In-Depth

Mergers & Acquisitions: A Survival Guide

Experienced hands suggest keeping surprises to a minimum and staying sensitive to cultural challenges.

• By Fred Bayles
• November 01, 2006

In that short time his original company, Sorensen Computer Connection Inc., has gone through three mergers and acquisitions to become Heartland Technology Solutions, a Gold Certified Partner specializing in network infrastructures. His original staff has grown from 25 to 75, and his one-office operation in Harlan, Iowa, has multiplied to seven offices across five Midwestern states.

As you might expect, Sorensen has learned a lot about the intricacies of mergers and acquisitions: the care you must give to due diligence before joining forces with another company; the value of a good attorney and a good accountant who can check for and clear the potential pitfalls; the jungle of human resources red tape and the plethora of human quirks that come with merging two separate company cultures.

But one principal lesson stands out among them all: You can never anticipate everything. No matter how many times you've been through a merger or acquisition, each one is different-and there's always an unexpected gremlin lurking in the details.

"You know what to look for from the last two mergers you've gone through, but there's always a new area that comes up," Sorensen says.

Those surprises can range from an employee's concern about a necessary job-title change to widespread complaints about shifting pay day from, say, Tuesday to Thursday. Such examples illustrate that you can successfully navigate a merger's financial and logistical issues only to find that some small misunderstanding has upset some valued employees and sent them rushing out the door.

"Even when it's done right, it can be brutal. You must have a good plan going into these situations," says Petri I. Salonen, CEO of Tellus International Inc., a Dallas-based Registered Member that works with European firms interested in gaining a foothold in the U.S. market.

Such words are especially important for technology companies today. Although the surge of IT M&As during the boom of the late 1990s cooled after the bust, the numbers are rising again.

According to FactSet Mergerstat LLC, a Santa Monica, Calif., firm that tracks and analyzes global trends in mergers and acquisitions, the M&A craze within the IT industry peaked in 2000, when there were 5,227 deals worldwide. Back then, merger/acquisition fever was driven by the industry's hothouse nature. New companies were born daily, providing a feeding frenzy among competitors and entrepreneurs that was fueled by a seemingly endless supply of cash from venture capitalists eager to buy into the boom.

By 2003, of course, the bubble had burst and recession had reduced that number by more than half, to 2,339 deals. Those mostly involved smaller companies looking to survive. Now, those numbers are again are on the rise, according to FactSet Mergerstat, which recorded 3,477 deals in 2005, an increase of 11 percent over 2004.

The new M&A boom is driven by a theme that echoes through the IT industry: To survive in this leaner, meaner and faster world, smaller companies must grow. "You need to expand your market and your footprint," says Sorensen. "You're either growing or falling away." Growing "organically" by adding more customers, a new product niche or another geographic area can be risky and time-consuming.

The alternative: Grow quickly by joining with other firms that have different, but complementary, product lines and territories. Mergers and acquisitions offer companies a chance to tap into each other's resources at a speed necessary for survival. (For more on expansion by M&A, see "Buying Your Way to Growth," May 2006.)

At the same time, don't expect miracles overnight. Those who have been through mergers or acquisitions say the processes take an average of 18 months to complete, which can put a near-fatal strain on your business in the interim.

"It takes way longer than either party ever thinks," says Jeff Rudolph, the partner in charge of Sikich LLP's ICS Technology division, an Aurora, Ill.-based Gold Certified Partner specializing in accounting and financial solutions.

Rudolph, who started his business in his basement 16 years ago, has been through four mergers and acquisitions since 1998, first joining with the accounting firm of Sikich and then adding other software consulting firms with expertise and markets in compatible geographic and technological areas.

Those machinations have created a $15 million-a-year firm with 70 employees. But the journey to that destination hasn't always been pleasurable. "Going from the conversation to the action [of joining forces] can suck the life out of you if you're being acquired," Rudolph says. "You become totally focused on this merger or acquisition and [your] whole business can fall off. You can lose a lot of momentum."

Advice for those contemplating a merger or acquisition comes in big and small packages. The larger mechanics of the deal -- the complicated bookkeeping tasks, due diligence and discovery -- are the realm of accountants and the lawyers with the skills and experience in those processes. There the advice is simple: Find the best and most experienced professionals. The smaller package consists of recommendations for avoiding or addressing the unexpected details of M&As. As Sorensen puts it: "It isn't the big stuff that's difficult. It's the small things that eat your time up and cause you problems."

Communication Is Key
Some deals require secrecy. You might not want competitors to know your plans about a potential merger or acquisition. You don't want to alert other suitors to the object of your desire. In some cases, you might even face legal consequences for letting word slip that a deal is in the works. But the experts agree that, if at all possible, you should always let your employees know what's coming.

The consequences of failing to do so can be painful. Secrecy creates uncertainty and hurts morale; unconfirmed rumors can often send your most valued employees out looking for new jobs.

One prime reason for honesty is a practical one: Secrets are hard to keep. Salonen, of Tellus International, recalls being involved in the sale of a company where dealmakers kept employees out of the loop. Despite the best attempts at secrecy, simple facts alerted employees to the fact something was up. "People would come and say, 'What the hell is going on? Why aren't we signing the lease for this computer for the next three years?'" Salonen says.

Rudolph recalls one instance where a small company kept its employees in the dark about a deal until 20 minutes before the final papers were signed. "They had the deer-in-the-headlights look when they were told," he says. "It went downhill fast." Since then, all but one of the eight original employees has moved on.

A better approach, Rudolph says: Make mergers and acquisitions a group effort from the start. "The first time the owners tell the employees what's going on, [they should] all go to a restaurant and break bread and start working together," he says. "It's important to be able to meet the employees and show the love."

Addressing Cultural Challenges
Rudolph's second merger was with another accounting solutions firm that based its work on the Great Plains accounting solution (now Microsoft Dynamics GP). His company had worked with the competing Navision software (now Microsoft Dynamics NAV). It was, as they say, like mixing oil and water. The Navision crew saw the Great Plains newcomers as a threat, a portent of a time when they would be thrown aside for the new system. One of Rudolph's workers quit as a direct result of that fear.

"These were two separate teams that had been mortal enemies," Rudolph recalls. "It was two different, very opinionated cultures that had competed against each other for years."

In fact, the very reasons for joining companies -- adding a different product line or bringing in another area of expertise -- can cause the deepest dissent among your employees. Sorensen sums it up this way: "The easy part is doing the deal. The hard part is bringing the cultures together."

In Rudolph's case, he was able to cool the budding in-house war by bringing in two new deals for the Navision team, showing those employees that they weren't being devalued. Ultimately, the company merged with another Navision-based company, further easing the Navision group's fears and allowing them to coexist with their Great Plains colleagues.

Paul Evans, vice president of technical services for Solbrekk Inc., a systems integrator and Gold Certified Partner based in Golden Valley, Minn., took a crash course in corporate culture when he merged his small, seven-person firm with three other Minnesota companies in 2003. Although the four firms did similar work, each focused on a different vertical market.

Evans says the merger's success depended largely on making sure that all employees understood that what had been four cultures would now be a single new, improved hybrid. That goal was accomplished by bringing the different teams together for meetings, dinners and social events as the merger progressed.

"We really pushed the idea that 'We are the new company' and spent a lot of time making sure the employees melded," he says. As a result, turnover was held to a minimum of six employees, close to a standard rate in the musical-chairs world of IT.

Of course, sometimes cultural differences generate positive results. Rudolph recalls his employees' fears that they would have to don the coat-and-tie uniform of bean counters when his original company merged with the larger accounting firm. Instead, it was his more casual IT crew that subverted the larger organization. The first sign of the new culture: installation of a foosball table in the combined companies' new offices. In addition, he recalls, "the accountants changed their dress code and started wearing Dockers."

"That's Not How We Did It Before ..."
The notion that people are resistant to change might well seem like a gross understatement to executives going through a merger or acquisition. Even simple changes can generate an in-house uproar.

Sorensen, for instance, was beleaguered by employees angered about a new policy requiring them to report to work at 8 a.m. rather than 9 a.m. Others complained about a shift from weekly to biweekly pay. In one case, a worker was steamed about the fact that his new payday would come two days earlier. The reason for the employee's anger? He feared he would now spend the money before his automatic car payments were deducted from his bank account.

Merging two companies will, of course, create more serious issues requiring serious attention. Among the biggest: the inevitable turmoil that occurs when you're standardizing health care plans between two or more organizations.
Rudolph and his new partners took the step of raising salaries for employees who must now pay more for their new health coverage. In some cases, that's involved an adjustment of $100 or more a month. "We try to make it as fair as we can," he says. "The goal is to make the bottom line as good or better than it was before the merger."

Who Gets to Drive?
Another M&A issue that can't be anticipated by due diligence or a look at the books is the emotional impact for company owners. Many mergers and acquisitions, particularly in the IT world, occur among entrepreneurs who have built their companies up from scratch. The sale or merger of someone else's company with your own life's work can bring you to a minefield of emotions and bruised egos -- and that's something to keep in mind from initial negotiations to defining the management for the new combined company.

Co-mingling those different personalities at the top can be tricky, but it can also strengthen a new company by playing to individual strengths. In Solbrekk's case, Evans and his new partners found they had complementary skills: He was the techie, another was skilled in sales, a third was a management whiz, and the fourth's strong suit was finance.

However, that doesn't mean everything went smoothly. There have been spirited debates among the four on issues ranging from the way employees are to be handled to new marketing ventures.

"We have four people with four opinions," Evans says. "We beat each other up to reach a consensus so when we implement we're all in agreement. But you have to put your ego down a bit. You have to get over the fact you used to be the only one who had a say."