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.

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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.

A Galaxy of Acquired Brands

Entering the new year, The Merger Verger is watching one particular transaction that has good strategic intent and sensible (bordering on downright modest) synergy goals written between the lines of the announcement hyperbole: Newell Rubbermaid’s (NWL.N) purchase of Jarden Corporation (JAH.N) for cash and stock.

Each of these companies has an enormous stable of consumer brands (on which more below); together the list is mind boggling. And each company has grown over the years through acquisitions. It is tempting to quibble (or even judge harshly) that Jarden acquired more like a financial buyer (using acquisitions to build critical mass) whereas Newell Rubbermaid acquired more like a strategic buyer. But that would be splitting hairs.

NR-J strategic rationale

Both companies know how to do deals. And both companies know how to integrate them into a larger whole. So the deal could have gone either way. In fact, Jarden founder Martin Franklin said, “If we had the multiple and we had the market cap, we’d be the buyer.” But from an integration perspective, The Merger Verger sees it as good news that the “strategic” buyer has come out the winner. (It’s also good news that no one is bandying about that hideous old saw “merger of equals.”) All tolled, the chances of this deal achieving its strategic intent would seem good.

newell-brands-logo-slider_article_full

 

The number of consumer brands represented by the combined entity in this deal (to be rechristened “Newell Brands”) is way too big to list but it is very impressive indeed. The key names are listed in the deal press announcement, available by clicking here.

Picking through the Year-End Commentaries

Those snappy thinkers at McKinsey wrapped up 2015 with a nice piece entitled “M&A 2015: New Highs, and a New Tone.” There are some interesting observations that warrant highlighting.

First, let’s give credit. The full McKinsey & Co. article can be found by clicking here.

Examining share price data in the days surrounding the initial announcement of deals, McKinsey found that investors in 2015 McK Ex 2continued to be neutral on large deals (as regards the buyer’s shares), which is a step up from years past when they were decidedly negative.

But The Merger Verger wants to know why and we’re given two very promising explanations:

  1. Companies are being smarter about large deals, more and more looking at them from the angle of revenue growth than cost reduction. It
    always requires an investment to reduce costs but investors appear to be saying that paying multiples over market to get those reductions perhaps isn’t the best approach.
  2. Not only are companies smarter about why to do deals but they are getting smarter about how to do them as well, as this quote from the article states quite succinctly:

“Companies may also be getting better at integration and capturing deal synergies. In our observation, the discipline, professionalism, and capabilities around integration have certainly improved.”

This warms the cockles of, you know, The Merger Verger’s heart and … under the theory of better late than never we offer the following illustration to support this post.

too soon old_570xn-333619476

(Rumor has it that the foregoing is Dutch wisdom… more advanced thinking from the folks that brought us the nutmeg, tulip manias, legal dope and the Kröller-Müller Museum.)

Integration = Change Management

Wouldn’t it be great if understanding this one factor – that integrating two businesses is at its core about managing change – were enough to make deals work?  Sadly it’s not.  Turns out that most change endeavors fail too, as illustrated in this fairly informative little video from the folks at Strategy + Business.

Click here for the video, just under five minutes long.

Change … Lost – without a map.

1929 Standard (PA)

About the Art:

1929 Road map of Pennsylvania (illustrator unknown), distributed by Standard Oil Company of Pennsylvania, a subsidiary of Standard Oil Company of New Jersey, itself one of the 34 companies that devolved from the breakup of the Standard Oil trust. Standard Oil of NJ marketed gasoline under the Esso brand, which became Exxon in the 1970s. (Author’s collection)

99.9% Perfect

A statistic was bandied about years ago that in managing the Apollo moon launch projects, if NASA had 99.9% of its systems working perfectly, there were still 15,837 things (or some such number) going wrong.

Apollo-11-Infographic

Merde! That’s a lot of room for error.

On that score The Merger Verger sees little difference between the moon launch and the integration of an acquisition … lots and lots of room for things to go wrong.

It’s one reason why the Verger finds checklists both empowering and debilitating. Deals contain enormous amounts of wee activities that contribute to the whole of a success. Lose track of them and your spaceship veers slowly off into outer darkness.

BUT … focus too sharply on your checklist and you have no vision on changing circumstances that may obviate certain listed activities and necessitate other new ones.

Good project managers run with checklists but they do not live by them. They think. They envision. They project. They call audibles. And are ready to do so at any time.

 

The Merger Verger Issues a Challenge:

While we’re on the subject of moon launches and whatnot, TMV would like some computer historian or NASA retiree to provide us with a comparison of the computing processing power available to NASA during, say, the Apollo 11 moon landing and that contained in the laptop from which this post is written.

FCPA and the Integration Process

The Merger Verger is no lawyer so we don’t like to get too deep into the legal aspects of integration (hoping – in part – to set an example for lawyers not to get too deep into the operational aspects of integration) but once in a while we come across an article that draws attention to a topic that doesn’t get much attention in integration circles. So we highlight it.

One came to our attention recently on the risks associated with acquiring a company that does not comply fully with the Foreign Corrupt Practices Act. Goodyear did just such a thing with fairly expensive results after the dust settled and the non-compliance came to light.

Banditos

The article lays out three core areas of attention:

  • pre-closing due diligence including a distinct anti-corruption compliance component,
  • post-closing audits to unearth things that might have escaped the rush of pre-closing investigation, and
  • post-closing integration practices including training, financial controls, and internal communications systems.

Quick article. Worth the read if only to goodyear zeppelin-crash-pictures-1make sure you’re attuned to the issues so you can get help when the circumstance arises.

Read the full article from Michael Volkov of the Volkov Law Group by clicking HERE.

 

Walking in Whose Shoes

Integrating Benefit Plans for Real Benefit

One place where the difference between running businesses and merger them shows up in magnified form is in the combining of two disparate benefit plans.

The Merger Verger was discussing this issue recently with a mid-level executive in a service business that was being acquired. This contact was not a part of the integration team but was concerned for the impact of benefit changes on her own staff. She had recently been informed of the intended changes in a manner that was informative but not at all helpful.

She felt that the integration team – most of them senior staffers – had not Lobbwalked in the shoes of their subordinates’ subordinates (and below) and that both the changes and the manner in which they were dictated reflected little thought. She foresaw disgruntlement arising from lower levels that would be challenges to the integration and to mid-level managers … challenges that senior managers might never get a real feel for. All because no one walked in the shoes of those being affected.

Example 1: If you, the buyer, have a vacation policy that is less generous than that of the target, forcing conformance with your plan may seem like the most efficient way to go but to the target’s staff, it represents a pay cut. Yes, that’s right: a pay cut. They now have to work a day or a week or whatever more for the same amount of money; that’s a pay cut.

Example 2: If you recast your benefit plans to have some give and some take, do not presume that what you – as a senior executive – think is a “good trade” will be received as such down lower into your staffing layers. In the case above, there was a decrement in paid-leave days but an increase in 401(k) coverage and match. That might be a reasonable swap for higher-paid executives for whom investment accounts matter but people counting their days off or without spare cash are not likely to see it that way.

LouboutinThink your new staffers will be happy about that? Think they’ll drink the new Kool-Aid with enthusiasm and gusto? Wrong. They will gripe, take reduced initiative, spread bad Karma and generally prove that the kind of “savings” you were hoping to achieve are frequently not worth it. So think again.

Lesson: What a buyer might think of as an efficient answer to an integration issue may not be for reasons that relate to people’s responses way on down the food chain. Before you foist some new program on the target’s people, take off your Lobbs or your Louboutins and walk in their shoes for a while.

A Loss of the Real Kind

Sad news over the weekend. Longtime acquisition advisor and fellow New Jerseyan, Phil Clement, died in a private plane crash. Phil was the founder and head of Cathedral Consulting, an acquisition consulting firm, and was highly alert to the issues of integration. He and The Merger Verger had been trying to get together last week for a relaxed sitdown near the beach but an emergency on my end precluded that. And then the crash swept everything away.

We will miss Phil’s energy, his deep deal experience and his confident willingness to bring others’ integration expertise to the benefit of Cathedral’s clients.

Good life, Phil. Relax. We’ll take it from here.

St._Patrick's_Cathedral_(New_York)_1

For more info on Phil and Cathedral click here: Cathedral Consulting Group, LLC