KUHN CAPITAL Wednesday, December 13, 2017
Dispatches from the front

Avoiding Bad M&A Mojo II
(1/10/2005)

Our last Dispatch addressed in general how M&A can fail to realize its potential or even deliver a break-even proposition. This month we'll focus on Internet, software and tech services transactions in particular.

We've heard from Joe Bower of the Harvard Business School on how the causes of failure differ depending on the reasons why management undertook the deal to start with -- to extend geographic reach, to broaden a product line, to acquire cutting-edge R&D, etc. But in a word, he says most failures are due to poor post-deal integration.

Now comes a study carried out by Grant Thornton in 2004 on 750 software, Internet and tech services firms, and recommendations on what you can do to circumvent the more common traps they found.

Like Bower, Grant Thorton finds a key reason for bad M&A mojo in these industries is flubbed integration: 65% of the managers they interviewed identified this factor. But unique to software, Internet and tech services firms was the loss of key personnel, at 67% the most common single factor quoted.

This number isnít surprising: these industries are characterized by high levels of intangible assets, otherwise known as intellectual property and people. So people are both critical to post-deal success and a lot harder to manage and motivate than things. For this reason, we see the retention of people as an important value driver, even to the point of calculating alternate deal valuations based on the probability of key person loss.

Other frequently cited factors were lack of clear strategic rationale (61%); insufficient due diligence (60%); weak communications (59%); conflicting corporate culture (55%); unrealistic expectations of synergies (52%); and overvaluation (45%).

Grant Thornton goes on to recommend an antidote: start thorough due diligence and integration planning at the earliest stages of target contact. Of course, we canít disagree with this suggestion for the same reason we donít disagree with apple pie. But more fundamental, we think, is this: the deal must have the attention and involvement of the buyerís most senior relevant executives, they must take personal responsibility for its success, and they must know their targetís executives -- both owners and operating executives -- well enough to read their motives clearly.

From this buy-side commitment by a competent and powerful executive, one should expect good things to flow: a coherent M&A rationale, comprehensive due diligence, strong communications and realistic assessments of synergy, culture clashes and value.

In contrast, we have found that remote, disengaged executives who delegate these key activities to untested subordinates attract M&A trouble Ė itís like shaking hands with someone whoís looking the other way.

Another indicator of tough sledding ahead is arrogant M&A teams, often those of big buyers, who tend to reduce the transaction solely to rote, financial terms, as if the target were just another commodity. Sometimes these teams are simply reflecting the attitude of their leader. And in these environments, an even worse development is to find this attitude mirrored by the targetís owners, who are now inadvertently being encouraged to ďtake the money and runĒ.

So, ironically, we have seen the greatest wealth destruction occur in circumstances where financial types take charge of teams going through the motions to get to the finish line. Such destruction is understandable when one recalls that this sort of process alienates the very people at the target who are crucial to post-deal success. Consistently winning M&A teams know how to listen and learn.

In sum, successful M&A requires all your senses: eyes open, antenna out, brain engaged, and hand extended in greeting. Yes, take Grant Thorton's advice on advance planning and analysis, but as important, earn the target's respect and loyalty starting with first contact.

What do you get for all this effort? The fastest route to increased sales and profitability known.

Ryan Kuhn


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