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How to Evaluate or Avoid a Target Company |
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Wanted: Integration Project Manager |
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A Perspective on Executive Packages |
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The First Step - Due Diligence |
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According to Mergerstat.com, there
were 8224 domestic merger and acquisition transactions that took place
during the year 2001, totaling over $702 billion in value. With an estimated
failure rate exceeding 80%, that means over $560 billion invested will
result in a significant loss of value. This is an alarming statistic! And,
even more alarming is the fact that companies continually embark upon the
merger and acquisition trail without fully understanding the risks ahead.
There are a multitude of reasons why mergers and acquisitions fail. While
poor business judgment, overpayment for Target companies, and changing
market conditions may be cited in some instances, research repeatedly shows
that more mergers and acquisitions fail due to inadequacies in the merger or
acquisition integration process rather than to any fundamental failure of
strategic concept.
In other words, while the deal may look great on paper (and it typically
does), the ultimate success of the deal is dependent upon a successful
integration. The key to a successful integration is developing an effective
strategic integration plan, and the first step in developing this plan is
evaluation.
If the internal process of evaluating a Target company leads to the decision
to acquire or merge with that company, then further evaluation is required
before involving yourself in further negotiations. In addition to the
obvious objective criteria such a strategic fit, revenue forecasts, and
product architecture, there are a number of subjective integration related
criteria such as cultural fit, management style, human resources issues, and
employee morale that must be included at this stage of the evaluation.
The problem is that most companies make the mistake of assigning these
"fuzzy" integration factors a lower priority, if any, in making the ultimate
decision to pursue a Target company. Countless examples of failed mergers
and acquisitions prove that when critical personnel and organizational
issues are overlooked in the pre-merger or acquisition planning stage, the
overwhelming odds are that even the most promising transactions will fail.
With this in mind, the following are some examples of integration factors to
consider when deciding whether to evaluate or avoid a Target company:
Cultural Fit (Buyer and Target)
Employees are like-minded; similar business environment (entrepreneurial,
bureaucratic, casual, formal); similar employee incentive structure,
motivation and drive.
Organizational Fit (Buyer and Target)
Senior-management is like-minded; similar management philosophy; similar
decision-making processes; similar reporting structures; similar management
responsibilities and autonomy levels.
Location (Target)
Target is located near an existing Buyer location, as remote locations
present serious management obstacles; similar type of facility, equipment,
and employee spaces.
Strength of Management Team (Buyer and Target)
Management team will be committed to merger or acquisition; team is
confident and able to navigate the new territory and rise to new and unique
challenges; team is respectful of existing organizational structure and
authority, team is forward looking and sees the big picture; team is capable
of motivating their employees.
Employee Morale (Target)
Employees are positive and inspired; employees are driven and want an
opportunity to prove their abilities; employees have not been previously
bought and sold and assimilated; employees are talented and offer a broad
breadth of experience.
Organizational Readiness (Buyer)
Organization receiving the Target's product or technology is ready and
positioned to receive on all levels - the management level, the personnel
level, the space level, the customer and partner level, and the budget
level.
Customer Satisfaction (Target)
Referenceable customers; loyal customers; few potential conflicts legally;
few potential conflicts with Buyer; i.e. Oracle Corporation buying a company
whose biggest customer is SAP.
Human Resources Issues (Target)
Consistent and enforced HR practices; few severance issues or non-standard
employee agreements, pension liabilities, VISA issues, or foreign transfer
issues; no labor disputes; availability of all HR and benefits agreements to
which the Target company was a party.
Financial Situation (Target)
Clean financials; organized and well-kept books; routinely audited by a
known and reputable firm; no SEC issues or investigations; competent team
committed to seeing the deal through close.
Legal Issues (Target)
No outstanding or potential claims, labor disputes, class action suits,
employment suits, product quality suits; acceptable number of commercial
claims; well-organized and documented file of existing contracts and
agreements with customers, suppliers, distributors, and partners; the use of
standard contracts and agreements.
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It is fairly common for small and
mid-size companies to manage the integration of their merger or acquisition
in-house. In light of the fact that mergers and acquisitions are not a
common occurrence, such companies will typically 1) place the burden of
managing the integration process upon an executive who is already handling
another full-time job; 2) appoint a less experienced employee with this
task, viewing it as mundane and low priority; or 3) charter the business
development representative with drafting an integration plan and
implementing the plan, ignoring the day to day management of the integration
process all together. It is no surprise that eighty-percent of mergers and
acquisitions most commonly fail in the integration stage.
If a company does not have the funds to hire cost-prohibitive large
consulting firms and decides to handle the integration process in-house,
then we recommend that 1) the company recruit a qualified employee
internally, dedicating them as a full-time integration project manager, and
2) the company train this person on how to plan and implement an effective
integration. When searching for this individual the following skills should
be required:
Management Experience:
This person will be managing a team of up to twenty senior-level
individuals. Therefore, it is imperative that this person has management and
motivational skills.
Organizational Skills:
Attention to Details; and Ability to Multi-Task: This person must be able to
organize information from each of the companies' functional areas; i.e.
development, support, consulting, sales, etc. In addition to organizing this
information, this person must stay on top of the details pertaining to each
functional area to ensure that issues don't 'fall through the cracks'.
Finally, this person will be bombarded with issues and concerns throughout
the term of the acquisition integration. This person cannot be the type of
person who focuses on one activity at a time, while keeping the others on
hold. They must return phone calls and emails in a timely fashion. They must
find answers to questions as soon as possible. They must be able to respond
to crisis situations on a routine basis, while ensuring that the entire
project stay on track.
Ability to Work with Senior-Level Management:
Not only will this person be working with senior-level individuals from the
functional areas, but they will also be working with executives from the
acquired company.
Business Background:
It is helpful that this person have some sort of business background, as
many of the decisions this person will be involved in directly impact
revenues and long-term business strategy.
Ability to Grasp All Areas of Operations:
This person will be responsible for managing the integration of each of the
functional areas; therefore, it is helpful that this person have a basic
understanding of what each of these areas entails.
Leader, Decision Maker, Ability to Think 'Out of
the Box':
This person must foster a team environment and essentially lead this team
through the integration period. In addition, there will be decisions to be
made. While it is ideal that this person consults with management before
making critical decisions, there are going to be many instances, as a matter
of routine, where this individual will be presented with two or more options
by the team, and this person will need to make the decision for the team.
Also, many of the issues that this person deals with will be non-standard
issues that have never before been dealt with at your company. This person
must be a creative thinker and be able to design solutions, with the help of
the integration team, to these issues.
Outgoing, People Person:
As you know, the integration process is people intensive. Without the
people, it is impossible to have a successful acquisition, unless it is
solely an acquisition of code, etc. For this reason and for all of the
above, perhaps the most important quality in a program manager is that they
be people oriented; likable, trustworthy, sincere, confident, easy to talk
to, etc.
Job Title:
Finally, the title you give this person should reflect the importance of the
job you are expecting them to do. They are representing your company in the
acquisition. They are one of the first people that the acquired employees
see; they are the point of contact throughout the process. People must
believe that this person has the authority to do this job, to make
decisions, and to get things done. Therefore, a Sr. Manager or Director
level title is recommended.
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Executive Packages are typically
addressed in the negotiations stage of the deal. However, the end result
will strongly affect the eventual success of an integration, as the acquired
executives are typically the thought leaders within an organization, and
their thinking and motivation will often set the tone for the new
organization and drive employee morale following the transaction. The
Buyer's business development representative, corporate legal counsel, and
the human resources executive should be included in these meetings.
There is no such thing as a standard executive package, and subsequently,
each is negotiated on a case-by-case basis. As a general rule, each package
typically includes an offer of base salary, variable compensation, stock
options, car allowances, official title, and discretionary title
information. It is important to keep in mind that the title may be one of
the most important offers the Buyer will be making to an acquired executive,
especially as the executive is normally a high-ranking executive within the
target company, i.e. the CEO or COO. This can prove to be a touchy area and
should be approached in a respectful and ego-sensitive way, keeping in mind
that this person may have the power to sway the loyalties of the employees
he or she formerly led.
Other components of the offer might consist of, but are not limited to, the
coverage of outstanding loans made by the target company to the executive,
relocation costs, housing costs, and equipment costs. The Buyer's policy
should be to try to accommodate an existing term of an executive's current
compensation package; however, if this is difficult to do within the
framework of the buyer's operations or systems, it is recommended for the
Buyer to honor this term by converting it to a bonus of some designation.
This way, the buyer is able to cover the value of the benefit without
throwing its accounting systems and payment policies into disarray.
Most executives will be asked to sign an employment agreement that would
typically include strict non-disclosure, non-solicitation, and in most cases
non-compete clauses. However, some clauses may be illegal or unenforceable
within certain states. Therefore, in whatever state the buyer is located, it
is important for the business development representative and human resources
executive to work closely with an employment attorney in drafting
non-standard language in these one-off type offers. The rule is that all
offers must be reviewed and okayed by legal before being made to the
respective executives.
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Due diligence is typically a
comprehensive investigation of the potential business, market, and legal
risks associated with the target company. Although it occurs prior to the
actual signing of the acquisition agreement, the due diligence stage is
perhaps the most critical component of the acquisition process.
Before making a formal request for documents, learn what you can from
financials, press releases, SEC filings, Internet news searches, analyst
reports, industry reports, etc. It is important to form a general impression
of the Target Company into which the details of the due diligence will
eventually fit. The primary goal is to gain a realistic understanding of the
Target Company, to understand its history, its corporate structure, its
mission statement, and its core competencies.
A formal request for copies of documents and provision of information should
be made at the appropriate stage. As the documents and information are
presented, keep a list of what you've looked at and what's missing. Some
general categories of items that might be requested at this stage include
documents pertaining to the legal structure of the entity, financial
records, material contractual obligations, corporate financing details,
employee information, organizational structure, benefit plans, technical
material, intellectual property assets, partners, customers, and suppliers.
Once the document request has been made, an initial due diligence team must
be appointed. The buyer's Business Development representative negotiating
the deal should lead this team. The key members of this team should consist
of a representative from each of the critical functional areas; for example,
in a high-tech company, the team would be comprised of representatives from
each of the following areas: Chief Corporate Architect, Development,
Support, Sales and Marketing, Consulting, and Human Resources. For
consistency's sake, it is highly recommended that the members of the due
diligence team should also be appointed to the integration team.
Once the due diligence team is assembled, they should travel together to a
specified location to meet with the functional area heads of the Target
Company. Documents and information requested in the document request should
be made available for review at this time. This meeting should take place at
a neutral location for both parties.
Prior to discussions amongst team members, CDA's should be signed, the CEO
of the Target Company should give an introduction and overview of the
company, and product demos should be given. It is important that all members
of the due diligence team understand the fundamentals of the company they
are examining, for this understanding will provide them with a critical
framework from which they will be examining the details of their particular
functional area. A minimum of one to two days should be allocated to this
examination process. Keep in mind that it must be stressed from the get go
that this meeting is highly confidential and cannot be discussed outside of
the team members. This requirement of confidentiality makes it imperative
that the team be made up of experienced, senior-level executives, who are
able to quickly and accurately sift through the piles of information they
will be exposed to, and make an educated and dependable assessment of the
target company.
There are certain critical due diligence items that may be considered "show
stoppers". The due diligence team should keep a keen eye out for any
evidence suggesting the existence of these items, as they can make a
considerable impact on the deal and the eventual success of the transaction.
These include, but are not limited to, potential severance payouts, golden
parachutes, poison pills, unfunded pension plan liabilities, the necessity
of third party contractual consents, unusual contractual provisions
(especially future commitments and change of control clauses), actual
litigation, potential litigation (expected or threatened), export issues,
product liability exposure, warranty claims, potential Antitrust issues, and
applicable government regulations if a regulated industry or permits
required.
At the conclusion of the meeting, each representative should prepare a brief
paper summarizing: what they examined, what they found, potential strengths,
potential weaknesses and issues, and a conclusion stating that they
recommend the acquisition or do not recommend the acquisition and why. These
reports should be sent to the buyer's Business Development representative
who is negotiating the deal. When the buyer's Business Development
representative prepares his/her report to the Board, these functional area
reports should be attached.
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