Do Diligence … All of It

Analysis: The Merger Verger recently conducted a Google search on “due diligence.” In approximately one half a second, 36 million results popped up. We took a quick look at all of them and found that of those relating to M&A 98.7% deal with legal and financial due diligence. Digging a bit further we found that of M&A results 93.4% offer the same information within one standard deviation.

Conclusion: even The Pinball Wizard could conduct a tolerable-good due diligence investigation into the legal or financial aspects of an acquisition.

Tommyalbumcover

Tommy can you see me?

But strategic and operational due diligence … well, that’s another matter altogether.

For less experienced acquirers, The Merger Verger worries that they may make inquiries about what due diligence to do only to be told not to worry about it, their lawyers and bankers and accountants have it all under control. “Okay, good,” they might reasonably say.

Unfortunately, that sad little exchange explains why so many deals fail … because legal and financial due diligence do not – as a rule – probe the strategic and operational issues that are the foundation of (1) making a sensible deal and (2) making it actually work.

It is one thing, for example, to know how a sales force is structured and how they are compensated and even which salespeople are the most productive but it is another thing altogether to know how the sales people sell and how they interact with the product design people or if the selling process requires a deep solutions orientation or merely efficient order taking. It’s all different.

Your lawyers and accountants can ask all the “what” and “who” and “where” questions in the world about your acquisition target but if your operations people don’t ask the “how” questions your deal is doomed.  (The point here is not to besmirch lawyers or accountants but to face the fact that this kind of due diligence is outside their normal scope of work.)

Strategic and operational due diligence provide the information upon which a successfully closed deal becomes a successfully done deal.

pinball 1951 Genco Tri-Score woodrail pinball machineIt begins with understanding how you, the buyer, function and then asking the questions you need to know to understand how to make you and the seller function together. If you don’t have the time to develop the “how” questions, probe the answers and enact the solutions yourself, get help. You will tilt the otherwise very long odds in your favor. The Merger Verger guarantees it.

 

About the Art: The original album cover from The Who’s rock opera Tommy and a detail of a 1951 Genco Tri-Score woodrail pinball machine (courtesy of Mystic Pinball, www.mysticpinball.ca)

Afterword: it’s probably not that great an idea to quote any of the statistics cited in the opening paragraph of this posting.  We made them all up. “Illustrative fiction” from TMV!

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Five Questions Before Leaping

Robert Sher, a Forbes contributor and author of the book “The Feel of the Deal,” offers an extremely succinct set of questions for any senior executive considering an acquisition. They should be part of the CSEE (C-Suite Entrance Exam).

Writing in the Forbes cliff jumpingLeadership Forum, Sher sets the stage by asking this simple question:

Why is M&A success such a crap shoot?

To which he answers thus:

The sad fact is that most deals look great on paper but few organizations pay proper attention to the integration process – that is, how the deal will actually work once all the paperwork is signed.

His five key questions address the following critical issues:

  1. Management capacity
  2. Cultural compatibility
  3. Alignment with corporate strategy
  4. Purchase price and integration investment
  5. Alternative uses of the invested capital

Check out the full text of Sher’s piece here. And more on Sher here.

 

 

Leadership Counts

A lot of acquisition integration guidance focuses on the people handling the day-to-day grunt work of managing a deal’s integration. But it should come as no surprise that corporate leadership on both sides of the deal plays a large role also. Consultant J. Keith Dunbar has written a short but interesting piece for the September issue of Harvard Business Review that quantifies this effect.

Dr. Dunbar concludes that there are key attributes in a leader that can be predictors of deal success. Jaume PlensaThey differ as between the leadership of the acquirer and the target but not by much. For example, leaders from both sides of the more successful transactions were found to be strong on motivating others, influencing others, and building relationships. Other strengths on the side of the acquiring leadership were the ability to develop others, act with integrity, show adaptability and focus on customer needs.

Let’s pause on these attributes for a moment. What can we learn if we look at Dr. Dunbar’s conclusions from 35,000 feet? The MergerVerger has some thoughts:

The likelihood of deal success increases when acquirer leadership takes an active role. Why? One would hope that leadership is able to keep out of the daily muck of deal administration and make sure that the integration team is keeping their eye on the strategic objectives of the deal. Lose sight of those in the morass of daily details and your team’s way can get lost very quickly. So the skills of motivating others and focusing on customer needs make a key contribution here.

It is also clear that the visibility of acquirer leadership and his or her power to communicate objectives and other deal factors to the newly combined staff is vital. You cannot influence and develop others without these skills and without putting them to priority use often.

And we can see that deals work better when leaders give their subordinates something to look up to. Why else would integrity or adaptability matter? Particularly in the kind of turbulence that an acquisition represents, giving your staff the belief that their company’s leadership will act rightly in the face of new and changing circumstances will help you keep your best people and will motivate your team at large.

That all sounds like a formula for success.

Read Dr. Dunbar’s full HBR article by clicking here.

Today’s artwork is Irma-Maria (2010), a pair of sculptures by Jaume Plensa exhibited in 2011 at the Yorkshire Sculpture Park in Yorkshire, England. You can see more on Plensa, a Catalan artist, here or the sculpture garden here.

Simple. Elegant. Successful. (Repeat)

As a kid, did you ever play the Pete and Repeat game with your friends? The one about Pete falling overboard and Repeat being left? Then the whole thing plays round again (ad nauseum). Get it? Repeat is all that’s left? (Yeah, I know …)

Anyway, it turns out (observation courtesy of the smart folks at Bain & Company) that this is the most successful formula for sustaining and growing a business: focus on that which you do uniquely well; understand intimately why it is better; communicate that understanding throughout your organization; repeat.

Successful practitioners of roll-up acquisitions get that formula particularly well. Ditto for those whose acquisition sights are set on bolt-on deals. Have you read the most recent annual report from Berkshire Hathaway? There’s a strategic theme there. Sure, the portfolio is diverse but the acquisition M.O. of each of those companies is focused tightly on growing the sweet spot. Simple. Elegant. Effective.

Simplicity means that everyone in the company is on the same page – and no one forgets the sources of success.

Chris Zook and James Allen, two Bain partners, have written a book on “repeatability” in business, concluding that truly successful companies have crisp elements that differentiate them from their competition and they aim to maximize those differentiators to the exclusion of everything else that ambles down the strategic pike. The book, entitled “Repeatability: Build Enduring Businesses for a World of Constant Change,” is available on Amazon and spin-off articles are available on the Bain website (links below). The Merger Verger recommends the recent article in Harvard Business Review; it has many concepts that have direct application for acquisition strategy and integration planning.

There are several elements of the “repeatability” concept that bear on dealmaking and acquisition integration. First (as always) is the message of strategic intent; get that part right and many of your acquisition risks will be behind you. But … this is not just a process of thinking you are good at this or that; you must really understand your uniqueness in the marketplace. No fluff allowed.

The next key element is to articulate that message throughout your organization. In fact the Bain authors state in no uncertain terms that the greater the distance between a company’s strategic plan and the men and women who are called upon to carry it out, the greater the risk of dissipation, digression, disinterest and disaster. Keep your competitive differentiators clear and make sure that your team knows them and is invested in them.

The final key is the simplest to describe and potentially the hardest to do. Repeat. That is, repeat without straying from your strategy and your differentiators.

In closing, let me pause on the second of the three elements: articulating the message. The Bain authors imply that this step is too often overlooked, under the theory that everyone already knows what their employer does and what it stands for. Not true, they say. But if going the extra mile to articulate issues of strategy and competitive uniqueness is a value driver in normal settings, how much more so in the context of an acquisition?

A link between well-defined, shared core principles and frontline behavior was more highly correlated with business performance than any other factor we studied.

Take the time to truly understand, articulate and sell your company’s strengths to your newly acquired staff. They will be better performers and better apostles for it.

Some useful links:

Bain & Company website

Bain specialty site on Repeatability in business

HBR article: the Great Repeatable Business Model

Amazon.com: Repeatability

About the Art: Danish architect Bjarke Ingels Group’s award winning design for Kazakhstan’s new National Library, modeled on a möbius strip.

Is Amazon / Kiva another [Buyer] / [Seller]?

When it comes to corporate hubris and strategic inanity, there is no “beating a dead horse.”  The poor animal simply will not die.

So The Merger Verger offers herewith the prospect of history repeating itself yet again, this time in the large-cap tech sector.  I quote below a series of comments from a business blog discussing the acquisition by a tech giant of a very young company in a field only tangentially related to its core operations.  See if it smells to you the same way it smells to me.

Analysts’ quotes:

  • “With today’s purchase of [Seller], [Buyer] is making its boldest bid yet to remain the most potent force in e-commerce.”

Query: does the definition of the word “bold” inherently imply “smart?” Some analysts wondered:

  • “It’s a marked departure for [Buyer], which to date has acquired only companies directly related to e-commerce.”
  • “It’s also a heckuva lot of money for a nascent business, no matter what the growth and the promise—and one in an entirely new area in which [Buyer] has no experience.”

One tech analyst went so far as to ask:

  • “… why [Buyer] couldn’t have gotten the same benefits much more cheaply and wondered if [Buyer] management might be leaning on their sizable market cap a little too much.”

Eschewing such doubters, Buyer’s CEO offered this tidbit of strategic happyspeak:

  • “Together, we can pursue some very significant growth opportunities. We can create an unparalleled e-commerce engine.”

Each of those quotes – including the one from the CEO – could have been made (and several were made) about the Amazon/Kiva deal.  But they all come from a very different transaction, one that was made in 2005 and then unwound (after a huge write-down) in 2008.  The deal?

eBay’s purchase of Skype.

At the time of the unwind, one analyst remarked:

  • “eBay seems to have bought Skype and set it on auto-pilot (destination: nowhere) almost immediately.”

So all that Meg Whitman said about her acquisition, mirroring as it does what Jeff Bezos has said about Kiva Systems, could perhaps have been realized … if they had integrated the businesses more thoughtfully.  God is in the details (another quote, architect Louis Sullivan, this time.)

I seem to be in quote mode, so I will offer one more, this one from the 18th century philosopher, Georg Wilhelm Friedrich Hegel, who said:

“We learn from history that we do not learn from history.”

To which Karl Marx appended:

 “He forgot to add: the first time as tragedy, the second time as farce.”

The eBay acquisition of Skype was a tragedy, to use Marx’s term. It was one part strategic clunker and three parts integration disaster.  The Merger Verger will watch with interest to see if the Amazon acquisition of Kiva – repeating history – turns into a Marxian farce.

Previous postings on Amazon/Kiva:

Further reading on eBay/Skype:

CAT’s Ratings Still Rock

Fitch Ratings just affirmed its debt ratings on Caterpillar (NYSE:CAT) following its acquisition of Bucyrus.  See earlier TMV posting here and Fitch press release here (via Reuters).

In its press release, Fitch stated that its “previous concern about temporarily higher leverage [at CAT] following the Bucyrus acquisition has diminished.”  Despite the deal causing a material increase in debt exposure, the company’s year-end Debt-to-EBITDA ratio remained near the pre-acquisition levels due to strong cashflow at CAT.

The rating review spoke favorably about the strategic benefits of the Bucyrus deal:

Following the Bucyrus acquisition, CAT has the broadest product line in mining capital goods. In addition, the acquisition added substantial aftermarket revenue, and CAT’s global distribution network should further improve customer service and product support for the legacy Bucyrus business. Also, CAT expects to realize revenue and synergy benefits, including putting CAT engines in more of Bucyrus’ machines.

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.