To Do or Not To Do?

Here’s a great quote that The Merger Verger came across the other day.  It should warm the cockles (whatever they are) of every integration manager’s heart:

Perhaps most important in the overall scheme of things, companies that beat the odds in M&A are prepared to walk away from a bad deal.  They insist on high-level approval of deals and often use the compensation system to encourage executives to ward off ill-considered acquisitions … They also set a walk-away price.

This last step is crucial.  Consider a finding from a recent Bain survey of 250 executives.  Respondents cited “allowing politics of emotions to interfere with decision-making” as the greatest due-diligence challenge.  Successful corporate buyers excel at resisting risky deals.

Source: Rovit, Sam, David Harding and Catherine Lemire. Strategy & Leadership, vol. 32, no. 5, 2004, pp 18-24.

“Successful corporate buyers excel at resisting risky deals.”  Ye Olde Merger Verger could not have said it better himself.

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Don’t Forget Visual Communication

There’s a good piece on the difference between brand managers and brand leaders in The Mergers Daily and I recommend it as a seed for thinking about the role of not just oral and written communication in post-merger integration but visual communication.  Here’s a snippet:

“Brand leaders understand the fundamental proposition that brand is not just a logo but is the sum total of the experiences customers have when exposed to their products and services.”

This is not artsy-fartsy stuff with little meaning to an integration process.  This is the visceral visual connection between each and every customer and their experience with your company.  Think of it as the graphic manifestation of your deal’s strategic intent: an absolutely key issue.

Too Smart for their Own Good?

What is the difference between a carny barker and an academician with a mission?

Well, really, basically, nothing.

Both are out to sell you something and will use any degree of intimidation to do it.

So The Merger Verger had a good chuckle the other day in running across an academic treatise on M&A that basically slammed academic treatises on M&A.  It came from the Journal of Financial Transformation published by the Capco Institute in the UK.  Author Shahin Shojia’s paper looked at the “practical benefits” to be found in academic studies of M&A and found them absent.

While such studies on M&A do, according to Shojia, “provide a reasonable aggregate of what the markets are doing, they form no basis whatsoever upon which judgments are made about acquisitions or mergers and they certainly are of little or no value when it comes to the strategic issues that are essential” to managing the M&A process.

Whew!  That’s nasty! 

But you’ve got to appreciate a straight shooter, particularly from academia. 

I will leave you with this quote:

If one buys the argument that with the exception of exceptionally bad acquisitions, it is close to impossible to determine the success of [a transaction beforehand], and most managers acknowledge this, then the only issue that is of importance is the management of the post-acquisition period.

Integration professionals take heart: strategists and deal types may get quoted in the press but we are the ones that create value.

Laugh or Cry: Morgan Stanley’s Smith Barney Mouthful

Don’t you just love the story from this week’s Wall Street Journal about the Morgan Stanley gagging on Smith Barney? (Click here to read; registration or subscription may be required.)

Really, how can you not love Wall Street?  What industry generates more money by giving others management advice yet simply cannot manage itself? Merrill? Poof! Lehman? Poof! Drexel? Poof! Solly? Poof! Bear? Poof!

So The Merger Verger was not surprised to learn that Morgan Stanley is choking on its acquisition of Smith Barney.  According to the Journal article, the process of integrating back office IT systems was more complicated than expected!  How pathetic is that?

Do you know what “more complicated than expected” is code for?

“We didn’t do our homework very well beforehand.” That’s what it’s code for. More Wall Street bravado.

Word to the Wise:

When Wall Street comes calling with a great acquisition idea, if you remember nothing about that industry and its history remember this: They have no clue about the role that simple “picking and shoveling” plays in making an acquisition work, not as deal advisors, not as deal doers.  Their advice is about ideas (and fees), not about the practicum of making those ideas work.  Listen, they are smart guys with frequently good advice; you just have to figure out for yourself if following it can be made to work and if so how.

Fun Facts from History:

The illustration on the right is the “tombstone” ad from Ford’s IPO in 1956.  (Click on it for a larger image.) Of the 25 “major bracket” firms listed in the ad, only two remain alive and independent today. (Ironically, Morgan Stanley does not even appear on the list, suggesting that someone there had pissed Ford off in a major way.)

Recommended Reading:

One of the truly great books on Wall Street dates from 1940: Fred Schwed’s, “Where are the Customers’ Yachts?” It will make you laugh and cry!

Coty on Avon: Identity Issues Abounding

I admire the folks at Coty for stepping up opportunistically and pouncing on Avon.  This will be a very interesting deal to watch if it happens. Can you think of a company that has a more distinct heritage and indentity than Avon?

Avon sells primarily its own products through a fleet of indepenent salespeople (with fully 80% of its sales coming from outside the US).  Coty sells licensed and branded products (including Calvin Klein and dozens of others) primarily through retail chains and department stores.

The situation is made even more interesting by a couple of facts that have lots of potential for head spinning:

  1. Coty had previously been in discussions to sell itself to Avon.  Those discussions went nowhere so Coty turned the tables and went after Avon.
  2. Avon is about two and a half times bigger than Coty.
  3. Avon has huge potential liabilities related to overseas bribery and corruption lawsuits (making valuation a crapshoot).
  4. Avon is in the process of hunting for a new CEO, a process that Coty has pledged not to interrupt.

    Good-bye Tomorrow?

I look forward to watching this deal unfold and would welcome comments from anyone with any inside scoop on it.

Amazon + Kiva: I Think I Finally Get It

I’ve worn a groove in my head from scratching it on last week’s Amazon-Kiva Systems deal.  After reading all the press stating what a crafty move it is and after the huge uptick in Amazon’s (NASDAQ: AMZN) stock price, The Merger Verger feels like the odd man out on this one. [Original posting here]

I still disagree with all the fawning Wall Street analysts and tech-media commentators but I think I have homed in on an explanation.  Let me offer up some facts and then some observations.

Facts:

  1. Jeff Bezos built a spaceship to go to Zebulon or  some place.  (You can look it up.)  The guy clearly has a “boys with toys” problem.  Robots – even ones that look like giant orange throat lozenges skating around a warehouse floor – count as objects of desire. (Earth to Jeff.)
  2. Kiva (founded in 2003) creates leading-edge material handling systems used by an impressive list of customers, including units of Amazon (but not Amazon itself).  It’s privately held but recent revenues were reportedly north of $100 million, making the purchase price of $775 million a bracing 7X multiple of sales. (Yikes.)
  3. Amazon has a long history of successful acquisitions, but all of them of the horizontal type. They have vertical partnerships but their experience in integrating a company whose business fundamentals are entirely different to theirs is basically nil. (Uh-oh.)
  4. The company’s press release about the Kiva acquisition says a big nothing about the rationale behind it and offers only one minor tidbit about the plans for its integration: Kiva’s HQ will remain in Massachusetts.  (Whoopee.)
  5. Equity analysts have settled on the rationale that Kiva robots will bring significant efficiencies to Amazon’s order fulfillment process, which they should.  (At an NPV of minus how much?)
  6. Other analysts have pointed out that the move could be a competitive one, designed to prevent others from having the cost/efficiency advantage associated with the Kiva system, thus enabling Amazon to defend an important advantage. (Come on guys.)
  7. One or two analysts have floated the idea that all those reasons apply but are small beer; the real reason is that Kiva unlocks a door to the next transformational step for Amazon. (Now, ladies and gentlemen, we may be getting somewhere.)

Here’s The Merger Verger’s take on all that:

  1. The absence of any Amazon commentary on the deal’s strategic rationale could be a case of intentional competitive silence but it sure smells like the lack of any meaningful strategy to describe.
  2. On the efficiency explanation, to suggest that the best way to capture the benefit of a key component of your operational infrastructure is to own it outright is just hubris.  By that line of thinking, Amazon should buy a corrugated box manufacturer, UPS should buy a truck maker and Apple should buy, well, China. Metaphorically speaking, there must be some compelling reason to own when you can rent.
  3. As a corollary, one does not pay 7X sales to obtain operational efficiencies; that’s just stupid.  One pays that kind of multiple to launch a sales rocket.
  4. Similarly, to buy a technology company merely to prevent competitors from gaining access to it is a flaccid strategy at best.  Even acknowledging Kiva’s technological superiority, squirreling it away for Amazon’s exclusive internal use merely invites robotics wannabes to fill that void.
  5. Again, one does not pay 7X sales for a company that one intends to prevent others from patronizing. For Amazon to gain an economic return, Kiva must be able to sell its products widely.
  6. So what one DOES pay 7X sales for? One only pays that kind of money to unlock a transformed future.

Amazon is already a world-leading provider of retail fulfillment services, both internally and as a third-party provider for others.  It has the expertise and infrastructure to keep growing this “pick and pack” business.  But Kiva – owning it, not just renting it – could provide the last essential component of the next generation of competitive dominance in the space. By this thesis, the facilities and operational expertise that already exist at Amazon get combined with a future-pathway technology to create a logistics service that is domain leading and defensible. That makes sense to me.

Ironically, if my analysis is right (not just boys-with-toys, not just hubris, not merely operational efficiency, not competitive paranoia) Amazon has some gigantic integration challenges ahead of it.  But I wouldn’t bet against them.

Information on Kiva:

Click here for the company’s website and here for a series of videos showing the system in action. Click here for an amusing robotic interpretation of the Nutcracker Suite entitled “The Dance of the Bots.”

Making 1 + 1 = 1

Title get your attention?  Mine too.

The Merger Verger stole it (well, “borrowed” it) from a recent study published by the folks from Knowledge@Wharton dealing with the topic of “identity” as it impacts value creation in the process of a corporate merger.  Authors Hamid Bouchikhi (ESSEC Business School, France) and John R. Kimberly (Wharton) lay out four distinct approaches to identity in the integration process:

  • Assimilation
  • Confederation
  • Federation
  • Metamorphasis

These approaches differ in their degree of retention or replacement of legacy corporate identities and establish the overall framework for the degree and type of integration.

The study is a worthwhile read for all integration practitioners. Click here for the full 24-page study report or here for a shorter write-up on it.  As always, comments welcome.

Aside:

The authors also cite examples of situations where the integration process was pushed ahead TOO fast, a problem that runs counter to the norm (and could be an extremely interesting topic for their next study: when to act the tortoise and when to act the hare).

Quotes:

“For one plus one to make more than two, at the economic level, it is necessary that one plus one make one, at the psychological level.”

The merging of companies will only be successful when the employees of the merged entity “feel a sense of belonging to a single enterprise with which they can identify and to which they are motived to contribute. This is particularly true when one organization acquires a competitor; all of a sudden the enemy is on your side.”

Today’s illustration from my road map collection (no topical rationale).

Head Scratcher: Amazon + Kiva = ?

I am scratching my head over Amazon’s (AMZN) announced acquisition of robotics (read: automated logistics) manufacturer, Kiva.  For $775 million!!!

What strikes me initially is the comparison with two other recent news items: UPS’s (UPS) acquisition of TNT (TNTE.AS) and Apple’s (AAPL) decision to apply a fistful of its cash to dividends and stock repurchases.  UPS is using its cash to expand horizontally, expanding its known capabilities into broader markets.  Apple is admitting that it can’t possibly put all of its cash to good use and so is returning some of it to its owners, the shareholders.

Amazon is spending close to a billion dollars on a technology that it knows largely as a user (and a recent one at that).  The Merger Verger is skeptical.

Jeff, you can buy this book online at http://www.amazon.com. Doug

That view is running counter to Wall Street’s.  Amazon’s stock remains up about 5% from the announcement (against a generally flat market since then), resulting in an increase in market cap of nearly $4 billion.  Holy shirt! That’s five times the purchase price.

From an integration perspective (strategic intent, vertical versus horizontal expansion, management know-how and probably due diligence as well) there is a lot to talk about here.  More to come.

Bain: How to Keep Customers

Friday’s Wall Street Journal offered up an interesting piece authored by two partners from consulting firm Bain & Company on ways to keep customers following a merger.  You can find the article here: After the Merger, How Not to Lose Customers. (link may require registration or subscription)

As with most newspaper articles, this one was short but authors Laura Miles and Ted Rouse did have some sweet points that were both specific and actionable.  Integration professional will want to pack them somewhere neatly in their bag of tricks. 

The Merger Verger highlights:

  • At the very moment when many merged companies have their noses buried in books and numbers or focused on technology issues or cost cutting, customers are looking for clues as to how they will (or won’t) be served in the newly merged enterprise.  Mistiming those clues can be, well, just watch out for Mr. Chairman with a lead pipe in the boardroom.
  • Specifically, the authors state that, “Customers watch carefully after a merger to see if service falls off.  That means that early signals of improved service carry a lot of weight.”  I would go even a step further by saying “early signals of any kind of change in service – good or bad – carry a lot of weight.”
  • Miles and Rouse also suggest the bundling of good news and bad news in communications, citing an example of what sounds a lot like the United/Continental merger.  Their comment about using this technique both to keep people informed and to ease the dissemination of bad news is applicable to suppliers and investors as well as to customers.
  • Their final point was almost frustratingly underplayed, that of the need to authorize customer-facing employees to take swift and free action to ensure consumer satisfaction through a transition.  Their example came from the airline industry but the message is the same for B2B: a merger is no time to be a control freak when it comes to empowering employees to make customers happy.  Just do it.

I caught an interesting undercurrent in the Journal piece: there are inherent – sometimes invisible – conflicts in the management of mergers.  Practitioners would be wise to make them visible in their process.  One example is the conflict between the pressure to cut costs in a merger and the simultaneous pressure to focus on revenues.  Too many dealmakers turn their attention immediately to costs, largely (methinks) because they are crisp and quantifiable.  How do you measure the avoidance of loss of a customer?

Recommendation: If you can’t be in two places at once, focus first on customer retention and then on cost reduction. 

Why?  Because costs will be there to reduce once the customers have been recommitted to the new enterprise.  But the converse will not always be true: customers may not be there to retain once you’re done attending to costs. 

I would posit the following corollary to Poor Richard (with apologies):

A penny not lost is as good as a penny earned.

There are other conflicts here that we should perhaps look at another time: as Miles and Rouse imply, between the empowerment of local employees and the need for central controls in a complex, often disorderly process or between speed and thoughtfulness (an integration classic). 

Question: What are the other inherent conflicts that companies experience in the integration process and how have you dealt with them?

If I am right in sensing that the authors are talking about United and Continental when they allude to “the recent merger of two major airlines,” they should be congratulated for their role.  My reading is that the marriage of UA and CO has been extraordinarily smooth when compared to other highly complex mergers and that shareholders have done (and will continue to do) well by the deal.  Kudos (assuming…).

Earlier postings on the United merger can be found by clicking the blue “United Airlines” link in the “Tagged” section, below.

Won’t Somebody Please Organize Due Diligence?

I have come to believe that one of the industries that is most in need of consolidation is the Due Diligence Checklist industry.  It makes me want to scream.
 
Listen, if you are creating a due diligence list for publication or broad consumption, unless your list covers the entire equatorial spectrum of possible topics in relatively equal depth, do not imply completeness.  Do not label your document something stupid like “Due Diligence Checklist.”   It’s a lie.  It suggests a level of breadth and thoroughness that is not there.  That is dangerous to people legitimately trying to practice the trade of deal making and acquisition integration.  Grrrr.  You are definitely pissing The Merger Verger off.
 
I recently read an article discussing due diligence for high technology companies, written by a Silicon Valley attorney.  The piece was 18 pages long, of which five were a “due diligence checklist” organized into six categories.

 

Now get this: the section entitled “Financial Condition” had four items listed (I didn’t even have to count them; they were numbered). That’s sure been my experience: round up four or so items of financial data and that part of your due diligence is …

FINISHED!

Beer anyone?

Were that not bad enough, there was nothing – zero – on HR, nothing on corporate practices or culture, nothing on the sweeping Alpine vistas of corporate complexity.

Now, I have no problem whatsoever with a due diligence list that is focused on this aspect of a deal or that aspect. In fact, I think that’s the way it should be.  Just don’t call them more than what they are. It’s a small point; I get that.  But the implications are large.

We – deal makers, all of us, regardless of our specialties – need to be honest with ourselves.  No one of us is capable of producing an All Points due diligence checklist.  And no one should purport to do it.  This is too important a topic not to have our acts together.

Suggested Best Practice:

  1. Create the full sweep of legal, financial, operational, HR, and strategic due diligence procedures (including checklists) founded on specialized expertise from each area.
  2. Keep those procedures and lists organized separately to better enable dedicated teams to focus on the areas of their purview.
  3. When assembling a due diligence list focus on the specific area of your professional expertise and label it simply and honestly, e.g., “Due Diligence Checklist: Human Relations,” or “Legal and Organizational Due Diligence Checklist.”   To do otherwise is a prescription for confusion and incomplete analysis.
  4. In your company’s Integration Handbook, keep distinct due diligence checklists organized by specialty area.  Ensure that all areas are covered by separate lists.  Update those lists during and at the end of each transaction to codify new learning for the future.

I welcome other suggestions on how to manage the process of due diligence.  The effective obtaining and using of thorough corporate information in an acquisition is the absolute cornerstone on which a successful deal is built.  The stronger that cornerstone, the stronger the prospects for your deal’s success.

It is …

just

that

simple.