A friend of mine recently began looking for her next career move. To date, every CEO she has met with has articulated an intention to sell the business within the next 12 months -- and not one intends to stay after the transaction. This suggests a severe transition in market models, from start-ups to larger, more institutionalized companies. It also points to the paradox at the heart of mergers, namely, that most of those seeking them don't want to survive them. This paradox reflects the conflicts of interest and emotion that make successful mergers and acquisitions so hard to achieve.
As an entrepreneur, I founded ZineZone, a Web entertainment company, in 1998. Within less than a year it had been acquired by CMGI and merged with iCast, of which I became president and, later, CEO, until it was closed down. I have also been an acquiring CEO, so I've seen the process up close and personal from both sides. In addition, I observed what happened inside CMGI when some 50 acquisitions were completed.
Out of all of this I derive several conclusions. First, there is no such thing as a merger -- there are only acquisitions. Any other description is doublespeak and shouldn't be trusted. Second, most acquisitions don't work. A recent study by KPMG suggests that 83 percent of large deals do not deliver on promised synergies. Third, acquisitions are an emotional rollercoaster for everyone involved, and any disavowal of that emotion is a symptom of inexperience. Understanding these conditions at the outset saves one a lot of heartache later.
Aim Effectively at Your Target
When you're broaching an acquisition with another company, nothing replaces homework. Certain principles and mandates can go a long way toward increasing the odds of success.
- Know your target better than it knows itself. What are the alternatives? Will the acquisition repay the time, resources and distraction that it will cost? Finding out in advance helps to ensure that the acquisition makes sound strategic sense and that you have buy-in from your management team.
- Try to be rigorously honest. This sounds simple but isn't. There are as many euphemisms about acquisitions as there are about death. When you approach the target company, you may find yourself talking about "joining forces" "combining assets" "joint ventures" "collaboration" and "the whole being more valuable than the sum of its parts." These words make the approach gentler and imply the respect of peers, but they are hidden time-bombs whose eventual explosion can render your deal valueless. This doesn't mean, of course, that you don't try to persuade your target of the advantages of being acquired - to do so is essential. Still, acquisitions are business, not love. The more upfront you can be about issues like autonomy, brand identity and executive titles, the more success you will earn, long-term.
- Reach beyond the CEO. You need all the major thought leaders of the company to believe in the deal. Understand who holds real power in the target company and enlist their support. Your whole team can help: your CFO can win over the finance team, your CTO can dazzle the tech team. The deeper into the organization you can reach, the smoother your path will be - and the more insightful your due diligence.
Due Diligence or Deal Momentum?
Rarely is due diligence used as it should be: to determine the true value of the target (and, if need be, renegotiate price), reappraise how far the strategic goal of the acquisition can be realized, and understand how it will be achieved operationally. Too often, after conceptual agreement is achieved, deal momentum takes over. The bankers want their tombstone and the executives want to get on with business as usual.
Adopting a devil's advocate approach is worthwhile, and it helps the emotional dynamic if you can use some external assessors. Try to find reasons not to do the deal. Find out what is wrong with the product and where the target company's internal demons reside. None of these things may scupper the deal, but you want to avoid surprises.
Find the Right Formula
Valuation of non-publicly traded companies is another sensitive issue and, more often than not, the ultimate deal breaker. If valuations are seriously mismatched, the problem is usually more than the numbers disagreeing, and the bigger the numerical difference, the bigger the disconnect. I've seen deals where the conceptual agreement appeared secure, only to crumble when numbers were attached to it. It is all the more important that deal mania not be allowed to override the warning signs that valuation issues bring up.
The best way to avoid these impasses is to agree on a basis of valuation (market comparables, revenue multiples and the like) which can be applied to both the acquiring and the target companies. On that basis, relative ownership, stock-option pricing and other aspects of ownership can be calculated in a transparent manner. The common sense of this approach should make it inevitable, but in fact, a surprising number of deals base valuations on everything from press releases to wishful thinking.
Provide Resources for Relationship
Once due diligence is completed and price finally determined, the hard work really starts. Everything you do right will make your new employees feel that they belong, and everything you do wrong will make them feel abandoned. I have seen (and, I confess, been part of) acquisitions where, once the deal was done, no one really attended to the relationship.
- Put a 100-day integration plan in place. This should ensure that communication occurs daily. Your new employees need benefits, titles, strategic focus and encouragement. No detail is too small for the 100-day plan - they may also need hats, letterhead, business cards and t-shirts.