KEY PLANNING REQUIRED to Successfully Integrate an Acquisition

Even though most mergers or acquisitions start out with the best of intentions, numerous studies have shown that the majority fail to increase enterprise value.

This is highlighted by the following statistics from The Wall Street Journal, Forbes, Fortune and CFO.com:

• 70% of M&A deals fail to achieve the anticipated synergie

• 50% report a drop-off in productivity in the first 6 months post closing

• 47% of acquired company executives leave in the first year, and 75% of executives leave within the first 3 years

• Management grade the financial performance of their acquisition as a
  C minus on average.

Create an Integration Plan

So, how can you make sure your business is on the right side of these statistics?

Owners and managers need to put substantial time and effort into an M&A integration plan. Closing the deal is just the beginning. Before closing, you should have clearly defined your deal drivers and put them in measurable and quantifiable terms. Integration efforts should focus on delivering these goals and give you the framework to identify the critical action plan to achieve these goals.

Additionally, you need to determine the key success factors from the newly acquired company, which you may want to adopt in the existing company. Ideally, you will have two companies which learn and adopt best practices from each other to add value to the company as a whole.

Early on, you need to determine the degree to which the new entity should be integrated with the existing entity. Do you want it to remain largely independent, share the same corporate culture, processes and technologies, or maybe somewhere in between?

In making that decision, you need to look deep inside both companies and consider how they may or may not fit together. And don't make that decision from the sanctity of your office. You need to go down to the shop floor, talk to your managers, employees, live and breathe the heart of the two companies.

Based on this understanding, you should try and customize your integration structure and approach, then develop a plan for the first 100 days post closing. And then constantly refer to that plan so as not to lose sight of important items during the frenetic first few months.

Don't be afraid to adjust the plan based upon new findings after closing. This should also allow you to increase input from both sets of employees as they see the ongoing implementation and impact of the integration plan.
Leadership

Key people should be identified to manage the integration process. They need to quarterback the process while you retain the coach's role. Clear leadership roles are critical to minimize uncertainty, assign accountability and define authority.

Make sure that you have leaders on your team who are trustworthy, communicate well in both organizations, and can handle the inevitable uncertainties and morale issues with care. Leaders should be able to respond to changing conditions while keeping the strategic vision of the deal in mind and need to act according to the culture that you want to instill in the entity.

Communication

According to Watson Wyatt Worldwide, 90% of acquirers agree that communication is important but only 43% deem that communication was effective and successful in their integration. Communication success depends on paying attention to all groups involved with adequate attention focused on senior management, while at the same time providing clear and consistent messages to all employees from day one. Unfortunately, many integration leaders fail to communicate early and often.

Delay = Uncertainty = More Disruption = Decrease in Morale
= Loss in Productivity and Increased costs

Culture

The set of norms, values and assumptions governing daily actions and interactions are another critical issue that many acquisition integrations overlook. Most often an acquirer hopes to maintain its own culture and hopes that the new entity's culture merges into its own. But that doesn't really make sense.

Before you closed the deal, you likely placed a high value on the people in the target company. If you don't observe, understand and respect their culture, you will not only erode their productivity, but will also lose many of their key people. You need to carefully consider how their culture works and carefully design and implement incentives, compensation and benefits to reward behaviors that you believe are critical to the success of the integration and work within their culture.

Speed of Integration

Despite the fact that many managers like to take their time in integrating firms post closing, a 2008 study by PricewaterhouseCoopers suggests that waiting is a mistake.  According to PwC, people are most open to changes in work culture and processes during the first 100 days.

A timely integration leads to improved employee commitment, lower employee turnover, improved focus on customers and improved adoption of new technology.

Conversely, prolonged transitions slow growth, decrease profits, erode morale and reduce profitability.

If you take too long getting to work on the integration, your company could lose market share and miss the best opportunities to deliver the anticipated synergies of the acquisition.

Conclusion

Companies that adequately plan and deliver on M&A integration issues should significantly increase the likelihood that their acquisition works out as everyone had hoped. So, remember the following three steps:

1. Gain knowledge about both businesses
2. Apply knowledge with a clear plan of action and constantly refer back to the plan and intended goals
3. Deliver the integration plan in the first 100 days. Track, monitor and adjust to deliver integration goals.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.


About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.


ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.


Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.


For further information, visit www.clearridgecapital.com.

Selling Your Company in 2010? More Analysis Is Required

More Analysis Required
If you're going to sell your company in 2010, you need to think differently. Yes, there are buyers lined up with cash right now, but most are either looking for a high growth company that has been bucking the negative economic trend, or they're looking for a stressed balance sheet and shaky capital structure to pick up a "good deal."

For companies that are somewhere in the middle, you need to be better prepared than ever before. Buyers are going to be more critical and more likely to submit a low purchase offer unless they have a real understanding of your business. To submit a fair value purchase offer, they need to be convinced of the opportunity.

You need to have clear data and analysis of your business, systems and processes before you talk to any prospective buyers. This is in addition, to the more obvious steps of highlighting competitive strengths, weaknesses, business outlook, opportunities and benchmarking. Clear means well documented and easily understandable to an independent person who has no prior knowledge of your business.
Why is this data and analysis so important? Because when a buyer makes an offer to invest in your business, they should be well informed and understand the business with an insider's knowledge. If that happens, they feel less uncertainty. Less uncertainty = less perceived risk = higher purchase price.


To illustrate this point, it is useful to consider some of the differences between the equity valuation of a public company and a private company.

Public

Private

Information Publicly Available Audited Financials Daily Pricing Information (Stock Price) Daily Analysis by thousands of analysts Highly Regulated Equity Liquidity Highly Liquid Instant trading of minority interest (stock market) Industry of brokers, agents and market makers All sources of capital available High competition for lending and investment Public Auction Process to Sell Majority Interest Valuation Multiple Relatively HIGH

Information Little Pricing/Valuation Information Rarely Audited Financials Non-GAAP Accounting Data available, but little or no analysis Slight or No Regulation Equity Liquidity Low liquidity Few ownership/equity transfers Majority enterprise interest Fewer sources of capital available Less competition for lending Negotiated Sale or Private Auction Process Valuation Multiple Relatively LOW

Investors in public companies have easier access to more reliable and timely information, data and analysis than investors in closely held private companies. Why is this data and analysis so important? Because when a buyer invests in a public company, they are informed with research from thousands of analysts from many different perspectives. As a result, there is less uncertainty risk. At the time of writing this article, the average PE ratio for the S&P 500 was 20 compared to an average 5.2 adjusted EBITDA multiple for middle market private companies, according to a recent AM&AA report.

Yes, there are other factors to consider when comparing public to private valuation, such as stability and liquidity, but the bottom line is that investors will pay a significant premium for "ABC Manufacturing" public company than the comparable "XYZ Manufacturing" closely held private company. The price premium can be double, triple or more. Therefore, unless the buyer of XYZ Manufacturing has a deep insight into the business before they make an offer, they're going to price in their uncertainty with a lower multiple.

Let's be realistic. A private company is rarely ever going to sell for a public company multiple, but just bridging some of this information gap and shifting 10 or 20 percentage points towards a higher multiple can mean millions of dollars to you.

So, what can be done to bridge this gap? If you look at the typical closing process when you buy a closely held company, there is a boilerplate due diligence list. And due diligence nearly always begins after the sale price has been negotiated and the letter of intent has been executed.

If you're the seller, this is counterintuitive. If you want a buyer to stretch and pay maximum price for your business, they need to be fully informed when making an offer. After signing a letter of intent, they only have two real options. They either buy your business for somewhere close to the negotiated sale price or walk away. Yes, a buyer will often use due diligence to try and negotiate lower, but the majority of negotiations are already complete by that point.

It has been proven to us time and again that it is better to lose a buyer earlier in the process than have them make an uninformed low ball purchase offer.

You should spend time preparing insightful analysis of your company before negotiating with a buyer. It is natural to want to get a feel for the market value of your business before spending too much time, but by moving forward too quickly, you will lose negotiating strength and are unlikely to ever find out what the market could really pay.

So, what analysis do you need to perform? Well, we can't give away our proprietary process, but it comes from the experience of the buyer's perspective and seller's perspective from countless acquisitions. It also depends on the size, type and complexity of the business. One thing is for sure, however. When a ClearRidge client brings a company to market, prospective buyers will have access to relevant, concise and convincing analysis, so their offer is going to be based on a much clearer understanding of the business. You will lose some buyers in the process, but you'll also sort through to find motivated prospects who are more likely to meet your price expectations.


All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.


About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.


ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.


Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.


For further information, visit www.clearridgecapital.com.