Merger & Acquisition Challenges in the Oil and Gas Sector

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Merger & Acquisition Challenges in the Oil and Gas Sector

Challenges in Mergers and Acquisitions in the Oil and Gas industry include timing, cross border M&As and lack of big picture alignment combined with poor planning. Some of the best practices in managing an M&A include recognizing the core competencies of the organization and the staff, managing a merger like a change project and recognizing the importance of company culture.

Challenges in Merging Operations And Support Systems

Timing

  • Before the deal is finalized, top management is tightly focused on valuation, due diligence, and negotiations. A merger is often a long exhausting process that takes many months. It is exacerbated in oil and gas M&A's because of the fluctuating prices in the market. Once the deal is finalized, senior management is ready to focus on celebrating at the same time as the rest of the company is hearing about the change for the first time.
  • The result is that, just when they need to be at their best to engage middle managers, highlight the reasons for the mergers to the organization and drive the integration through the organization, senior managers are not at their best. Research has shown that for many companies the seeds of failure are sown during this crucial phase,
  • A common mistake many organizations make is that senior management does not involve middle managers, does not give them time to 'digest' the news and understand the rationale and then translate this into 'what it means for daily business.' Because middle management is the pipeline to sharing information and getting buy-in from the staff, this is a serious challenge.

Cross-Border M&A's

  • Many oil and gas mergers cross national borders and pose unique challenges for the organization.
  • The dynamics of cross border M&As are comparable to domestic ones. However, there are specific challenges due to the involvement of two or more countries and different cultural, economic, institutional, and regulatory structures.
  • Oil and gas mergers and acquisitions are even more challenging since they can involve overseas companies.
  • Merging of organizations in the oil and gas industry can be impacted by multiple factors such as regulatory changes in any of the countries involved, different energy policies, any financial and political uncertainties, oil and natural gas prices, reserves, and production levels.

Lack Of Big Picture Alignment and Poor Planning

  • "Lack of big picture alignment and thoughtfulness about the long term environment" in the oil and gas industry can lead to a host of problems down the road, well after the dust has settled and M&A integration has begun.
  • A well-thought-out and coherent M&A strategy that includes factors specific to oil and gas, needs to be established to ensure all the parts, especially the newly acquired ones can work together. Focusing on closing the deal without properly planning what happens afterward can lead to a host of issues during the integration of the new acquisition.
  • One of the leading reasons that mergers and acquisitions fail to generate the expected value is poor planning. Many executives make the mistake of looking at the deal through rose-colored glasses. They may expect the technical challenges of the integration of the new entities, but overly optimistic planning based on projected price per barrel can negatively impact revenue projections. Market and cultural factors also cause serious challenges that are often overlooked.

Best Practices in Oil & Gas M&A's

Recognize Core Competency

  • Post-merger integration (PMI) is a complex process that necessitates changes in a company's business operations, people, processes, organizational structure, and culture.
  • The merging of two companies experiencing massive change while at the same time ensuring that business continues, as usual, is a huge challenge that is exacerbated by the need for speed.
  • Investors expect to see synergies implemented and "cost savings realized within 12-24 months of deal close." The longer the process takes the more the likelihood increases that expected synergies will be lost, economies of scale and cost savings will not be realized, "management will become disillusioned, and key staff will leave."
  • For the management team in an oil and gas company, PMI is not a core competency. PMI requires a distinct skill set than is necessary for usual business operations. The best companies recognize that and provide teams of experts to guide both organizations forward.

A merger is a change project

  • Taking into account the scope and size, a merger should be considered as a change project and managed as such. While some senior management is involved in negotiations, other senior managers should be training in change management.
  • In a merger, the reason is often not apparent to employees. It's therefore not clear to staff what is 'expected from me' as it relates to additional duties, new initiatives, and changed behavior.
  • Change management projects, including introducing new behaviors or roles in an organization, require a whole series of carefully planned initiatives, many focused on the employees themselves. First, they need to know why, and immediately after that, they need to know what and how.
  • For a merger to be successful, the change has to be conceptualized and implemented by the employees themselves. This process requires support and encouragement from middle management who are adequately prepared.
  • The key to a successful merger in the oil and gas industry is employee involvement. Ensuring employee engagement in the "what and how" ensures that the change will happen and will be supported.

Importance of company culture

  • It would be ideal if the culture of the companies involved in an M&A merger could be quantified and evaluated to determine compatibility. Unfortunately, company culture is not easily measured. Culture consists of a series of unwritten rules. It is a system of shared assumptions, values, and beliefs that strongly impact how a company runs.
  • However, there are some systematic ways to evaluate company culture. They include activities like cultural due diligence, culture assessments, and culture workshops. Cultural assessments include evaluating the onboarding process, gauging openness within leadership, looking at incentive programs, observe team interactions, and asking the right questions to determine attitudes.
  • Successful mergers must have a clear understanding of existing cultures in all departments and must plan for cultural integration. There are two ways to achieve that. One is that the newly acquired company adapts to the buyer's culture. If that is the approach, the company must be prepared for both resistance and employee departures. Alternatively, the employees can work together to define a new culture taking the best from both sides.
  • Sometimes the hardest thing for an organization is determining if the merging of cultures is successful. One way to determine if the cultural integration has been successful is to check the staff cafeteria after one year. Have the employees mixed, or can you still observe the former companies at the lunch tables? To paraphrase Tom Drucker "Culture eats poorly planned integrations for lunch."


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