A merger includes preparation and initial negotiations, due diligence, the sale and purchase, and portfolio transfers, all involving financial, legal and human implications. It is not a process that one undertakes lightly. In a previous feature article, "Why Merge?," I addressed the pros and cons of merging. Before initiating a merger, you may wish to consider your reasons for choosing to merge in relation to the negatives and positives it will bring to your business.
Usually once the decision is made to buy or sell, the search for the right candidate is begun. For the seller, a valuation report including a history of the business; a description of how the business operates, the facilities, the suppliers, marketing practices, competition, personnel, owners, insurance, and legal matters; and three to five years worth of audited financial statements must also be made ready.
Most experts strongly suggest the inclusion of a merger intermediary. There are two types of intermediaries: business brokers and M&A specialists. Generally, business brokers handle small businesses and M&A specialists, larger and middle market businesses. Business brokers charge a percentage of the purchase price, usually in the neighborhood of 10 percent. M&A specialists have a flat fee or an hourly fee, with a portion paid in advance. Expect to receive in return a valuation report, an appropriate pricing for the business, the terms for the sale, a comprehensive presentation package, professional marketing, negotiation and evaluation of offers, and follow-up on all needed legal procedures.
Due diligence, checking to make certain there are no hidden pitfalls, is the responsibility of the buyer. Again, professional help is advised, but here are the major areas that should be covered: corporate records, financial and tax information, indebtedness, employment and labor matters, real property, personal property, agreements, supplier and customer information, compliance with law and information, and any other documents which are pertinent to the functioning of the business.
Many smaller businesses are purchased with the seller financing a significant portion of the purchase price, somewhat like carrying the note on the sale of your house yourself as an incentive to the buyer. Interestingly, the chances of obtaining outside financing improve as the size of the transaction increases. Both the willingness of the lender and the number of potential lenders increases. Collateral usually is an interest in the tangible assets of the business.
In middle market transactions stock may also be used as payment. About 18 percent of middle market transactions in 1999 were paid for entirely in stock, while another 30 percent consisted of a combination of both cash and stock.
The final "closing" is also very similar to a house sale. An attorney or an escrow officer manages the transfer and all other issues, such as assignment of leases, verification of financial statements, transfer of licenses and financial transactions. This transfer agent handles all appropriate documents including a settlement sheet, bill of sale, any promissory notes or security agreements, noncompete agreements and employment agreements. Usually a timeframe is set for meeting the terms of the sale. An agreement can be invalidated if the timeframe is not met.
Don't breathe a sigh of relief once the legal and financial portions of the merger are done, however. The real work of making this merger successful has just begun.
Steps to Success in Your Merger
After you merge, what are some of the problems to watch out for? Why do three out of four mergers fail to achieve their desired financial and strategic goals?
Productivity drops of as much as 50 percent have been reported when the workplace cultures of the merging businesses clash. Even when an acquisition is successful, it can take anywhere from three months to three years for an organization to recover.
For employees, there is uncertainty and the high probability of change that produce stress. This stress affects perceptions, judgments, and interpersonal relationships.
For organizations, there is often less communication and increased centralization as reorganization planning takes place. Supervisors are stretched thin between planning meetings and their regular duties, limiting access by employees just when they are needed the most. If active intervention is not initiated, rumors and insecurities can lead to reduced productivity and the turnover of key people.
It has been estimated that most companies spend only about $10 per employee per year on internal communications, less than is spent on many corporate Christmas parties. However, when an employee leaves a company, businesses spend an average of $8,300 per employee in replacement costs. When one considers the additional costs to a business of unhappy employees who are unproductive, poor internal communications can be a substantial expense for a business.
Internal communications do not need to be extensive to be useful. The important factor appears to be a continuous flow of information, even if all the answers are not in yet -- simply report progress. Think of employees as public relations people for the business because during a merger, they are. Whether they are speaking with outsiders doing business with the company or their neighbor at home, they are conveying a picture of the company and how it is doing. The more they are informed, the better they can represent the company in the broader community -- and the more they will feel like they are part of the process of making this merger a success.
Of critical importance is that employees learn about major corporate changes at work before they hear about them from other sources -- and they should have plenty of opportunity to ask questions. Often newspapers in researching a story will uncover an array of details that management failed to share with the employees, not because of any bad will, but because they are dealing with so many other new and different variables themselves. Nothing creates panic faster than a feeling that there is information available to other sources that is not being disclosed to the employees.
Some suggestions that a variety of experts have made to help make the transition smoother are:
- Provide a consistent message from the top down to both sides
- Have consistent accountability and compensation throughout the firm for similar positions
- Develop new ways of organizing the company to help bridge corporate culture differences
- Establish measurable objectives particularly in areas that need to work together
- Revamp the incentive compensation plan to recognize the extra work required by the transition
- Plan a variety of different ways for the groups to get to know each other
Do not overlook the importance of communicating with current and prospective shareholders. These are the people who have or are considering investing their hard earned dollars in your company's success. They need to know how the proposed merger will add value for them and their investment. Many companies have put their investor relations program on hold during a transition in the past. In successful mergers, the interim period of time between approval and execution is used to help investors understand the impact on prospective yield, value, size, markets, customer base and cash flow. Negotiating communications with investors successfully can give you needed support in the future.
Does this sound overwhelming? It certainly isn't an easy process or one that should be pursued without sufficient planning and thought, but growth of any type usually isn't easy -- and mergers are, in essence, a growth strategy. In many ways, it is like nurturing a child. With patience and persistence, the rewards are tremendous. Follow a solid plan, consider each step carefully, and enjoy the unfolding process.