Gunslinger Wisdom – 2

The quote below comes from PRITCHET, LP, a post-merger integration consulting firm based in Dallas. They use the metaphor of a gunslinger to describe those who would succeed at managing mergers.  (The Merger Verger likes the metaphor and has used it previously here: Gunslinger Wisdom.)

During a merger, you need to become a bit of a gunslinger. There is real danger in waiting from problems to “draw first” … and you don’t have the luxury of taking time to aim perfectly. Colt 44 Doc Holliday
We’re not advocating that you proceed with wild abandon,
but we do want to emphasize that the conservative, slow, methodical approach typically doesn’t cut it in a merger environment. That can be the most reckless strategy of all.

The Verger agrees with the good folks at PRITCHETT; they are correct that too much can go too badly wrong with a wait-and-see attitude. The idea of taking one’s time “to get it right” is yet another one of those areas where merging companies and running them are two completely different arts.

That said, it is equally important to note one element of their observation that is tucked neatly right in the middle: “We’re not advocating that you proceed with wild abandon….”

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Remember Your Day Job

Gregg Stocker, author of the book “Avoiding the Corporate Death Spiral” has this to say about one of the disruptive risks of doing a deal:

Although true of any size company, small companies must be especially careful that an acquisition does not become such a distraction that it pulls management attention away from running the organization as a whole.

Stocker’s observation is true in both the deal-doing process and the integration process but in the latter the converse is also true.  Integrating two companies is a complex, long-running and very challenging process and senior management must not let the day-to-day fires of the underlying organizations keep them too far from it.  Managing a company and a deal is a true balancing act.

Disney Eats Shark, Survives

Thrives, in fact.

The Merger Verger was looking for his Baked Alaska recipe the other day – in a fruitless attempt to impress a third-date woman friend – and what should drop out of the file labeled “recipes” but an article on Disney’s 2008 acquisition of Pixar. What ho, Malvolio!

finding-nemo-bruce

So, we provide below a few nuggets from The New York Times piece entitled, “Disney and Pixar: the Power of the Prenup.”

The worries were two-fold: that either Disney would trample Pixar’s esprit de corps … or that Pixar animators would act like spoiled brats and rebuke their new owner.

The Verger says: Respect is a two-way street. Trust is a two-way street. But in both cases someone has to go first. Disney went first and that was the key to getting the deal right: they respected the unique culture and needs of Pixar and made that respect clear in words AND in ink. It makes perfect sense to expect the acquirer to go first. (Side note: that is one of the reasons why “mergers of equals” tend to fail; neither side wants to bend first.)

[Robert A. Iger, the new chief executive at Disney] … won some early support at Pixar by talking candidly and clearly about the [unpleasant] lessons he learned when his previous employer, the ABC television network, endured two takeovers.

The Verger notes: As the leader of the buyer, Mr. Iger knew that he had to convince the unconvinced. He used candor and psugarcoatersonal experience and he did NOT sugar coat it. If your target’s people are smart enough to do something that you want to have, then the chances are good that they’re also smart enough to see through sugar coating.

Don’t do it.

Mr. Iger also agreed to an explicit list of guidelines for protecting Pixar’s creative culture. For instance, Pixar employees were able to keep their relatively plentiful health benefits and were not forced to sign employment contracts. [He] even stipulated that the sign on Pixar’s front gate would remain unchanged.

The Verger notes: While the extent Disney went to may be over the top for industrial companies, for creative companies and service businesses it may not be. Keeping good people is in the details: health plans and signage; Disney even let the Pixar folks keep email addresses with the Pixar name rather than converting them to Disney.com. It’s the little things that evidence to people that you will do right when the big things arise. And this: Iger made a written contract about what he was going to do and not do; but he didn’t make his “new underlings” do the same.

And finally:Elena D'Amario / PARSONS DANCE

The key to successful integration, analysts say, has been Mr. Iger’s decision to give incoming talent additional duties. … “If you are acquiring expertise,” he told The Times, “then dispatch your newly purchased experts into other parts of the company and let them stretch their legs.”

The Verger notes: how better to let your new people know that you value their wisdom and their creativity than to put it to use on a bigger stage?

Obviously there’s some risk of professional dilution in letting people loose on too many projects, but giving acquired staff an opportunity to soar right when they are at their most worried can go a long way towards ensuring that your best talent doesn’t suddenly become your competition’s best talent.

About the art:

Top: Finding Nemo, courtesy of Disney

Middle: DK (who cares?)

Bottom: Elena D’Amario of Parsons Dance Company (photo by Lois Greenfield)

Choosing the Right KPIs

One of the most common mistakes that less experienced acquirers make is to apply their company’s standard Key Performance Indicators (KPIs) to the newly acquired target or to the integration/transition process itself.

As The Merger Verger has harped on over and over again, integrating two companies is not like running one larger one. It’s just not. (If you still can’t accept that premise, I suggest you’ll get more out of Archie and Jughead than any further reading of TMV.)

There are three key elements of successfully executing an acquisition:

  1. Keeping the underlying business running successfully
  2. Keeping the acquired business running successfully (or getting it to that state)
  3. Integrating the two successfully

Well, DUH! The point isn’t that that list represents any rocket science on TMV’s part but it evidences why the next concept is so important:ruler-dsc9068-edit_1024x1024

If you’re performing three different activities,
you measure and assess them using three different standards or sets of measurements.

That’s the key here: for your integration you need to “think different.”

Start with these questions:

  • What is the strategic intent of my deal?
  • What are the keys to achieving that intent?
  • What are the impediments or risks to getting there?

The answers to these questions should be the basis upon which all your integration KPIs are developed, quantified and prioritized.

Read that again: KPIs for an integration are about achieving
the core purpose behind the deal: what to focus on achieving, what to focus on avoiding. They are not about measuring the integration against your normal yardsticks; they’re about measuring it against the point of the deal.

Needless to say (but I’ll say it anyway): the intent behind basically every deal is unique. So The Merger Verger can’t tell you what KPIs to monitor.   IT ALL DEPENDS!!

That said, if your acquisition is about revenue growth through expanded territory, for example, track your sales in that territory alone (particularly sales to existing customers’ locations in the new territory), look for growth rates based on new standards not old, watch your new-customer intact; track your regional cross selling, measure after-sale follow through and reorder rates. In each case quantify your KPIs at levels that are appropriate for the new business, not the existing.

If your deal is about new technologies, for goodness sake measure your retention of key innovators but also watch the degree to which existing customer services or solutions are being repositioned with new capabilities, track your training of existing staff on new systems and their translation of that training into sales calls and revenues.

Figure it out for yourself. But THINK DIFFERENT. Focus not on how you’ve done it before but on what and how you measure to achieve the new specific objectives of the deal.Archie Veronica_Banner copy.jpg

Sales Fails in M&A

In acquisitions, sales can be just plain hard.

The Merger Verger was Sails series no 1conversing earlier today with a senior sales executive at a recently acquired technology service provider and the subject of post-merger sales came up. More than half a year into this deal, major sales issues were still causing trouble, down to the level of non-existent goals and undefined bonus formulae.

Hello! Who’s in charge here?

A big part of this challenge sounds like a failure of due diligence or, if known, a set of differing practical issues that got downplayed and dismissed. They shouldn’t have. Turns out that the differences were pretty fundamental… and obvious if one looked.

Here’s the landscape: The buyer and target are in parallel lines of business. There were good revenue synergies and cross-selling potentials in the deal. The companies’ reputations and statures in the marketplace were compatible.

But…

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Put it All on Red

The cost of a proper integration process is sometimes off-putting to executives. The problem is that – like many professional services – the ROI is pretty squishy.

That’s just a stupid excuse, in the very humble opinion of The Merger Verger.

The integration effort needs to start soon, ramp up big and go long. That all costs money. Sometimes Big Money. Estimates in the range of 10% of deal value are fairly common.

Executive: “Ten percent? Are you kidding?”

Verger: “No. Face the facts.”

The facts are that well over half of all deals fail to achieve their intended results and many actually destroy shareholder value. Failure percentages range as high as 70-90%. That’s horrible.

So look the old Verger in the eye and tell him that you’re willing to invest 100 cents on the dollar for a deal with a 70-90% likelihood of failure but not 110 cents on a deal that might actually work?

roulette_wheelA thorough, effective integration process is an insurance policy … insurance against decades of past failures. That’s the problem: how do you measure the ROI on an insurance policy where the payoff is not measurable at the outset?

You don’t. But you’re corporate executives; it’s your job to make decisions on imperfect information.

That said, there are some proxies to consider:

  1. Try this out for a measuring stick. Go home and tell your wife that you’re going to cancel all your life insurance policies because the returns are just too hard to assess positively. She’ll kill you. What’s your return on that?
  2. Take a look at the cost of your car insurance as a percentage of your purchase price. It can be 25% or more. Not only that but you hope you’ll never use it! Sure makes paying 10% for something that you will actually use and benefit from seem like a bargain.

Recommendation:

If you are not willing to fund a thorough integration process, go to the nearest casino and put the deal’s purchase price on red. Your chances of a positive return are higher.

Communicating Gut Wrenching Change

Quote

Communication [in acquisition integration] is about more than backslapping and ego-boosting. It’s about mobilizing support and removing uncertainty. It’s about honesty and candor. It’s about supplying honest answers to the hard questions that good people ask when they’re in the dark and worried…. Straight bull_frogtalk itself is a highly important value driver. It’s anchored to four firm rules: no secrets, no surprises, no hype, no empty promises.

Source: Feldman, Mark and Michael Spratt, “Five Frogs on a Log: A CEO’s Field Guide to Accelerating the Transition in Mergers, Acquisitions and Gut Wrenching Change”

 

Four Mistakes in Mergers

The Merger Verger directs your attention to a very good article in today’s Wall Street Journal entitled “Four Mistakes Companies Make in Mergers – and How to Avoid Them,“ authored by Sydney Finkelstein, a professor at Tuck School of Business at Dartmouth College.

Dr. Finkelstein’s article is structured in a very helpful format, stating each problem clearly (with examples) and then providing a solution. How great is that? Full article available here (subscription required).

There’s enough here to look at in more detail. For example, Problem #1 is interesting: thinking that previous merger experience Loreco Louisiana smshould be the basis for a new deal. Not necessarily so, says the professor. Why? “Because each of us has a tendency to over-generalize from small sample sizes.”

A couple of quick comments, then I’ll let you get to your assigned reading:

Dr. Finkelstein suggests that integration management teams should include both experienced deal folks and fresh thinkers. A good idea. But it will require management to make sure that the new folks don’t just defer to (or get overpowered by) the “old hands.” We’ve all been in meetings where a close-minded veteran overwhelms an insightful rookie. “Well, we did it this way the last time and it worked just fine. Besides, what do you know about doing deals?” Preventing this is management’s responsibility and it’s crucial to making the very positive dynamic of the old and new work together effectively.

He also suggests that companies should capture the learning gained from each acquisition, a crucial step that is all too often dropped in the rush “to get back to work.”

But to prevent this second point from tripping over the first, it is important to record not just what is learned but also the circumstances surrounding it. When learning is enshrined in generalizations (a sample size of one, for example), i.e., without context, it will become gospel without application. And hence a prescription for failure.

Take Aways:

  • Varied experiences and perspectives are a sound foundation for an effective integration team. But make sure your forum enables each voice to be heard.
  • When making after-action revisions to your integration playbook make sure to discuss not just what you did but what the circumstances were that led you to chose that approach… and why.

About the Art:

Road map of Louisiana from the Louisiana Oil Refining Corporation, late 1920s.

God Is In the Details -1

What follows is an old but nonetheless very useful tale of integration woe:

  1. In the late 1990s, US auto parts company Federal-Mogul acquired UK auto parts company T&N. (So far so good)
  2. Acquirer decided to integrate the target’s aftermarket sales function into its own, resident in the United States. (OK, maybe)
  3. Federal-Mogul discovered that its ordering system couldn’t recognize non-US telephone numbers. (Uh oh)

Now the specifics of this mess could not happen with today’s CRM systems but the message is still relevant: God is in the details.

It’s hard for The Merger Verger to determine from the available facts whence cometh a screw-up like this one but I see two possibilities: either (i) there was insufficient focus on the operational aspects of due diligence or (ii) there was reasonable data collection but insufficient analysis and findings based on that data.

A fair measure of due diligence is about gathering information. But much of it is about using information.

If you are an infrequent acquirer or new to the deal business, this is an absolutely critical lesson for you to take in.Barcelona Chair

Some due diligence is about making sure you have information that you, the new owner of a business, should have. An example would be papers relating to the target’s corporate formation. You get the data; you put it in a file; you forget about it. (This kind of information will come from the due diligence checklist supplied by your lawyers.)

Other due diligence is about confirming that you are getting what you pay for (and the corollary, that you are not overpaying for it). An example, here, would be a statement of aging accounts receivable. If the target has a third of its receivable stretching back to Moses’ time, you might want to rethink the price you’re paying. (This kind of information will come from the due diligence checklist supplied by your accountants.)

Lawyers and accountants provide essential guidance in the development of due diligence checklists. But much of the information derived from those lists has limited use or limited life to its usefulness.687128015_193dc6eafd_b-640x500 V

Not so with the next form of deal information.

The final form of due diligence is about getting ready to own the new business. This is the area where Federal Mogul fell down. You must understand how the business works down to some very nitty gritty details and then apply those findings to shape how you are going to integrate the business.

In Federal Mogul’s case, they should have realized that the customer-facing requirements of the target could not be handled by their own existing CRM system. Knowing that, they could have avoided making an uninformed misstep in the integration process or reversed the move by integrating their own customer interface with the apparently more flexible system that T&N used.

Can their customer database handle non-US telephone numbers? It seems like an impossibly small item to worry about. But sometimes it’s not.

In words of two syllables or less:

Make sure you get the operational information necessary to know how to integrate your acquisition.

Once you have gathered the information, use it.

And … before you make big integration decisions, consider doing further due diligence.  Closing day is not the end of information gathering … not by any stretch.

Acting quickly is generally the right approach when integrating two businesses. But don’t ignore the asterisk: act quickly … on good information.

About the Art:

The coining of the phrase “God is in the details” is attributed to German/American architect Ludwig Mies Van De Rohe. Despite having built some fairly impressive buildings including New York’s Seagram Building, Mies is perhaps best known for his Barcelona Chair (top), which he designed in 1929.

May your own work stand such a test of time.

CEOs: Ask These Questions First

Some while ago Forbes published a very useful little piece aimed at making sure companies were asking the right questions before they embarked on a new acquisition.  It’s short and very pithy … so worth bringing back to people’s attention.  The article is entitled Why Deals Fail and What You Can Do About It.  Highly recommended.

Cadillac Ranch BW

About the Art: Cadillac Ranch, conceived and constructed by Ant Farm, 1974.