LESSONS FROM MASTER ACQUIRERS

A CEO Roundtable on Making Mergers Succeed

Rohan Solanki 1310Kalyani Mudliar

1289Hilda Merlin 1281

Objective of the Case…

This case gives an insight on what a CEO and the Organization thinks, before getting into the process of restructuring or as we know it a Merger or an Acquisition.

It discusses the trade off between the target company and the acquiring company. The growth of the firm after restructuring and the key factors to a successful integration.

Are Mergers & Acquisitions worth it?

In the early 1970s and 1980 a lot of mergers or acquisitions ended up being a failure. But today M&As have become a strategy for sustainability.

Growth through acquisitions has been a critical part of success for many companies. Acquisitions give the companies an opportunity to enter new economy.

M&As have today become the single most important factor to build a great market cap.

Alex Mandl, CEO at Teligent and Ex No.2 at AT&T. Responsible for

AT&Ts take over of McCaw Cellular“M&As are the single most

important factor in building up market capitalization.”

“Need for Speed forces companies to acquire rather than build.”

M&As have critically been successful today for few very simple reasons :

Acquiring a firm is much easier then building it. Helps save time and a lot of resources.

For IT firms M&As are certainly the fastest way to expand and solidify their position in the market. M&As are a good way to add product lines and increase distribution channels that are costly to build from scratch.

But the decision to buy or to build is a delicate decision. If the target firm is a good strategic fit, the management decides to buy, or else if they have the process knowledge to capitalize on, the firms prefer to build on it.

David Bohnett, Co-founder and CEO of GeoCities which was

purchased by Yahoo! in 1999 for $3.7 billion. Today runs a internet start up Baroda Ventures and is on the board of several companies.“M&As are certainly the fastest way to expand and solidify their

businesses.”

How does one chose the right companies to buy or merger with?

It depends on company to company. Each firm differs in strategy. For one firm the main objective may be to reduce costs, where as for the other it may be revenue enhancements.

But experts believe that, acquisitions work best when bundled with the idea of cost reductions. In case of revenue enhancements, it’s a dicey situation and it can go either ways.

The reason being simple, it takes a longer time to replace the existing strategies for selling products with newer ones, which face a situation of being rejected in the market. But cost reduction comes with just changes in the implementation of processes which posses slightly less threat.

But this depends on the type of industry. For eg : In Pharma sector, when a firm

acquires another the focus is on revenues as once the drug is developed the costs are minimal, and if the company can increase its revenues its in great shape.

Another eg could be of an IT firm, where the focus is on gaining market cap. IT firms focus on acquiring the products, services or the technology that in itself could be more beneficial for the companies.

Dennis Kozlowski, Former Chairman & CEO at Tyco International. Tyco has diversified under

Kozlowski. Tyco has made a total of $25 billion in acquisitions including the $12 billion acquisition of

AMP.

“Acquisitions work best when the main rationale is cost reduction.”

“But, there's more risk with revenue enhancements as they are much more difficult to

implement.”

David Komansky, Chairman and CEO of Merrill Lynch, one of America’s

leading brokerage houses and one of the top investment banks in the world.

Merrill Lynch made over 18 acquisitions in the period of 1995-2000, including a purchase of $6.6

billion of Mercury Asset Management.

“Adjusting to the new economy is like changing a tire on a 747 in the middle of its landing. Something is going to

get squeezed somewhere”

Why do companies prefer to buy in their own business space?

For some business’ its not worth the risk to diversify outside their area. An acquisition would become attractive only if it offers a new consumer segment or geographic area to sell their existing products.

So its about exploiting their core competencies which is only possible when its in their area of specialization.

But in today’s competitive environment it is very important for firms to stamp their authority. Many firms do tend to diversify with the help of M&As.

Mackey McDonald, Chairman and CEO of VF Corportion a leading apparel manufacturer with sales of $5.5 billion. Brands include Lee,

Wrangler, JanSport, Vanity Fair, etc.“Acquisitions become attractive if it offers a new consumer segment or geographic markets to sell our products to or add new products to our

core cateogaries.”

Are M&As a critical strategic tool for growth in the new economy?

For firms it is all about solidifying their position in the economy. Companies have adopted the strategy of acquiring rather than building. Larger firms use their market cap to takeover companies and enhance their positions.

Main motive of M&As now a days is to enter the Internet space. But it is not possible for all to expand in such a manner.

For eg : Mackey MacDonald says that the apparel business’ best solution for success is to partner with sole distributors. Apparel business heavily dependent upon the traditional distribution channel rather than occupying Internet space, even in today's tech-saavy human nature.

Nicholas Moore, CEO at Pricewaterhouse Coopers and Coopers & Lybrand.

“Cultural differences are not just a matter of geography. Different companies can have different attitudes and

ways of working.”“You have to build trust and that take a lot of managerial

attention and time.”

Bill Avery, CEO of Crown Cork & Seal, a global leader in

packaging consumer goods. Has made over 19 acquisitions.

“When you buy a company outside US, you really need to

know what you are getting into.”

Raj Gupta, Has worked at

speciality chemical company Rohm and

Haas. Became Chairman and CEO in

1999.

“Cost reduction shouldn’t be the sole goal, most successful

companies will be those that can grow

as well.”“The first thing after an acquisition you have to do is settle the uncertainty.”

Mergers & Acquisitions falling apart due to cultural incompatibilities?

M&As have fallen apart due to cultural differences. Even if the negotiations go through well, they tend to fall apart sometimes.

This often happens during cross cultural mergers. The reasons being : Difference in management styles Socio cultural philosophies Decisions regarding organizations center of

operations Cultural differences are eminent in all M&As.

For eg : When a British and an American company are poised

for a merger, they totally differ in their competence levels and management styles. They differ in views.

Like in US, if the firms do not cut into the budget they would cut costs as the prices of their products are going down. But in the same scenario in Europe a manager would have a less aggressive approach to cutting costs.

But to overcome such cultural differences the firms have to adapt the local way of doing business to co-exist.

How do you approach an integration? What are the priorities?

•The initial step to approach an integration is more inclined towards the business negotiations and portfolio of the companies.

•Later on they have to concentrate on the personnel's of the companies.

•Finally they will start to integrate their plans and processes.

People are the most important asset a organization has. When there is restructuring there is lot of uncertainty filled in the environment. This is the time when they lose most of their employees and customers.

It is essential to have the right people and the right place to solve such situations.

Its often happens in such situations that people think about themselves rather than the organization.

Employees start to think about themselves,

The change starts to affect the customers.

The best way to come out of such a situation is to have constant communication.

Jan Leschly, CEO at drug powerhouse SmithKline Beecham

for six years. Shortly after this article SmithKline Beecham agreed

on merger with Glaxo, a long anticipated deal. The deal was

valued at $180 billion. Today Glaxo SmithKilne is one of the world’s

leading drug makers.

“Its true that the talk of merger makes a lot of people unhappy.

But it can also make a lot of people very happy, and that brings its own

problems.”

Why do companies not take on Directors from the acquired companies?

Its not about taking on directors from the acquired company. Its about how many are willing to join, and take on the challenge of representing the shareholders and management of not only the company on whose board they originally where.

A lot of people move on and start their own ventures.

But incase of Mergers, some part of the board is certainly taken over.

Ed Liddy, CEO of Allstate Insurance Company. Made two major acquisitions worth $2.2

billion.“The challenge is finding people

who are prepared to represent the interests of all shareholders, not

just the shareholders and the management of the company

whose board they were originally were on.”

What do we know? What have we learnt?

To conclude, every organization has a different approach towards restructuring.

Some firms have a motive of revenue enhancement, where as others have a motive of cost reductions. Its up to the management and the CEOs to decide which approach they chose after strategically thinking their options.

But in the end, it all leads to one prime motive of Sustainability.

THANK YOU…