs and increase revenue. But synergies are not always easy to achieve.
Combining companies – including companies from similar industries – is challenging, especially if integration is treated as an afterthought to be considered only after closing. Integration strategies may differ based on a purchaser’s unique goals for an acquisition.
Failing to plan ahead for integration can cause lost time and value to the acquisition as purchasers attempt to integrate as an afterthought without an organized plan. Worse, failing to treat integration as a forefront concern early in the deal process can cause companies to miss valuable synergy opportunities as they scramble to unite operations. Fortunately, these pitfalls can be avoided by planning for integration from the start and conducting the entire deal process with an eye toward streamlining integration.
How Do Regulatory and Legal Issues Impact Long-Term Integration Success?
The potential for value often largely exists within companies’ ability to unify and streamline operations. Regulatory considerations should be of primary concern during integration, as a failure to identify and prepare for regulatory issues can have significant financial consequences. For example, a facility’s failure of design might require extensive renovation and related capital expenditures.
Food and CPG companies are rife with regulatory considerations that stem from the unique aspects of such industry. These can range from issues regarding compliance with FDA-imposed labeling requirements to licensing and permit requirements that must be satisfied for manufacturers to operate. From an early point in the deal process, purchasers should thoroughly evaluate a target’s regulatory framework to identify regulatory compliance issues in need of correction. Prudent purchasers incorporate regulatory diligence into their broader due diligence process, which enables them to develop a plan before closing to efficiently navigate – and rectify – regulatory issues or roadblocks during integration.
When conducting regulatory diligence, purchasers should look closely for regulatory red flags, such as expired licenses or permits, improper product labeling, and specialty certifications related to product ingredients and manufacturing (e.g. non-GMO, kosher, organic). In addition, because the FDA limits the kinds of claims companies can make about their products, purchasers should conduct thorough diligence on any extraneous statements made by a target company, such as those made within marketing materials or on the company’s website. Where regulatory diligence reveals potential issues, purchasers should act immediately after the closing to address them, such as by renewing licenses or creating plans for updating production methods to ensure compliance with specialty certification requirements. Ultimately, by performing detailed regulatory diligence early in the deal process, purchasers can spot problem areas that could hinder integration or impact valuation and proactively plan to address them to simplify integration.
Company operations can also be minefields for legal considerations that affect integration. When one company purchases another, each enters the transaction with its own independent set of operational procedures and relationships, many of which may be duplicative. While integrating two complex operational structures may seem daunting, a proactive purchaser can plan ahead and use its ongoing transaction diligence to implement an effective integration plan to eliminate redundancies and emerge with valuable operational synergies. Once again, this requires a forward-thinking approach that begins with initial diligence. In the early stages of a deal, a purchaser should evaluate the target’s operations to identify areas of overlap that could be translated into cost-saving synergies. For example, a purchaser should review a target’s procurement structure and relationships to identify areas where supply chains can be integrated to yield cost savings. This is especially important if a purchaser and target operate in similar sectors.
Additionally, synergies related to research and development (R&D) can be incredibly valuable to food and CPG companies – combining companies’ R&D efforts during integration can lead to advancements in product quality and development by allowing each company to build on the R&D history of the other. However, the legal implications of integrating company operations can be significant, because companies often have contracts related to supply chain relationships, procurement processes, and R&D that can lead to missed synergy targets and lost value if not integrated with the advice of counsel.
Sales contracts can also play a major role in the integration process. Agreements with brokers and sales representatives are often vital to a food or CPG company’s success in distributing its products for sale. But once the company is acquired, many of those agreements may need to be transferred to the purchaser or terminated and replaced with new contracts. The same may be the case for distribution agreements with shipping companies, particularly where a target company requires specialized fulfillment procedures, such as temperature-controlled shipping services for perishable goods. The process of transferring or terminating and re-negotiating these agreements can be complex, and typically requires the assistance of legal counsel to ensure that favorable terms are obtained. To prepare for this process, purchasers should perform thorough diligence of a target’s operational agreements and look for provisions that could hinder integration, such as exclusivity provisions and favored pricing or anti-assignment clauses. Additionally, purchasers should prepare for transferring material contracts and terminating troublesome contracts as conditions to closing, so that operational synergies can be more easily achieved once operations are consolidated.
Finally, purchasers should also consider the implications of consolidating company policies and procedures during integration. Even where a purchaser and target operate within the same industry sector, each company can have its own set of unique policies and procedures that may prove difficult to integrate. This is particularly true where production protocols – particularly those related to food safety, quality assurance, and product recalls – may differ based on the specific products a company produces. The best way for a purchaser to prepare for integration is by conducting detailed diligence on a target’s policies and procedures in this area, which makes it possible for the purchaser to identify discrepancies that could hinder integration if encountered unexpectedly after closing. Ultimately, the key to achieving effective integration is early action. By conducting the entire M&A deal process with a forward-thinking view toward planning for integration after closing, purchasers can overcome many of the challenges posed by the integration process. And by utilizing effective legal counsel early in the deal, purchasers can identify and prepare for the legal pitfalls that can make or break a successful integration experience.
Suzie Trigg is a partner in Haynes and Boone’s Dallas and Austin offices. She holds leadership positions in the firm’s Food, Beverage and Restaurant Practice Group and its Healthcare and Life Sciences Practice Group. She focuses on guiding companies through FDA regulatory matters, high-stakes supply chain transactions and strategic growth.
Dan Malone is a partner in the Corporate and Private Equity Practice Groups in Haynes and Boone’s Denver office. His practice focuses on complex business transactions for both private and public companies, with a particular focus on mergers and acquisitions, leveraged buyouts and strategic investments.
Megan Gess is a partner in Haynes and Boone’s Orange County Office. She has extensive experience advising companies on sophisticated mergers & acquisitions, corporate governance, private equity, securities and commercial transactions.
Joanna Pearce is an associate in the Healthcare and Life Sciences Practice Group in Haynes and Boone’s Dallas office. Her practice focuses primarily on transactional and regulatory matters related to the food, drug, healthcare and life sciences industries.