Deal Magic Potion

Sorry…!

Another interesting article from the folks at CFO magazine, this one from R. Neil Williams, CFO of Intuit, maker of QuickBooks, Quicken, TurboTax and other financial management tools. Intuit (Nasdaq: INTU) has done 15 acquisitions over the last two years. In his short article, Williams looks at the question, “Is there a magic potion to a successful inorganic growth strategy?”

The hags of MacbethShort answer: no … but there are keys to the process. Interestingly, having answered “no” to his own question, Williams turns immediately to the importance of strategic logic. Let the Merger Verger state that another way: he gives first priority to strategic logic, admonishing readers to be aware of (and leery towards) shiny objects that invariably come before acquisition leaders.

Pivotal Quote (wherein Williams comments on his overarching observation about deals as a means to corporate growth):

The lesson was that the most successful mergers involved [targets] that had similar culture, style and operating process. The ones that only brought economic benefit were challenged to succeed.

The Short and Sweet from the Verger:

  1. The best deals arise from a buyer’s strategic plan and they address an identified gap or shortcoming.
  2. A thorough due diligence process must include an assessment of the culture, the values and the operating mechanisms of the target company.
  3. When acquiring a company still managed by its founders/owners, make sure you and they see a common future for “their baby” under your leadership and get them really juiced about that enlarged potential.
  4. Empower your integration team to move quickly, including making rapid decisions.
  5. Determine as soon as possible the fundamental changes that you expect to make and then communicate clearly what will stay the same and what will change.

The full text of the CFO article is available by clicking here. One page, well worth reading.

If you’d like to see some of the deals that Intuit has completed over the last few years, there is good descriptive information on their website. Click here.

Final Note:

Magic potions are not a strong suit here at the Merger Verger but we can offer the following list of ingredients (sourced from an old friend).

Eye of newt, and toe of frog,

Wool of bat, and tongue of dog,

Adder’s fork, and blind-worm’s sting,

Lizard’s leg, and howlet’s wing.

You’re on your own for quantities and procedure.  Just be careful.

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The Destructive Power of the Individual – Part 1

I was discussing an interesting acquisition situation the other day with a long-time business friend of mine.  She was looking at acquiring small a privately-held company in the specialty logistics space as a launching pad for a roll-up strategy. NASA STS-75Her target was a company with an amazing customer list and a stellar 40-year reputation.  It was underperforming operationally, which offered rich efficiency upside.  The owner (age 70+) was interested in retiring.

Sound fabulous?  Dig deeper.

If you are involved in executing a roll-up strategy, sooner or later you will come upon a potential target where the owner is the founder and long-time “face” of the business.  In such a case,  The Merger Verger has three words for you:

Approach with caution.

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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.

CEO Roundtable Blog » Post Acquisition Integration – A Checklist

The Merger Verger is not a big fan of “short and sweet” due diligence checklists but this one from Loren G. Carlson, of the CEO Roundtable, is well worth reviewing, particularly for those new to the topic.

CEO Roundtable Blog » Blog Archive » Post Acquisition Integration – A Checklist.

There are two reasons why I like this list:

  1. It reinforces the essential (and dual) role of due diligence, reminding us that while information is important in the process of buying a company it is absolutely essential in making that purchase succeed; and
  2. It lays out the sometimes non-obvious connection between legal due diligence and operations, citing examples of how “purely legal” stuff can affect directly the commercial elements of a deal and therefore its success or failure.

Carlson acknowledges that his article is to “get you started” but with that caveat in mind he does a nice job.  He also notes that the most successful acquirers were those that “invested in post-mortems after the deal” to learn from what went well and what didn’t. (Too important topic to cover here/now; more another time.)

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.

Chick ‘n Roll-Up

Rolling up fragmented industries is an age-old strategy. Sometimes it works.  And sometimes better than others.

The Merger Verger was involved once in leading a series of roll-ups in the industrial packaging and crating space.  Chick Packaging (now a part of the Swedish global packaging concern, Nefab) began life in 18-something in rural New Hampshire and grew through acquisitions to be the largest industrial packaging company in the US.  While the strategy was highly successful, it never achieved one of the its fundamental underpinnings. 

The cornerstone business – and in fact most of the bolt-ons – had deep customer relationships with one or more of the Fortune 100.  The roll-up strategy called for leveraging those relationships into national contracts as the operational footprint of the company grew.  It didn’t happen, not to anywhere near the degree it seemed like it should have.

The reason offers a cautionary tale for anyone contemplating a consolidation strategy.

The Chick Map

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Chuck the Checklist? Check!

Being a lifelong Forgetful Guy, I have constructed little organizational systems to protect myself from myself.  One of those systems is checklists.  So I believe in them.  To a point.

When doing acquisitions, checklists are absolutely critical because there is so much information from so many different dimensions to manage.  So we have due diligence checklists (legal and financial, about which there are 487 things to say … another time) and integration process (strategic) checklists.

All successful acquirers build a “book” of know-how, constructed in part from lessons learned on previous deals.  Out of that process comes a thorough integration checklist, cataloging hundreds, sometimes thousands of items requiring attention.

In that setting – amidst thousands of boxes to check – how is it possible to keep your eye on the ball (by which I mean the larger strategic intent of the deal)?  Focused on rows and rows of line items, how can you possibly perceive “trajectory creep” or the surprise rocketing in from some unseen nebula somewhere?

The danger of checklists – and the more “thorough” they are the greater the danger – is that they become substitutes for thinking.

As an integration leader, I insist that my teams pause occasionally to chuck their check lists.  In those pauses I ask them questions designed to pull them from their pages to the big picture:

  • What are we missing here?  What are we not thinking of?
  • What could be different here from any of the other integrations we’ve done in the past?
  • How would or could we respond if [fill in all kinds of blanks here]?
  • What isn’t working so well?
  • What expected problem has not materialized (yet)?

and probably the most important of all:

  • Why did we do this deal in the first place and what else should we be doing or thinking about to make sure we accomplish that end?

Every now and again, chuck the checklist and think for yourself.

Check.

Manufacturing Due Diligence

The Deal magazine is currently running a moderately interesting article on things to look out for when doing due diligence at a manufacturing company.  The article doesn’t break a lot of new ground but it does offer some succinct points on things not to forget when looking at an industrial target.

Link here: http://www.thedeal.com/magazine/ID/044712/commentary/pe-and-manufacturing-deals-close-inspection-is-key.php

 

Why an Acquisition Integration Blog?

I had scanned the internet and blogland as much as I cared to and still not found any kind of satisfactory forum for dialogue on the subject of acquisition integration.  Even the integration-related groups on LinkedIn seemed pretty inactive or, well, sort of lame. So I launched The Merger Verger to lay some observations and opinions out there and to see who and what came back.

This is important stuff folks; a lot of shareholder value hangs in the balance.

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