Merger & Acquisitions
When … 1+1 (will equal) = 3
This is a story about mergers and acquisitions, some of my personal experiences, and what to consider so the math above works.
Boards and CEOs generally consider Mergers and Acquisitions either an offensive or defensive play: 1 (your company) + 1 (the target) (will equal) = 3. A better company greater than its sum.
Perhaps. Often it does not and the M&A landscape is full of world class examples.
Most likely you’re going the PE (Private Equity) or VC (Venture Capital) and potentially the IB (Investment Banker) route. If it is a very small acquisition (you really just want 1–3 employees of a company) it can often be financed out of operating cash flow or leveraging your profitable balance sheet. In larger deals, however, the investment cost of the M&A transaction is not accomplished through traditional LOC banking vehicles.
Whatever the size of the acquisition, things are going to change.
You are going to give up equity. You are going to report to a Board of Directors. You are going to have to manage the daily needs of “change management” like a virtuoso, weaving together best practices, some of which may be from the company you acquired. It takes steady leadership. It is not easy and it should be executed with a team with merger / acquisition experience.
Having raised capital, started 3 businesses, sold 2 businesses, and worked in M&A for a year after, I offer a few tips and insight from my experiences.
- If your goal is to acquire a mirror company to gain market share, expand into a bigger, more robust geography (bigger city or host of smaller ones for coverage) and it feels like 1+1= 3…Remember, just being bigger is not always better. You MUST be gaining some symmetric and ideally asymmetric solution sets. Hopefully these are different products or new solution sets that are close to the nest but NOT what you currently offer. Clearly you already believe deeply in the target’s talent pool and have studied the culture.
INSIGHT #1: I founded a company that over several decades achieved approx. $18M in sales and was considered very successful and profitable. To gain market share we acquired a $40M Company in Boston, and the acquisition failed. The math was not validated. Fortunately we were able to sell the combined company to someone who in fact was acquiring talent and solution sets they did NOT have so for them it was a net gain- everyone moved forward in a positive fashion.
2 Get your “IT house” due diligence plan well ahead of the final ink with action steps pre-planned and led by smart technology teams.
INSIGHT #2: When my company, the $18M firm, acquired the $40M company, our internal due diligence team was being led by the CFO in over his IT head, and not up to the task. As a result, we operated with 2 accounting systems for nearly the first 24 months, GAP principles fell apart and it killed productivity. Today such an error would not only do the same- but with all the “IT intrusions and on ramps” to virus and malware, you could be sunk before you leave port. I strongly suggest you hire an outside team to help you. Have a thorough discussion of what should be “On Premises” and know what should be “In the Cloud”. The CFO is not the person who should be leading this portion of the deal, as ours was. Just because they are on the due diligence team does not make them the expert in all matters even if they are stockholders.
3. This one is basic: Have your origination model wire-frame with shaded boxes (on what if’s) figured out. Discuss retaining key personnel and have their contracts (non-competes, stock options etc.) BEFORE the deal is sealed. If your board is full of great growth dreams, they need a single strong CEO to lead the way and set realistic expectations. It always takes longer to ramp up than expected.
INSIGHT #3: All this seems like common sense, but you would be shocked how long the acquired company leadership team can linger on and create resistance, because the Board did not give the CEO the full empowerment required. For me as founder and major stock holder, it was fatal to my leadership position to force best practices upon the larger company we acquired. The acquired company felt that since we were small — and from a small city like Syracuse, NY — that we were only capable of understanding riding the apple cart on a hay ride. In fact, our practices were the stronger of the two. One reason we were able to acquire the bigger company was that they had continued huge losses. Nonetheless, new Board- big city- blurred vision… gee it is politics, everyone was playing chess and I was not even on the board. I had one mission, turn a $40M Company losing $1.5 M a year to a profitable one: with a sales team that needed a new process and a plan to weave sales/engineering / project management together with new rules, and do it fast. Meanwhile the clock was ticking and for that CEO the new reporting pressure was on. Hey, we all report to someone — the banking convenient, the Board, your stockholders, your partners. One more thing- this is funny although unfortunate, the new chairman wanted to write the employment contracts for key personnel. Well let’s say he did not understand Microsoft Word that well and left track changes available for view. If the recipient had the view tracks setting on, they would see the all too often common salary section boilerplate. This error cost us nearly an extra $100,000 to retain key individuals who saw what the other offers were. Lots of little things make your hair gray.
4. Do not promise more than you can deliver. Again, another cupcake right? But, if you are to apply the 1+1+3 equation, it should indeed be more revenue, but how much, when, at what margin and will any be recurring?
5. Culture matters- regardless of how “mirror like” the companies are. Trust me, there will be culture shock. Get in the mix and lead by example. Create a culture of respect. Have the proper company-wide kick-off meetings, with yours and the target, on the same day, AM/PM or no later than the next day and of course, attend them in person.
Schedule a Q&A session and prepare for the expected questions and have answers. Our first question was from a person on the accounting team asking, “Because you have xyz teams coming in will I lose my job?”
INSIGHT #5: Know your style and stick to it. I had a nice big corner office. Instead I chose to work in the “honeycomb of cubes” with the sales teams, where I could coach more than the CEO/President should have, but this is my style. Here is a related story on CEO style and culture. <https://www.linkedin.com/pulse/ceo-owns-culture-bob-romano?trk=mp-reader-card.
6. Lead innovation and be on the front lines with your strategy. Know your business and whom you wish to target to grow it strategically. That might mean selling through instead of selling to. But in all cases, do not let your product plan road map get stale. You have already studied the basic question from the clients’ lens: “How is this company better and what does it mean to me? Explain that to everyone.
7. Surround yourself with leaders, people with special expertise and those who are smarter than you. Your best R&D think tank is made up of your current clients, looking for more or new opportunities with your company or others. BUT do your reading and stay current. ASK a lot of questions and learn enough to know whether you’re going to stray too far off course, or if the detour is worth the time. With that, don’t focus on failures for more than 24 hours. Learn, adjust, reset and go.
INSIGHT #7 Get good rest. You cannot go out with everyone and eat late every night. Get up early and stay sharp.
8. Set the example and condition your teams to be positive, especially the engineering & sales groups. When you know the answer is “NO” don’t say it. Be a “YES but” person, not a ‘no because’ person’. No one listens to anyone about much of anything if the first word is no.
INSIGHT in general
Finally it might be helpful to consider what I have now coined as the “Romano Rule 101”. If you want to make a deal, make a friend (and listen we all sell- we all sell- we all sell) — but if you are to influence, do one or all of these three things: Ask advice, Give a compliment, Tell a secret.
This article was written by Bob Romano and contains solely his own personal opinions. Romano has nearly 4 decades of experience in C level leadership, consulting , change management, sales process & branding innovative technology in the IT / Video Unified Communications ecosystems.