Any deal of material size will attract investors’ attention. Higher-premium, equity-dilutive, and cash-heavy deals shine a spotlight on the magnitude of synergies and speed required to become cash accretive. Recent corporate transactions illustrate this trend. Nearly 70 percent of announced synergies coming from cash-related opportunities are to be captured in less than two years.1 A relentless focus on rapid and aggressive value creation during post-M&A integration has become the norm and calls for companies to achieve five imperatives.
- Accelerate value capture. The sources of synergies in upstream M&A deals are varied and come with different timelines. Leveraging digital forensic capabilities to plan during the pre-close phase of the agreement accurately will accelerate post-close value capture. Negative synergies due to increased internal complexity are often overlooked. They need to be recognized early on. Rigorous tracking of value captured post-close—with apparent management oversight and accountability is an absolute must.
- Plan for the long-term multiplier effect early on. M&A deals in the upstream space typically take one of three forms: an acquirer takes over another company and imposes its model; two entities come together and make the best of what each company has to offer; or two bodies come together, reinvent the model and transform their way of working. Regardless of the M&A objective, an integrated oil and gas entity should aim to achieve a level of performance that is greater than the sum of its parts. That requires bringing together two sets of cultures and operating models. The integration strategy will dictate the success of those efforts—and determine whether the combined entity operates as two companies or as a reinvented enterprise that leapfrogs the competition.
- Act on portfolio adjustments quickly. Enormous oil and gas transactions usually come with non-core assets. Disposing of those as soon as possible, without distracting from integration activities, can have a significant impact on the deal’s profitability.
- Manage integration choke points. Because the upstream sector of oil and gas lacks a track record with large-scale deals, it can be challenging to anticipate the challenges ahead. A focus on day-one readiness is vital. But the complexities associated with organizational migration and IT integration, as well as gradual attrition, are issues that will require planning and senior management attention over an extended period.
- Zealously manage culture harmonization. M&A deals are stressful for the organization. This creates a significant risk in terms of loss of morale, confusion, and eventually attrition. Proactive change management programs that preserve the strength of the workforce and integrate cultures are critical to successfully executing an integration.
The investment objective of a specific upstream deal will drive the relative importance of these imperatives. The table below (Figure 3) provides a heat map of the possible integration issues across three possible deal archetypes: Two pure players (e.g., shale) come together. A global company acquires a genuine player. And two global companies come together.
This representation of deal complexity by archetypes underlines the need for companies to craft an integration strategy on a case-by-case basis. There is no single roadmap or boilerplate approach. The M&A process indeed follows a simple script at a high level. But to create and sustain value required by more demanding shareholders, the specifics of a deal will require detailed attention to the sources of synergies, risks, and longer-term challenges.
It is hard to predict the number or timing of corporate transactions in the upstream industry. What is clear is that large deals will receive more scrutiny in terms of valuation and execution than before. The lack of muscle memory across the industry will make the M&A journey quite challenging. Lessons from recent transactions, even from other industries that go through M&A exercises regularly, will come in handy.