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Some Considerations for A Successful Merger Launch

Companies being acquired. Happens all the time.

Big companies buy smaller companies; strong companies buy weak companies. Smart companies buy not so smart companies; cash-rich private equity funds buy broken or cash-strapped companies. Sometimes it works, sometimes it doesn’t. Look at what GM did to SAAB, and AMF did to Harley-Davidson before its resurgence. The American car experts killed a Swedish Automotive Icon. The bowling ball and fooze-ball table people nearly destroyed an American icon.

It’s a mixed bag, but such is the predatory food chain of acquisition.

Depending on which MBA-school, consulting group or industry think tank you consult on the success rate of mergers, the numbers vary but it’s generally agreed that the majority of mergers don’t deliver the anticipated or projected results, for a multitude of reasons.

If you’ve ever been through an acquisition, either on the buying end, or on the selling end, (it’s generally understood that it’s better to be on the buying end, provided you know what you’re buying, and why you’re buying it) one thing is certain – change. If you sit anywhere on the selling end, your life is going to change – sometimes, but not always for the worse. The general rule of thumb is that 15% of the employees in the acquired company will benefit. And the owners and senior team of the company being acquired may need to invest in an empty box and a copy of “Who Moved My Cheese.”

Mergers are misnomers. Mergers are really acquisitions. And, like all things newly acquired, often there are feelings, expectations, realities that accompany the various phases of the deal.

Enthusiasm. Generally once the acquirer is past the “get to know you” phase and the seller is past basking in the glow of the investor book, and the buyer generally has a handle on this company they wish to acquire, there is some threshold level enthusiasm necessary for completion of the transaction. Call it momentum, inertia, or high school physics, but a body in motion, in this case, the deal, can surprisingly remain in motion despite a whole host of variables. It’s quickly known whether this deal is happening or not, and at the terms and price put forth in the LOI.

Rationale. Some rationale is put forth, in part to continue to stack firewood, or at least kindling, on the fire of enthusiasm to do the deal. “We are getting customers, contracts, project management, nice office furniture, and they have nice Macs and we have 20 year old Dells.” It might be that the acquiring company CEO isn’t putting the numbers on the board and needs to tuck in an acquisition to justify his or her position. It might be that the market is shrinking and it’s a desperate play to defend market share. It might be ego or personal. It might be a proprietary app that the seller hasn’t figured out has greater value marketed to a completely different industry.

Hope. Yes, often those who remain hopeful, those glass-half full deal team members, capable of containing (or, deluding) themselves through due diligence, can and want to do the deal. Often the sellers are saying novenas, praying to the gods of M&A, and changing their office feng shui, whatever it takes to get to the end zone and be doused in Gatorade.  Expectations on both sides are set early on.

Fear. It’s often the case that the same level of fear strikes the buyer and the seller, but for different reasons. For the seller, it may be the loss of control, loss of a job, or loss of perks of the business. For the buyer it is often the unknowns, and fear of failure – that the acquisition may not deliver its expected results, benefits, and accretive profits.

Work. Fixing, turning around, and transforming companies, pre-sale, is an enormous amount of work. This work pales in comparison to integration of a recently acquired company. Acquiring companies is work. Keeping customers, maintaining relationships, hoping key employees don’t leave, figuring out who does what, who should do what, and what to do are just the beginning.

Getting the deal done is only part of the journey. The greatest determinant of post-merger success is not the deal itself, but rather, the sanity of the approach to the launch or the post-merger integration, or PMI.

Defining the Model. Companies must define the future state of the organization, who will run it, what it will look like, how it will be structured and what it will do. What will product and/or service offerings be, and how will they be priced? How many people are needed? What will they focus on? Who will the customers be? Is their diligent, objective analysis to determine where the revenues and profits really come from? I recall a project in which one unit of a half-billion dollar company had 90% of its sales coming from two clients covering just three projects. That is frightening.

The “Newco” (“Newco” is a euphemism for the new, yet to be named or figured out, company) must be clear on what service offerings will be matched to which customers and at what levels of COGS and SG&A.

Picking the Team. Who will make the decisions? Who is in charge? What is the chain of command and org chart? Who will stay, who will go, what are the positions we need to recruit for? Often the people who are in and around the deal up front will go away quickly after the close, and the senior managers or owners who may have been successful prior to close, are simply in the way after the transaction, as the buyer conjures up a radically different vision for the business. Oddly enough, frequently the best people in the organization prior to the close will either 1. Not be retained/rehired because the acquirer hasn’t figured out who does what, 2. Leave on their own because they believe (which may or may not be true) that the buyer doesn’t have a clue about how this business operates, or 3. Search elsewhere for a new role because what they have been offered something less than what they have at the moment, or even a perceived “step backwards.” Egos are fragile and bruise easily in this kind of dynamic.

It’s often the case that in addition to losing some of the key people, many of the least productive employees of the acquired company (that few expect to survive the cut) somehow rise from the ashes and find themselves gainfully employed. It might be simply that the new ownership sees them differently, or the employees themselves embrace a fresh start and commit to doing better work.

There is often not much logic in terms of who, what, and where survives, and it’s all hard to predict, but the one constant is change.

Resources. Despite having just closed an acquisition, generally an outlay of capex is required to seamlessly integrate technologies, processes, fleet, workforce and facilities so that data can be collected, processed and reported.   One of the major risk points for integrations is compatibility of systems – for example, one workforce uses field force technology, one doesn’t; one division runs Timberline, another Great Plains, another Oracle and what they really need is QuickBooks, or vice versa.  Systems integration and rollout always takes more time and money to achieve than what was originally forecast. Budget accordingly.

Location Logistics/Facilities. Where will we operate from? In the PMI phase, acquirers should commit to the current facilities for a short period of time, then regroup and determine the optimal location based on growth plans, where employees live radially from the office hub, and how the current location fits or overlaps with their other existing locations and facilities. Oddly enough, there is often a risk of losing good people because they won’t tolerate a longer commute. Tremendous savings can be accomplished by streamlining and consolidating facilities, and employers should look toward home offices and inexpensive outlier locations as cost-effective strategies for deploying people to best serve customers.

Culture. In an earlier post, I noted that “culture becomes fate.” Simply, the embrace and survivability of culture is the single largest determinant of post merger success – for both the acquirer and the acquired. Individual belief systems combine into an aggregate mindset, usually the “shadow of the leadership,” and fear, chaos and apathy can frighteningly become self-fulfilling prophecies. The opportunities to improve, grow, and prosper come by challenging the organizational inertia and making often marginal, but deliberate changes. Some teams just don’t work well together, and often the smaller, more entrepreneurial culture has more nimble processes and more widely experienced people, but they fall as casualties to a more bureaucratic culture with odd hierarchies and customs. Ideally, the employees forget about turf and titles, forget for a second about the people above them and put their focus and energies into doing what’s best for the customer, breaking down bureaucracies and making it easier for the customer to understand, and interface with, the new post-merger organization.

Corporate Messaging – Internal.  Here’s a synopsis of a botched acquisition launch:

The deal was not yet signed and the acquiring company had already sent personalized emails and FAQ’s to employees of the newly acquired company. They sent in a team of HR people with little advance notice, which showed up late in the day, to meet with employees who normally leave in the middle of the afternoon. HR staffers passed out new swag with the new company logos without any brand launch or presentation by senior management of both companies, ideally under a banner and with statements addressing the concerns and expectations of employee and customer alike.

To further add to the confusion, the selling company’s ownership group let it happen and went “radio silent” when the employees asked for clarity amid the chaos. Inexperienced HR managers pushed 10+ page non-compete agreements in front of the field employees, many of whom had English of limited proficiency and did not understand what a non-compete was, and the deal was put as risk because the private equity group funding the deal was insistent on the deal being contingent on the majority of the employees signed up with the new company. Employees won’t sign paperwork that they don’t understand. When an integration launch is blown, it’s nearly impossible to recover.

Some tips to avoid this kind of disaster:

• Establish an executive transition team with clear lines of reporting, responsibilities, a short, focused strategic plan and deliverables with timing and costs assigned to them.
• Internal messaging needs to be clear, articulate, and accurate. It should be proofed and approved by all senior managers of both organizations and should be handed out in meetings by a joint team from both companies.
• HR should be limited to the direction given to it by the senior management. As a rule, don’t send a private in to communicate deal terms with other members of the Joint Chiefs.
• Senior business development people should be included in the process and available to speak with other employees as to how this is a win for customers.
• Communicate specifics to employees and make sure they understand what is expected of them, and why.
• The CEO’s of both companies should work and communicate in lock step at the announcement of the close and launch of the integration plan.
• Message strategy needs to be carefully crafted, concise, credible and consistently communicated and understood.

Corporate Messaging – External. A clear, concise and accurate news release should be approved by all senior managers from both organizations and should communicate the who, what, when, where, why, e.g. of the deal and reinforce the following:

• Key contacts to answer questions
• Contact information
• Timing
• Rationale for the purchase
• Why this is good for customers
• Why this is good for employees
• Why this is good for the buyer
• Why this made sense for the seller
• Positive changes
• Positive investments
• Improvements to service and product offerings
• Specific wins for service delivery
• What’s next
• What will change immediately
• What will change over time

The general message should be consistent with what has been communicated to all of the other stakeholders, including customers, vendors and employees, e.g. Customers, vendors and employees should also receive a copy of the news release. A distribution list of key wire services, media, trade publications, and other stakeholders (which may include regulators, trade allies, e.g.) ought to be ready to go.

Cultural Nuances. Time and again, companies acquired by private equity groups or larger companies send people in whose presence and ego turn off the employees of the acquired company. Everyone has a career history, and it’s important that the first few waves of integration teams come in with humility and respect for others, and not carrying arrogance and egoism along with logo-ed swag. Employees and customers of the acquired entity want to feel special and valued, and not that someone somewhere has done them a temporary favor.

Regardless what intellectual property, customer lists, and other assets survive a transaction, the lifeblood of companies is the employees and the customer relationships, not the management, not the ownership.

Likewise, the acquiring entity needs to demonstrate a modicum of respect for the contributions of the departing ownership and management, however short or shallow, and lead by example, illustrating to those who remain that they’ve now become part of a professional and respectful organization.

For acquiring companies, there is never a second chance to make a first impression.