The Economist, that august British magazine, recently published an interesting series on six major takeovers and mergers (TOMs). The case studies contained the substance of valuable lessons to be learned which are as relevant to managers here in New Zealand as they are to businesses anywhere else in the world. The lessons effectively provide scorecard for evaluating prospective TOM.
It is often quoted, though even great leaders appear to forget it, that “history has habit of repeating itself”. Executives, directors and institutional investors – whose support for takeover is often prerequisite – must think carefully before they commit to TOM. Even with casual glance at the Air New Zealand/Ansett fiasco it is obvious that when an economy is as small as ours, it suffers when large TOM fails.
The Economist articles suggested that:
1. Over half of the TOMs destroyed shareholder value, and further third made no discernible difference. In other words, there is only one in six chance of TOM increasing shareholder value.
2. Defensive TOMs are bad idea. Companies under threat generally take their problems into the marriage.
3. During the heated days of courtship, don’t conduct due diligence in haste to close the deal – participants tend to know less about each other than they think.
4. post-TOM strategy with clear understandings, such as who gets what job, is needed to avoid cancerous uncertainty.
5. Murphy’s law applies. The time participants are weakest – post merger – is when major industry crisis is most likely to occur (Boeing – McDonnell Douglas, Compaq – Digital Equipment). TOMs are best undertaken during times of stable growth.
6. Trying to merge two distinct cultures is “like herding cats”. Arranged marriages work best between couples of similar background, culture, and complementary work styles – read “the kite and other stories” by Somerset Maugham.
7. Acquired and merged companies seldom contain many staff with TOM experience. If they have, look at the last 5 – 10 TOMs they were involved in and assess the accuracy of their forecasts.
8. Severance packages can be expensive as staff leave before generous severance terms disappear.
9. All the dirty washing might take years to discover and clean.
10. Appearances count. Joint CEOs must be able to work together although inevitably only one CEO and one company will survive.
11. Beware of share options as an incentive for merger – executives sometimes cash up and leave shareholders holding an infant with soiled nappies.
12. Do not take employee loyalty for granted.
13. Integration projects should be progress reported every four to six weeks to TOM “council” .
14. TOMs distract management from the basic task and focus of making money.
15. Participants should set up an in-house think tank to accelerate integration and extract knowledge from the different parts of the joint company and use it in the new organisation.
Below is scorecard which executives should complete before boldly going where others have mistakenly gone before – remember five out of six TOMs fail to achieve the synergies envisaged.
Remember there are alternatives to TOM. You could, for instance:
* Remain boutique operator with strategic alliances, this may be better than failed TOM.
* Pay back shareholders any surplus fat and let them reinvest elsewhere.
* Improve performance by focusing on under performing assets (that’s often the reason another company is interested in you).
* Grow the old-fashioned way by expanding from within.
* Invest as silent partner in small, fast growing companies with complementary services and extract value by internationalising their innovation.
TOM scorecard
Do you have the ability to turn away from deal if it doesn’t stack up?Have you evaluated the potential downside?Are the following team players experienced in accurately assessing the costs of the TOM and estimating synergistic savings?
– Advising brokers– TOM advisers– Board– Executive teamNote: TOM advisers and hungry executives are as accurate with potential cost savings estimates as they are with assessing the cost of their own home renovations – in other words generally hopeless. Have all other alternatives to the TOM been fully explored?Have safeguards been taken to ensure that the benefits from the TOM accrue to all stakeholders – shareholders, staff, local community and executive “share option holders”?Is your company experienced in conducting proper due diligence process?Is there enough time to undertake proper due diligence process?Have you assessed the economic impact if the TOM fails?Does the company have cash reserves to “weather any eventual storm” arising from the TOM?Have you audited the cultures? TOM is like merging two families and problems are overlooked in the frenzied courtshipIs portion of your advisers’ fees linked to successful realisation of the proposed TOM benefits? Ensure your advisers are TOM experienced.Do the assets fit – quality, condition and usage?Is your target company “CAMEL”? – Is there adequate capital, good asset quality, good management, record of sound earnings growth and good liquidity?Have the locked-in employment terms and conditions been assessed? Especially relevant if acquiring an Australian company.Have any environmental pressures been evaluated?Has the integration of IT systems been assessed? The IT team may not have the skills to cope with an enlarged environment.Has the TOM been initiated through sound reasoning? (Defensive or cost cutting strategies frequently fail.)Has your target been carefully selected? If you have been approached, have you ascertained the real reasons they want to sell?Have you adequately provided for likely bad debts and under performing loans?Is the business tied to contractual conditions which enable customers to pull out of profitable contracts? Have you established an integration plan that includes establishing “council” to oversee the key integration projects?Is the current relationship favourable – have you historically been fierce rivals?Do you have the resources to quickly select the new management structure?
Have you got contingency plan for the potential loss of key staff? Uncertainty and generous severance clauses may tempt the best executives to opt out.Can you stand the potential pain of lower revenue as management and staff are diverted by the merger?Are you prepared to be declared “surplus to requirements” when the dust has settled and the blood letting finished?
tick if you
can answer yes
less than 15Stop now – take break, and think of another strategy for growth or protection.
15-20High risk TOM – you may be able to increase your score through further evalu-ation and planning.
20-25Well done, look out for the areas where you do not feel inclined to cover, they could be your Achilles heel.
over 25Congratulations, you are in unique position – worth having your assessment checked by third party.
David Parmenter, is the CEO of waymark solutions, firm that specialises in helping organisations measure and improve their performance. waymark solutions does not profess to have experience in TOMs. Email: [email protected] Website: www.waymark.co.nz
