Introduction
Mergers and acquisitions are often a very important part of business growth or the harvest thereof. Unfortunately, many of these mergers and acquisitions are not successful. Some do not reach the execution phase due to a failure in the negotiation.
For more than a decade, Ventex Corporation has observed and advised on exit strategies for companies. The company also facilitated several mergers and acquisitions. This case study highlights the importance of having a well thought out and executed M&A strategy. It shows how small apparent problems can sink M&A negotiations or execution. The following failure reasons are discussed (with corresponding cases):
- Dishonesty.
- Dependency of the owners.
- System integration failure.
Dishonesty
Dishonesty is not sustainable. The basic principle holds: “You can fool all the people sometimes and some 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 have a tendency to come back and haunt the guilty party.
The sole owner of a small, but extremely profitable and successful manufacturing company, decided at the age of 55 to exit through a merger and acquisition. Due to the specialized nature of the business, it made tremendous strategic sense for a very large listed entity to acquire this company. They received the actual figures from the businessman and were very impressed and eager to make a deal. Unfortunately, further analysis showed that the entrepreneur used a different set of accounts for the income recipient in order to pay less tax. The difference was considerable and the large company decided to withdraw from the negotiations. Good corporate governance and public responsibility did not allow them to pay much more for the company than the official financial statements showed. Dishonesty (with the recipient of income) was also a serious concern.
By cheating the trustee, the businessman lost an excellent opportunity to get out. He also lost excellent monetary compensation. This would have been much more than the tax money he didn’t pay. He currently has serious receiver issues that keep him up at night, at a time when he could really reap the benefits of building a successful business.
Dependency of the owners
Entrepreneurs tend to love the feeling of freedom and being in control. Too often they don’t delegate enough. This may be because the knowledge lies in their experience, there are no suitable candidates, the business is too small, the owners are too busy, or they don’t know how to do it. Unfortunately, the potential value of the business is less in this situation than it would be otherwise. In order to increase the value, it is necessary to implement a system in which the owners are not trusted too much.
This phenomenon is very common in entrepreneurial businesses. We have seen many entrepreneurs frustrated in this regard, especially in service sectors (such as training and consultancy). However, one of our most powerful customers that has this problem is manufacturing. This company is a powerful medium-sized company and well respected. The company is at a disadvantage in merger and acquisition negotiations due to the strong emphasis on entrepreneurs. All potential buyers want owners to stay for very long periods of time and are also willing to pay a smaller multiple for the company because of this dependency.
By not having a proper system, where successors are properly trained, these successful and highly talented entrepreneurs have missed several opportunities to reap through a merger and acquisition. Your business is also worth less than it might otherwise be.
System integration failure
During the M&A process, companies tend to focus on perceived benefits and synergies, contracts, getting a good deal, and making sure everything is as it seems (through due diligence). Systems integration is often seen as a problem to be solved after the deal is concluded. Many merged companies pull out due to system integration issues.
One of our clients, a mid-sized IT company merged with a large publicly traded company. The publicly traded company was in the process of being acquired and bought several IT companies. They decided it was important for everyone to be in their IT system. System integration, the merging of various IT systems (which were customized to suit individual companies), proved to be too much. The management of the different companies spent most of their time on this (and reporting). They didn’t have time to spend on their strengths: the raison d’être of mergers. The big company was eventually liquidated and everyone else lost out.
By not properly planning for the system integration, or designing a system around it, it cost the publicly traded company dearly. Our client got a good initial amount, but many dreams were shattered. The final big payoff also did not materialize (via this deal).
Summary
A merger and acquisition can be a wonderful new dimension for a company to move into. However, it is important not to go into this blindly. The merger and acquisition must be managed diligently (preferably as a project) and potential problems must be addressed.
Apparently little things can make the difference between success and failure. This case study highlights the problems associated with dishonesty, owner dependency, and system integration. We have also seen many mergers and acquisitions fail due to factors such as greed, lack of risk management, and cultures that are incompatible (where proper change management is not used).
Copyright© 2008 – Wim Venter