A Need-Payoff Question Could Also Be Called A Value Question Mergers and Acquisitions Execution – A Case Study on Deals That Went Wrong

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Mergers and Acquisitions Execution – A Case Study on Deals That Went Wrong

Introduction

Mergers and Acquisitions are often a very important part of business growth or its harvest. Unfortunately many of these mergers and acquisitions are not successful. Others did not reach the stage of execution due to failure of negotiations.

For over a decade Ventex Corporation has observed and advised exit strategies for companies. The company also facilitates various mergers and acquisitions. This case study highlights the importance of having a well thought out and executed merger and acquisition strategy. It shows how apparently minor issues can sink merger and acquisition negotiations or their implementation. The following causes of failure (with corresponding cases) are discussed:

  • Dishonesty.
  • Trust the owners.
  • System integration failure.

Dishonesty

Dishonesty is not sustainable. The basic principle says: “You can fool all the people some of the time and some of the people all the time, but you can’t fool all the people all the time”. Important facts that are conveniently left out of discussions or outright dishonesty tend to come back and haunt the guilty party.

The sole owner of a small, but extremely profitable and successful manufacturing concern decided at the age of 55 to exit through a merger and acquisition. Due to the special nature of the business it makes great strategic sense for a very large listed entity to acquire this company. They received the actual numbers from the merchant and were very impressed and wanted to make a deal. Unfortunately, further analysis shows that the businessman used a different set of accounts for the recipient of the income to pay the lower tax. The difference was huge and the big company decided to withdraw from the negotiations. Good corporate governance and their public responsibility do not allow them to pay more for the company than what is shown in the official financial statements. Dishonesty (with the recipient of the income) is also a serious concern.

By cheating the receiver, the trader loses a very good opportunity to get out. He also lost a very good cash payment. It should have been more than the tax money he didn’t pay. He currently has serious problems with the receiver that keep him awake at night – at a time when he can really reap the benefits of building a successful business.

Trust the owners

Entrepreneurs tend to love the feeling of freedom and being in control. Often they don’t delegate enough. This can be due to the fact that the knowledge lives in their experience, there are no right candidates, the business is too small, the owners are too busy or they don’t know how. Unfortunately the potential business value is less in this situation than it would be otherwise. In order to increase the value it is necessary to implement a system where the trust is less on the owners.

This phenomenon is very common in entrepreneurial businesses. We see a lot of frustrated business owners about this, especially in the service sectors (such as training and consulting). One of our stronger clients has this problem, however, in manufacturing. This company is a strong medium-sized and highly respected company. The company has a disadvantage in merger and acquisition negotiations due to its strong emphasis on entrepreneurs. Potential acquirers all want the owners to stay for long periods and they are also willing to pay a smaller multiple for the company because of this trust.

By not having the right system, where the successors are properly trained, these talented and successful entrepreneurs have lost many opportunities to reap through a merger and acquisition. Their company is worth less than what it could be.

System integration failure

During the merger and acquisition process, companies tend to focus on perceived benefits and synergies, contracts, to get a good deal and to make sure everything is the way it is (through a due diligence). Systems integration is often seen as an issue to be resolved after the deal. Many merged companies have folded due to system integration issues.

One of our clients, a medium-sized IT company that merged with a large listed company. The listed company is on an acquisition trail and has bought several IT companies. They decided it was important for everything in their IT system. System integration – bringing together multiple IT systems (which are customized to suit individual companies) – is proving to be too much. Managing various companies took up most of its time (and reporting). They do not have time to devote their energies – the reason behind the mergers. The great company was eventually liquidated and all was lost.

By not properly planning for system integration – or building a system around it – it will cost the listed company dearly. Our client actually got a good initial amount, but a lot of dreams were shattered. The big final payment didn’t happen either (through this deal).

Summary

A merger and acquisition can be an incredible new dimension that a business can operate. It is, however, important not to go into this blindly. A merger and acquisition should be diligently managed (preferably as a project) and potential problems should be addressed.

It is obvious that the little things can make the difference between its success and failure. This case study highlights the problems associated with dishonesty, owner trust and system integration. We have also seen many mergers and acquisitions fail due to factors such as greed, no risk management and incompatible cultures (where proper change management is not used).

Copyright © 2008 – Wim Venter

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