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By
John Vestri
Saddleback Valley Professional Services, Inc.
Whether you
are on the buy side or sell side, an M&A transaction may be
the only legitimate strategic move available to your company in
today's environment. On the sell side many entrepreneurs have long
viewed an acquisition or merger as an easy means of liquidity. After
all now that people have realized that you have to actually run
the business after an IPO merging and cashing out sounds pretty
good. On the buy side a merger can be an easy avenue to revenue
growth that has been found to be wanting from organic sources. Here
is a humorous look (with a serious message) at "The TOP TEN
REASONS," an M&A strategy will make you crazy:
Number 10
- Small deals take as much effort, and time as large deals, and
have a similar level of risk.
Company X
acquired dozens of companies in a four-year period as part of
a roll up strategy. The deals ranged from less than $5 million
to over $50 million. The amount of time and energy was roughly
the same for large and small deals (actually in some cases smaller
deals took more time because the companies were so disorganized)
and the liability was in many cases higher with the smaller company
due to lack of process, procedure controls and adequate management
experience.
Number 9
- What you see isn't always what you get.
In some cases
buying a company can look innocent enough, with everyone on their
best behavior. What is unveiled after the deal is done is that
there was significant animosity for example between the founders
and that poison in the well might spill into the surviving entity.
Ascertain early on whom you are dealing with and are they someone
you want to be in business with.
Number 8
- 1+2 =0
Consider the
case of the merger of the number one and number two players in
a small niche software market. The two companies one of which
was public and trading at reasonable levels (1994 timeframe) see
an opportunity to dramatically improve their shareholder value
by consolidating their already dominant positions. However, after
unsuccessfully trying to merge the culture, technologies and send
a unified message to the marketplace, the company's revenue and
stock price plummeted, with the company being ultimately delisted.
Doing a deal just for the money makes bad business sense. Make
sure that synergy exists between the companies and a path for
joint success is viable.
Number 7
- The Honeymoon effect.
Your business
sells after its best quarter ever. Ninety days later your revenues
drop so low that they're difficult to pick up on your PowerPoint
chart. Your future net worth is directly tied to the performance
of your company post merger. So many times you see an organization
treat a merger or IPO (any liquidity event for that matter) as
an event, not as a normal part of doing business. So after the
champagne goes flat so do sales and operations as the organization
takes a collective breather. This is probably the single biggest
problem to overcome in the short term. Most of the "effect"
can be avoided by the proper presentation well in advance of any
deal. That is the team must see the goal as not just getting a
deal, but getting paid from that deal.
Number 6
- The buried bodies have more lives than Buffy's Vampires.
My favorite
is the CEO that literally minutes before closing a deal to sell
his company is faced with the fact that during due diligence he
personally let a four figure problem fester to the point where
the acquiring company called in to question the wisdom and ethics
of the CEO and the deal died. The message her is, "bad news
doesn't get better with age", clean up your messes before
you are forced to.
Number 5
- You say you had Uncle Arthur audit your books.
Up until recently
there was a great reason to use the Big Five for your audit, unimpeachable
results. In due diligence your results would sail through largely
unquestioned, because you had the "seal of approval."
Although that may have changed to some degree, there is great
value in having deal discussions center around the worth of the
business or technology not the accuracy of the financial statements…dump
Uncle Arthur.
Number 4
- They say they are in great shape, since they had a Big Five firm
audit their books (initials A.A. an unlimited liability partnership).
When it comes
to accounting, don't "boldly (or blindly for that matter)
go where no man has gone before". Stick to the basics and
make sure that you or someone on your team fully and completely
understands all of the audit firm's opinions and agrees.
Number 3
- Integration is now defined by Webster's as a four-letter word.
As most entrepreneurs
are finding out, cashing out is usually a long process that ends
well after the deal is complete. So many of today's acquisitions
are made using stock as currency it is now in you financial interest
to help make the surviving entity successful…then comes the
integration. You come to realize that the corporate culture that
you built was great for ACME Software, but is a complete train
wreck with ABC Company. Two things here; make sure you understand
the "personality" of your new mate. Just like a marriage
it is possible to pick the wrong partner. Second, make it your
personal responsibility to show leadership in creating the atmosphere
for change. People that have followed you for years won't dessert
you come crunch time.
Number 2
- You've invented "the better mousetrap," but nobody knows
what the heck you are talking about.
The technoprenuers
biggest challenge in shopping for a strategic partner is finding
one that will embrace the concept of the technology and make it
their own. So many times the new company doesn't really get the
vision; they are blinded by the dollar signs. It is important
that you are partnering with a company that can share the vision.
And the Number
One reason is -You just found out that the CEO of the company
you merged with has a cordial invitation to testify before a congressional
committee.
Do the due
diligence!!! In most cases the buyer directs this effort so that
they can get comfortable with the value of the acquisition, which
is as it should be. However, if you are planning a stock deal
you need to assure yourself and your team that the currency being
used in the transaction will have some real worth in the long
run…do your homework. One last point here. If at all possible
structure stock deals to pay 20% in cash to mitigate some of the
risk.
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