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The Intelligent Merger

The Intelligent Merger - Preface

The  overwhelming majority of corporate mergers and acquisitions disappoint the the stockholders, management and employees of both companies involved.  In some cases, this disappointment is so severe that the merger is dissolved, the acquired company is sold or closed, or the stock market or major shareholders take fright at the impact of the merger or acquisition on profits and share prices.

Mergers and acquisitions are not entered into without a great deal of study and preparation. Why, then, do so many fail? It is the contention of this book that the study is misdirected, the preparation is faulty, and that major issues are completely neglected before, during and after the merger or acquisition deal is engineered.

Most mergers and acquisitions start with two ideas: we must grow to survive, and it is easier to grow by merger or acquisition than organically. The concept of growth or corporate size, however, is a slippery one. Is growth increased capitalization, increased staff, increased sales, increased market share, increased profits, a wider product line, enhanced control of raw materials or channels of distribution, or a combination of these? Can we achieve synergy or economies of scale by the merger or acquisition, or are we merely uniting two separate organizations under one shareholder roof? Most importantly, what business are we in, before and after the union of the two companies?

The objectives of the merger must be compatible for both the acquirer and the acquired. Since most mergers are not truly unions of equals, it is appropriate, in most cases, to think of them as the acquisition of the less powerful company by the more powerful, regardless of the language used to describe the union. The acquirer usually thinks in terms of one or more of the objectives described above; the acquired may have completely different goals for the deal: access to deeper pockets to fund an expansion otherwise unaffordable by the acquired, or an assured market or source of supply, or access to intellectual resources, or simply a desire by the principals of the acquired company to cash out.

The first chapter of this book deals with establishing the goals of the merger or acquisition, and the creation of a preliminary business plan reflecting these goals. These are important to the ownership and management of the company, but are especially important to the venture capitalists and merchant banks that often provide the cash and put together the deals. It is impossible to estimate accurately the potential profitability of an acquisition if the reason for the acquisition is poorly defined.

A word must be said at this point about the difference between public and private companies, both as the acquirer and the acquired. Public and private companies differ in at least one important respect: more is known about a public company at the outset. SEC and exchange rules require the publication of a large volume of information about a public company; furthermore, this information has to be reasonably accurate, and is subject to audit by outside auditors, exchange compliance staff and governmental agencies of various kinds. Private companies have no such requirements placed on them, and tend to guard their private information fiercely. Initial discussions between private companies, or between a public and private company, often contain a large element of bluff, as unverifiable assertions are made that cannot be confirmed until the deal-making process is well advanced.

This places a heavy weight on the "due diligence" process of both parties. Chapter two of this book deals with proper conduct of this process. Due diligence in this book is broadly construed, and includes not only a thorough review of a firm’s figures, but also an investigation of the accuracy of representations concerning futures sales, current staffing levels, product quality, the competence and personalities of key employees, and other itmes material to the success of the merger.

A second major difference between public and private companies has to do with the personal as pects of ownership and management. In public companies, senior management may have enormous control over the operations and direction of the company, but they rarely have a 
major ownership stake, even with the liberal granting of options that has become common as a 
form of senior management compensation. In private companies, on the other hand, senior 
management and corporate ownership are often synonymous. The psychological implications of  this difference are of great importance to the success of the merger or acquisition. Several 
chapters deal with this at appropriate points in the process.

A second major difference between public and private companies has to do with the personal aspects of ownership and management. In public companies, senior management may have enormous control over the operations and direction of the company, but they rarely have a major ownership stake, even with the liberal granting of options that has become common as a form of senior management compensation. In private companies, on the other hand, senior management and corporate ownership are often synonymous. The psychological implications of this difference are of great importance to the success of the merger or acquisition. Several chapters deal with this at appropriate points in the process.

The structure, designation of business units, reporting relationships and degree of independence of company components are all dependent on the acquisition goals, original structures of the acquiring and acquired companies, and the negotiated desires of the company owners and senior management. Organizational design is dealt with in all three sections of this book: before the deal, as a picture of where the acquiring company wants to end up; during the deal, as a factor in negotiations; and after the deal, as a realistic roadmap to corporate integration and amalgamation.

Assuming that the thinking and planning needed to clarify goals, objectives, structures and psychology have been done at the outset, and that a preliminary business plan has been developed that reflects this thinking, and that an appropriate candidate for merger or acquisition has been identified, negotiations can commence. Section two of this book, "During the Deal", focuses on intelligently conducting the merger or acquisition negotiations. It is during the negotiations that price is set, that the roles for owners and senior management are defined, and that the organizational relationship of acquired to acquiring business units begins to be set.

Chapter Four of the book focuses again on the psychological aspects of the merger or acquisition, and gives pointers for bringing home to the participates the nature of the changes and adjustments they will be subjected to. It is at this point in the negotiating process that deals may well fall through. In fact, however, a deal that fails because on or both parties cannot accept the changed nature of their relationship to the company is a blessing in disguise. Avoiding this confrontation until after the merger of acquisition has taken place is a recipe for organizational disruption.

Chapter Five of this book provides guidance in structuring the shareholder agreement for a merger or acquisition of private companies. While it is certainly to the advantage of all  parties to ensure that their interests are protected, a poorly-written shareholders agreement can become a stumbling block to refinancing and organizational change. This chapter shows how to avoid these pitfalls and is especially important to the venture capitalists that may be bankrolling corporate growth. Control issues and the mandate for management roles are discussed here.

Chapter Six deals with an item not usually considered: the control of public statements prior to deal  closing. A sophisticated and unscrupulous use of PR while the deal is being negotiated can give an unfair negotiating advantage to one side or the other.  This chapter provides guidelines to managing the PR process.

Chapter Seven explores non-monetary terms and conditions that may be negotiated as part of the merger or acquisition. These are often organizational in nature, or concern protection for favored employees or favored projects, or may impact the naming or image of the resulting organization. Techniques are described for evaluating the impact of these conditions on the acquisition objectives, and for accepting and rejecting such demands.

Chapter Eight is a short but critically important chapter. In it, a checklist is included of actions, demands or negotiating tactics that should be considered deal-breakers. The appearance of any of these would signal an untrustworthy negotiating partner, or one whose requirements are completely out of line with any rational set of merger of acquisition goals. Suggestions are given in this chapter for dealing with some of these situations, short of aborting the deal entirely.

The third section of the book, After the Deal, is the longest and most detailed of the three sections, since it is at this time that most of the detail work of integrating the disparate parts of the organization must be done.

First we discuss the implications of failures in due diligence, and give recommendations for overcoming any difficulties these may have caused.

In this section of the book, we come to grips with the difficulties of merging operational policies; personnel policies; financial and accounting policies, systems and procedures; IT structures; and business continuity plans. It is in this section of the book, as well, that the resulting corporate image is reexamined and the problems of rebranding are discussed. And it is here that guidance is given for the finalization or organizational redesign, and the planning of time frames for change. Chapters Nine through Fifteen discuss these issues in detail.

Finally, this last section deals with employee attitudes, and with the unacknowledged costs of any merger or acquisition. Employee attitudes are affected by fear of potential change, whether the change be positive (enhanced responsibilities, new opportunities, etc.) or negative (fear of layoffs or diminished status, loss of the comfortable and familiar environment, etc.). Disappointments develop as a result of overpromising rewards and a glorious future when management attempts to sell the merger or acquisition to the staff.  It is also easy for intramural rivalries to develop, as employees of the acquiring firm develop a "we bought you" attitude, and employees of the acquired firm band together in defensive solidarity. Chapter Sixteen of this book suggests activities and structures for breaking down these attitudes and fostering more positive relationships.    

Chapter Seventeen deals with the hidden costs of mergers and acquisitions, including the natural disruption as familiar routines and relationships are changed, the necessity, in some cases, to do double work as new systems are phased in and old systems are phased out, and the halt to activity as employees wait to see what will expected of them and how the new structures will play out.

Chapter Eighteen explores the need for frequent reforecasting of post-deal costs, revenues and profits, based on actuals, and for a post-acquisition review of performance vs promises. Guidelines for creating these reforecasts and conducting the review are given.

Finally, in an appendix, a checklist is provided as a guide and memory-jogger during the complex and often stressful stages of the deal.

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