Introduction
Mergers and acquisitions are often a very important part of business growth or harvest. Unfortunately, many of these mergers and acquisitions are unsuccessful. Some do not make it to the execution phase due to negotiation failures.
For more than a decade, Ventex Corporation observed and advised on exit strategies for companies. The company also facilitated several mergers and acquisitions. This case study highlights the importance of having a well thought out and executed M&A strategy. It shows how small apparent problems can depress M&A negotiations or execution. The following failure reasons are discussed (with corresponding cases):
- Dishonesty.
- Dependence of the owners.
- System integration failure.
Dishonesty
Dishonesty is not sustainable. The basic principle holds: “You can fool all the people sometimes and some people all the time, but you can’t fool all the people all the time.” Important facts that are conveniently left out of discussion or outright dishonesty have a tendency to come back and hunt down the guilty party.
The sole owner of a small, but extremely profitable and successful manufacturing company, decided at the age of 55 to exit through a merger and acquisition. Due to the specialized nature of the business, it made great strategic sense for a very large listed entity to acquire this company. They received the actual figures from the businessman and were very impressed and eager to make a deal. Unfortunately, a more detailed analysis showed that the entrepreneur used a different set of accounts for the income recipient in order to pay less tax. The difference was considerable and the large company decided to withdraw from the negotiations. Good corporate governance and their public responsibility did not allow them to pay for the company much more than what the official financial statements showed. Dishonesty (with the recipient of income) was also a serious concern.
By misleading the receiver, the businessman lost an excellent opportunity to get out. He also lost an excellent monetary compensation. This would have been a lot more than the tax money you didn’t pay. You currently have serious receiver issues keeping you awake at night, at a time when you could really reap the benefits of building a successful business.
Dependence of the owners
Entrepreneurs tend to love the feeling of freedom and being in control. Very often, they don’t delegate enough. This may be due to the fact that the knowledge resides in your experience, there are no suitable candidates, the business is too small, the owners are too busy, or they don’t know how to do it. Unfortunately, the potential value of the business is less in this situation than it would be otherwise. To increase value, you need to put in place a system that doesn’t rely too heavily on owners.
This phenomenon is very frequent in entrepreneurial companies. We have seen many entrepreneurs frustrated in this regard, especially in the service sectors (such as training and consulting). One of our most powerful customers with this problem, however, is manufacturing. This company is a powerful, medium-sized and highly respected company. The company is at a disadvantage in M&A negotiations due to the heavy emphasis on entrepreneurs. All potential buyers want the owners to stay for very long periods and are also willing to pay a lower multiple for the business because of this dependency.
By not having a proper system, where successors are properly trained, these highly talented and successful entrepreneurs have missed several opportunities to reap through a merger and acquisition. Your business is also worth less than it might otherwise be.
System integration failure
During the M&A process, companies tend to focus on perceived benefits and synergies, contracts, getting a good deal, and making sure everything is as it appears (through due diligence). Systems integration is often seen as a problem to be solved once the deal is finalized. Many merged companies withdraw due to system integration problems.
One of our clients, a mid-size IT company, merged with a large publicly traded company. The listed company was in the process of being acquired and bought several IT companies. They decided that it was important for everyone to be on their IT system. System integration, the merging of multiple IT systems (which was customized to suit individual companies), proves to be too much. The management of the different companies spent most of their time on this (and on reporting). They didn’t have time to devote to their strengths, the foundation of mergers. The big company was finally liquidated and everyone else lost out.
Not planning properly for the system integration, or devising a system around it, cost the listed company dearly. Our client got a good initial amount, but many dreams were shattered. The final big payoff also didn’t materialize (through this deal).
Resume
A merger and acquisition can be a wonderful new dimension in which a company moves. However, it is important not to investigate it blindly. A merger and acquisition must be managed diligently (preferably as a project) and potential problems must be addressed.
Apparently little things can make the difference between your success and failure. This case study highlights the issues associated with dishonesty, owner dependency, and system integration. We have also seen many mergers and acquisitions fail due to factors such as greed, a lack of risk management, and incompatible cultures (where proper change management is not used).
Copyright © 2008 – Wim Venter