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
It has been a heady four years for Arlin Sorensen.
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
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
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."
Tips for Making M&As Easier
"Expect the unexpected" may be a cliché,
but it's also useful advice when it comes to joining
forces with another company. Following are seven recommendations
that may help you and your employees better weather
a merger or acquisition:
Let the pros do the numbers. You'll find few
complaints about the process of due diligence and discovery
among executives who rely on lawyers and accountants
experienced in mergers and acquisitions. Bring in experts
early in the process and provide them with access to
all the data they need.
Expect a bumpy road. Microsoft partners have
a wide range of experience in how long a merger or acquisition
takes. Realize that the process will require being away
from your usual business duties; you'll need to compensate
for these extra demands on your time.
Ease the transition. Not everything shows up
in the books. Consider smoothing the transition by offering
benefits such as extra vacation time to employees and
breaks on charges for shipping for customers.
Include your employees. Keeping your people
in the dark leads to many negative consequences. The
most successful M&As bring employees together before
any papers are signed. Giving your workers ownership
in the process can help dispel many fears -- and keep
key staffers from bolting.
Anticipate some emotional turmoil. Executives
in any company have time and emotional equity tied up
in their organizations. Don't discount the impact of
having to share that control with outsiders. Work toward
a new division of duties based on each executive's strongest
Anticipate the power of company culture. When
you merge two groups, both sides face changes. Don't
expect your staff to be thrilled about adjustments involving
job duties, benefits, pay or schedules. Your best bet:
Give them plenty of advance notice about anticipated
Expect attrition. No matter how well you try
to manage change, some employees won't adjust. Executives
who've been through the process suggest that you can
expect up to 20 percent turnover in the year following
the deal. Stop the bleeding by offering key people incentives
to stay, such as bonuses, profit sharing or a bigger
say in company strategy.
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
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
"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."