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The One Year, Thirty Minute Challenge :: Week 22 :: Strategic Planning :: Mergers and Acquisitions

Mergers and acquisitions are things that multi-billion-dollar companies do, right? Certainly, companies of that size do merge with and acquire other companies, but these strategies can be employed by companies of almost any size.

In this week’s One Year, Thirty Minute Challenge, we want to dig into the mechanics of surveying the competitive landscape, identifying synergies that might exist between us and our competitors and crafting a plan to bring two businesses together.

Let’s do a quick definition of terms. In a merger, two equals come together and craft a new business entity that most likely features leadership from both businesses, products from both businesses and a consolidated customer base. In an acquisition, one business purchases the assets, products, and customer base of another business. It’s possible that the leadership of the acquired business will be no longer be present. Its brand might be swallowed completely by the acquiring business.

Before we jump into this week’s exercise, let’s lay out the case for a merger or acquisition –

  • Consolidated back office functions reduce cost – two HR departments become one, two finance departments become one – you get the idea.
  • Distinctive competencies of each entity are leveraged across the new entity.
  • The new entity has a broader product offering.
  • Market share for the new entity automatically increases.
  • It reduces rivalry in the industry.
  • It increases bargaining power with vendors and customers.

 

Here are a few observations before we start on the exercise –

  • Companies who have grown rapidly through mergers and acquisitions all say the same thing – nothing is more important than culture fit. If the cultures of the merging companies clash, the synergy never happens and value dissipates (sometimes costing companies incredible amounts of money to separate the entities). Occasionally, the companies don’t survive.
  • Merging companies operationally is hard. There are systems and processes that must be combined. Which accounting system will the new entity use? How will we reconfigure the sales pipeline? And much, much more.
  • Most likely, some people will lose their job. That’s part of the improved value proposition. You need to create a separation process that, as much as possible, allows departing people to keep their dignity, positions them for future success, and gives them adequate financial resources for a transition. You also need a plan for the people who are staying – who are grieving the loss of their coworkers.
  • You might be looking at your bank account and thinking, “I can’t acquire a box of pencils, let alone another company.” The current climate has created incredible uncertainty. There might be companies you could acquire for just an assumption of debt or for a stream of future payments instead of a lump sum upfront.
  • Acquire or merge with positive cash flow. A company with negative cash flow might seem like an easy acquisition target, but unless the reason for negative cash flow is readily apparent and easily fixable, you want to acquire or merge with a company that is “paying its own way.”
  • If you’re acquiring a company just for their book of business, be cautious. Unless the company has a locked-in customer base (e.g. the only factory-authorized service center for XYZ brand widgets in six states), customers could defect to competitors and significantly diminish the value of the acquisition.
  • I understand that every bullet point above this seems fraught with peril. These are two hard strategies and they require a lot of soul-searching and empirical analysis before they are utilized. But, when executed correctly, they can create incredible value and opportunity for the owners and companies who utilize them. Companies can quickly experience every one of the benefits spelled out earlier in the post.

 

Here’s this week’s 30-minute exercise –

  • List 3-5 merger or acquisition targets. Remember, you’re looking for culture fit, complimentary product offerings and organizational synergy. When thinking about complimentary products, consider adjacent industries. For example, an HVAC company might find a good merger/acquisition target with a plumber.

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  • Write a few notes after each one regarding why you think they make a good merger or acquisition target. Be specific – cite products, services, people, similar marketing communication.
  • Sleep on it for a night or two. Revisit the list and the notes and see if they still make sense.
  • If it still makes sense in a day or two, introduce the idea to a couple of trusted lieutenants in your organization and get their take on it. Discuss all of the challenges listed above and any additional ones that you identify.

 

If after this internal deliberation, you still think it’s a promising idea –

  • Initiate a conversation with the principal of the target company. Suggest lunch or coffee. This is your first opportunity to gauge the culture of the organization, because culture flows down from the top.
  • If the conversation is positive, introduce the merger/acquisition topic. If there is interest from both sides, sign a mutual non-disclosure agreement. This will ensure that any financials or trade secrets disclosed during the following discussions will remain private.
  • Arrange a meeting with a small group from both entities. Invite operations people, finance people and tech people. In this meeting you’re still checking for culture fit and you’re starting to dig into overarching operational questions. It might be a good idea to engage a third-party to manage this meeting. Their job is to make sure everyone’s concerns are aired and addressed.
  • Each entity needs to have a debrief after this meeting to discuss culture, markets, operations, finance, and tech.
  • If everyone involved is still feeling positive, it’s time to involve legal counsel, accountants and possibly consultants with experience in merging operations (if you haven’t involved them up until now).

 

This One Year, Thirty Minute Challenge was a thought-starter for one of the more ground-shifting topics in the series. If you decide to undertake one of these strategies, think long and hard, and get help.

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