United States: Let the Buyer Beware

It’s a buyer’s market again. You may be asking yourself, "What planet is this guy from?"

There’s no question deal making has fallen off substantially in 2001. Thomson Financial reports a 62% decline in M&A activity since 1Q 2000. Uncertainty surrounding the two FASB rule changes discussed in this newsletter has contributed to slowing M&A activity. And, yes, the events of September 11 have further depressed a market that was already weak.

But the real drags on M&A activity are weak stock prices and falling profits. And that’s the opportunity. Because with bankruptcy filings on track to surpass 1998’s record-breaking year when 1.44 million new cases were filed, there are opportunities for profitable companies to acquire struggling companies that fit strategically for cents on the dollar. Or for two successful companies to merge and increase market penetration during the downturn.

Whether you’re the acquiree or the acquired, beware. A recent study by Booz-Allen & Hamilton shows that only 55% of large mergers succeed. Strategic mergers to vertically integrate an industry succeed only 32% of the time. So before proceeding with a merger, consider these three guidelines.

Gary Hamel and C.K. Prahalad found that great companies create an "obsession" over a 10- to 20-year "quest for leadership." It’s leadership that drives profits, not vice versa. This outlook, say the authors, led Komatsu to strive to "Encircle Caterpillar," led Canon to aim to "Beat Xerox," and prompted Honda to strive to become second to Ford. These companies set goals that "were all out of proportion to their resources and capabilities." Yet the goals they defined established a culture of winning at all levels. Stephen Covey advises that "if you want to have a successful enterprise, you clearly define what you’re trying to accomplish. The extent to which you begin with the end in mind often determines whether or not you are able to create a successful enterprise." So before proceeding with M&A activity, think critically about whether a true competitive advantage is being created, expanded or accelerated. Or whether, as the Booz-Allen study suggests, the merger might contribute to a process of competitive decline.

The due diligence phase is a time for putting both organizations – the acquired and the acquiree – under the microscope. That takes time. Benjamin Franklin was no M&A expert. Yet his advice from Poor Richard’s Almanac – "Haste makes waste" – should be heeded during the due diligence phase. Many mergers fail because business leaders dream of expanding market leadership with a stroke of a pen and believe certain difficult issues can be addressed after the fact. Not so fast. Tough questions need to be asked, answered and agreed to by both companies beforehand. What’s our five-year vision? What’s our strategy for achieving it? What ROI should we expect post-merger? How will our customers respond to a merger? How will our people respond? Who’s in charge? Who must be cut? Failure to achieve alignment among the new management team at the due diligence stage will lead to an M&A hangover of epic proportions once the deal is done.

Mergers are stressful. It’s a time of uncertainty. People want to know "What’s in it for me?" Tell them. Embrace the merger process as a time to recalibrate. Re-examine priorities. Take a fresh look at people, processes and programs. Listen to customers and suppliers. Communicate consistently and regularly – inside and out. When you take these steps, you can expect the new organization to be better than the sum of its parts.