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somewhere along the way. ''The Vision Thing" often underlies such situations, where a visionary CEO's idea of an industry-transforming deal runs straight into the reality of day-to-day business.
Due diligence is a difficult process from which to get good business results. It has an intensive legal and accounting aspect to it that involves large numbers of accountants and lawyers working long hours in unpleasant conditions. There is also a need for secrecy and speed, since leaks can prompt problems with securities regulators, customers, suppliers, and employees. Beyond this, many participants are either inexperienced or not sure what they are looking for. And many people do not want to be the bearer of bad news, especially as the process becomes more frenetic and the CEO and others get more excited about doing the deal. Put it all together and sometimes even major problems, including accounting and legal problems that should have been caught, slip through and blow up, usually in the year after closing.
In the heat of a deal, the acquirer may bid up the price beyond the limits of reasonable valuations. It is all too easy to find benchmarks that justify a higher price or bargain away important nonprice terms that restrict the ability of the acquirer to achieve planned-for savings and growth. Remember the winner's curse: If you are the winner in a bidding war, why did your competitors drop out (bearing in mind that they too may have scratched to find the last penny for their bid!)?
Poor Post-Acquisition Integration
Assuming that the price paid would allow for an acquirer to create value from a deal, there is still another hurdle to clear: implementation. It goes almost without saying that poor implementation can ruin even the best strategy. In M&A situations, the execution of a sound business strategy is made especially difficult by the complex task of integrating two different organizations. Relationships with customers, employers, and suppliers are often disrupted during the process; this disruption may cause damage to the value of the business. Aggressive acquirers often believe they can improve the target's performance by injecting better management talent, but end up chasing much of the talent out. Y et it is this very integration that should yield the returns to make the acquisition pay off. Failure to integrate can be as costly as integrating poorly. Exhibit 7.2 shows a typical losing pattern for unsuccessful merger programs. This death spiral, unfortunately, is all too common.
Exhibit 7.2 Typical Losing Pattern for Acquisitions
Steps in Successful Mergers and Acquisitions
We can break an acquisition program into the five distinct steps. The process begins with a pre-acquisition phase that involves a self-examination of your company and its industries. And the process ends with a carefully planned post-merger integration that is executed as quickly as possible to capture the premium that was paid for the acquisition.
Do Your Homework
If you have valued your own company and understand the changing structure of your industry and the players in it, then you should have a clear vision of the value-adding approach that will work best. Three avenues to consider are:
1. Strengthen or leverage your core business by gaining access to new customers or customer segments and to complementary or better products and services.
2. Capitalize on functional economies of scale (e.g., in distribution or manufacturing) to cut costs and improve product and service quality.
3. Benefit from technology or skills transfer. Some companies are better at doing certain things than others or have developed unique technologies. If these skills can be applied to larger volumes of business or opportunity, then they can be a source of real value.
When it comes to thinking through synergies, companies at times fail to focus on how revenues will increase or costs will fall. For example, it is tempting to assume that revenues for a new combined company will be the sum of the predecessor companies' sales plus a boost from cross-selling additional products. The reality can be quite different. First, the fact of a merger itself will disrupt customer relationships, leading to loss of business. Second, smart competitors use mergers as a prime opportunity to break into new accounts—including recruiting star salespeople or product specialists. Finally, customers are not shy about asking for price and other concessions in the midst of a merger, which salespeople will be eager to offer for fear of losing the business and getting bad publicity. It is hard to overestimate how much effort is required to deal with such issues, and to underestimate the impact if you do not.
Likewise, on paper, salesforces might be integrated to move more product through the same number of salespeople. Reality in the field might be quite different if the salesforces of the merging companies do not make exactly the same customer calls. For example, it is unlikely that two college textbook companies, one specializing in liberal arts books and the other in scientific texts, can profit from salesforce savings. Salespeople in the two companies actually visit different parts of campus, with little redundancy.