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It's Not Love, It's Business

Margaret Heffernan, Founder, ZineZone

A friend of mine recently began looking for her next career move. To date, every CEO she has met with has articulated an intention to sell the business within the next 12 months and not one intends to stay after the transaction. This suggests a severe transition in market models, from start-ups to larger, more institutionalized companies. It also points to the paradox at the heart of mergers, namely, that most of those seeking them don't want to survive them. This paradox reflects the conflicts of interest and emotion that make successful mergers and acquisitions so hard to achieve.

As an entrepreneur, I founded ZineZone, a Web entertainment company, in 1998. Within less than a year it had been acquired by CMGI and merged with iCast, of which I became president and, later, CEO, until it was closed down. I have also been an acquiring CEO, so I've seen the process up close and personal from both sides. In addition, I observed what happened inside CMGI when some 50 acquisitions were completed.

Out of all of this I derive several conclusions. First, there is no such thing as a merger there are only acquisitions. Any other description is doublespeak and shouldn't be trusted. Second, most acquisitions don't work. A recent study by KPMG suggests that 83 percent of large deals do not deliver on promised synergies. Third, acquisitions are an emotional rollercoaster for everyone involved, and any disavowal of that emotion is a symptom of inexperience. Understanding these conditions at the outset saves one a lot of heartache later.

Aim Effectively at Your Target

When you're broaching an acquisition with another company, nothing replaces homework. Certain principles and mandates can go a long way toward increasing the odds of success.

  • Know your target better than it knows itself. What are the alternatives? Will the acquisition repay the time, resources and distraction that it will cost? Finding out in advance helps to ensure that the acquisition makes sound strategic sense and that you have buy-in from your management team.
  • Try to be rigorously honest. This sounds simple but isn't. There are as many euphemisms about acquisitions as there are about death. When you approach the target company, you may find yourself talking about "joining forces" "combining assets" "joint ventures" "collaboration" and "the whole being more valuable than the sum of its parts." These words make the approach gentler and imply the respect of peers, but they are hidden time-bombs whose eventual explosion can render your deal valueless. This doesn't mean, of course, that you don't try to persuade your target of the advantages of being acquired to do so is essential. Still, acquisitions are business, not love. The more upfront you can be about issues like autonomy, brand identity and executive titles, the more success you will earn, long-term.
  • Reach beyond the CEO. You need all the major thought leaders of the company to believe in the deal. Understand who holds real power in the target company and enlist their support. Your whole team can help: your CFO can win over the finance team, your CTO can dazzle the tech team. The deeper into the organization you can reach, the smoother your path will be and the more insightful your due diligence.

Due Diligence or Deal Momentum?

Rarely is due diligence used as it should be: to determine the true value of the target (and, if need be, renegotiate price), reappraise how far the strategic goal of the acquisition can be realized, and understand how it will be achieved operationally. Too often, after conceptual agreement is achieved, deal momentum takes over. The bankers want their tombstone and the executives want to get on with business as usual.

Adopting a devil's advocate approach is worthwhile, and it helps the emotional dynamic if you can use some external assessors. Try to find reasons not to do the deal. Find out what is wrong with the product and where the target company's internal demons reside. None of these things may scupper the deal, but you want to avoid surprises.

Find the Right Formula

Valuation of non-publicly traded companies is another sensitive issue and, more often than not, the ultimate deal breaker. If valuations are seriously mismatched, the problem is usually more than the numbers disagreeing, and the bigger the numerical difference, the bigger the disconnect. I've seen deals where the conceptual agreement appeared secure, only to crumble when numbers were attached to it. It is all the more important that deal mania not be allowed to override the warning signs that valuation issues bring up.

The best way to avoid these impasses is to agree on a basis of valuation (market comparables, revenue multiples and the like) which can be applied to both the acquiring and the target companies. On that basis, relative ownership, stock-option pricing and other aspects of ownership can be calculated in a transparent manner. The common sense of this approach should make it inevitable, but in fact, a surprising number of deals base valuations on everything from press releases to wishful thinking.

Provide Resources for Relationship

Once due diligence is completed and price finally determined, the hard work really starts. Everything you do right will make your new employees feel that they belong, and everything you do wrong will make them feel abandoned. I have seen (and, I confess, been part of) acquisitions where, once the deal was done, no one really attended to the relationship.

  • Put a 100-day integration plan in place. This should ensure that communication occurs daily. Your new employees need benefits, titles, strategic focus and encouragement. No detail is too small for the 100-day plan they may also need hats, letterhead, business cards and t-shirts.
  • Take geography into account. Large acquiring businesses rarely allow companies of 50 employees or less to remain at a separate location, and the rule derives from hard-won experience. Yahoo is famous for getting everyone who stays to move to its headquarters, because being spread across several locations makes common culture impossible to develop. Consolidating eliminates power struggles and internal strategic confusion. The cost of relocation is nothing compared to the loss of a failed acquisition. When iCast acquired GreenWitch in 1999, the bifurcation of the company between Boston and San Francisco was a challenge we never overcame.
  • Give it time.Your acquisition is not done until at least a year has passed, so expect to work on it that long. Make sure someone in your company owns it and regards its success as part of their own. You can never overestimate the time and resources they need for that success make sure you give it to them.

Take Necessary Precautions

If your company is on the market, you almost always have choices, and you need to be sure that selling your business is the right one. During the courtship phase, get to know the acquiring company intimately. To it you are entrusting your employees, shareholders and reputation. Ask hard questions, give tough answers. Don't leave these until later; later is usually too late.

By the same token, needless posturing does nothing for anyone. I've known companies to inflate their own valuation, provoking similar posturing on the other side, with the result that everyone lost touch with reality and a good deal was wrecked. What do you and your shareholders need from the deal to feel good enough about it to make it work?

Due diligence is, or should be, mutual. You need to understand your acquirer's culture, processes, personnel and achievements. That's your best way to see the future and test the reality of the answers you've been given. If your marketing and sales teams are duplicative, don't believe the "no layoffs" promise. If your buyer has a savage culture, expect to inherit it. Always be prepared to walk away from the deal.

Facing the Heart of the Matter

Once the deal is done, your reputation is deeply involved in its success. CEOs who say they want to leave after a sale are being honest about their love of autonomy. But walking away from all you've built may allow it to be destroyed, and you need to be sure you, and your reputation, can live with that. You may find that, at some cost to your ego, it's worth staying for 12 to 18 months, to facilitate success and claim it as such. This is much harder than it sounds. Sometimes your continued presence, and the loyalty it commands, makes it harder for real integration to occur. Try to be very honest with yourself about your ability to put your company first.

Being acquired may feel like both success and failure, simultaneously. You have won insofar as another business values and validates your achievement and may make you and your colleagues wealthy. However, this will be the biggest test your humility has ever endured. You are losing autonomy, freedom and the ownership that made your business so personal and so satisfying. Don't let any acquirer convince you otherwise. The solution: Say goodbye to all that and embrace galvanic change.

If this sounds hard, that's appropriate. Mergers and acquisitions have a glitzy, macho reputation. Those most associated with them for example, investment bankers don't have to live with them, but entrepreneurs do. The numbers are against you, and the legacy of failed acquisitions (on both sides) lasts for years. But great companies have been built this way, and building a great company is every entrepreneur's dream. Know that ultimately, as in all business, it is not the deal but the relationship that matters.

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