Newspapers in 1998 were full of headlines announcing major corporate mergers. The unions of NationsBank and BankAmerica and Citicorp and Travelers Group sent heads reeling in financial circles. The automotive industry witnessed history in the making with the merger of Daimler-Benz and Chrysler. And, the list of major mergers went on and on . . . America Online and Netscape . . . Exxon and Mobil . . . HFS and CUC . . .Without question, 1998 was the year of the mega-merger. However, as the historical record tells us, these mega-mergers are often times mega-mistakes. So how do we know if a marriage is made in heaven or hell?
TYPICAL DUE DILIGENCE MAY NOT BE ENOUGH
Much like the "morning after" of a romantic fling, the morning after an acquisition can be equally unnerving. What looks great the night before may lose its glow in the day-to-day world of running a business. Even an extensive courtship - or due diligence involving financial, legal and market analyses and management assessments - may fail to find all the trouble spots.
POTENTIAL TROUBLE SPOTS
Eroding competitive strength of the acquisition candidate can be easily missed, even when current numbers look strong. Stable margins and cash flow can hide the truth of a declining market position - at least for a while. In addition, acquirers may fail to appreciate the threat posed by emerging technologies or new competitors with radical ideas.
Solid numbers can also hide problems due to aging products or technology. Strong net income and cash flow may mask deferred investments in research and development and plant and equipment.
Fragile customer or supplier loyalties can be difficult to uncover. The company being acquired may object to attempts at verifying those loyalties. Such reluctance may stem from a fear of upsetting customers or suppliers rather than a desire to conceal information. Often, a company with strained customer or supplier relations is the last to learn about them.
Overall profitability can conceal under-performing product lines. Unprofitable segments may be presented as great opportunities, when in reality, they are a significant drain on precious resources.
FAILURE TO HAVE AN ASSIMILATION PLAN
Addressing strategic, management and other significant issues before closing the deal is essential to a smooth corporate integration. In the heat and excitement of getting the deal done, many companies fail to develop an advance plan for resolving merger-related issues, causing "morning after" frustration and unmet expectations.
Failure to consider the compatibility of corporate cultures and value systems can make for severe "morning after" headaches. One company may be structured, while the other is fluid; one analytical, while the other is intuitive; and, one formal and another informal. A culture clash can kill assimilation, resulting in the inability to achieve synergies that originally made the merger look attractive.
GREAT LAKES TECHNOLOGIES
Great Lakes Technologies manufactured packaging machinery and systems for household products industries. After years of operating as part of a large diversified corporation, a "corporate refocus" resulted in the sale of GLT to a third generation, family corporation with similar lines of business. The new owner, a financial buyer with short term gains in mind, was thrilled with the deal.
Within six months, GLT was losing money. The new corporate COO knew something was seriously wrong, but what? Due diligence had not predicted such problems.
Due diligence had failed to uncover marginal product lines that were undifferentiated and losing money at the expense of core products. These products were driving a bloated, unproductive sales force, resulting in excessive selling costs relative to sales. To make matters worse, GLT discovered through the use of "activity based costing" that one long-standing customer segment was unprofitable.
Having not participated in the original acquisition decision, the new COO had no biases or barriers to action. After replacing three of GLT's four senior executives, he asked for a different plan. With new senior management and the help of outside analysis and recommendations, GLT changed its course.
The company hired a new Vice President of Marketing and Product Development. It sold, spun-off or shut down marginal product groups and enhanced research and development related to core products. It reorganized the sales force to consist of fewer, more talented salespeople with a focus on the right products. GLT also exited from unprofitable markets. The result - a return to profitability within one quarter.
Two middle market health care manufacturers competed in adjacent segments. Each dominated its respective market. Believing that these companies could create a stronger competitive advantage together rather than alone, the CEOs agreed to merge, forming KPX Medical.
On the surface, the two companies did not appear to be a "cultural" match. One was northern, the other southern; one was unionized, the other not; and, one was used to working from eight to five, while the other was committed to "doing whatever it took."
But, at the same time, the CEOs made a perfect match. To one CEO, the merger represented a vehicle for value realization and growth. To the other, it provided an exit strategy and succession plan. In addition, the CEOs recognized compatible value systems in both organizations. Each was dedicated to salesmanship, customer service, quality, honesty, and respect for the employee.
The due diligence process involved a financial player with strong operating experience and close contact between senior management. Before the deal was done, KPX anointed the smaller company's CEO as its future leader, and senior management jointly tackled strategic issues. In addition, transition teams with representation from both companies' technical, sales and accounting functions addressed tactical issues. Upon completing the acquisition, managers attended a retreat where they formally agreed on a mission for the newly formed company. As the two CEOs had envisioned, the new KPX solidified an enviable position in its industry
MAKING MARRIAGES WORK
KPX Medical exemplifies the ideal corporate union. Companies with complementary cultures and a shared sense of direction join together to create a more powerful organization.
In today's world, however, such easy combinations are the exception rather than the rule. More often than not, merged companies experience "morning after" problems. The key is to recognize problems early, find their root causes, and take decisive action. Outside assistance may be necessary in order to gain a clear, objective understanding of the situation.
As in the example of Great Lakes Technologies, outsiders can play an important role in developing and implementing solutions to "morning after" problems. Experience shows that even marriages with rocky beginnings can succeed in the end due to a common vision, effective planning and a willingness to make it work.