Chaotics: The Business of Managing and Marketing in the Age of Turbulence

The economic meltdown has introduced new factors to consider when we contemplate corporate restructuring - particularly when mergers or acquisitions are involved. Recessions are not entirely negative. They also offer opportunities to acquire new assets at relatively low prices for companies with the resources (financial and managerial) to take advantage of the circumstances. Kotler and Caslione (2009:113-115) cite a McKinsey report on the 2000-2001 recession which observed that the most successful kept careful control on borrowings and operating costs, thereby allowing themselves the maximum strategic flexibility. Kotler and Caslione note that the most successful companies did not reduce headcounts across the board and paid suppliers earlier and thus obtained better contract terms. They state:

"...many that emerged as leaders managed to expand their businesses during the recession, both organically (through internal investment) and through inorganic activities such as mergers and acquisitions, alliances and joint ventures. And although the leaders increased their asset bases through capital through capital expenditures or acquisitions at the same pace as less successful companies, the focus of their growth was different: The more successful CFOs made sure their companies spent less on M&A activities, on average, and more on organic growth during times of growth and prosperity."

However, during the recession itself "...better performers leapfrogged the competition by continuing to invest and to grow inorganically: Companies that emerged in the top quartile spent 15 per cent more on capital expenditures and conducted 7 per cent more M&A - possibly buying cheaper assets from distressed sellers."

Mergers and Acquisitions - some definitions

Mergers and acquisitions are examples of business combinations. True mergers imply some degree of equality between the parties. However, many (most?) are disguised takeovers. According to the Dictionary of Business and Management, a merger is:

"A combination of two or more businesses on a relatively equal footing that results in the creation of a new reporting entity. The shareholders of the combining entities mutually share the risks and rewards of the new entity and no one party to the merger obtains control over the other."

The following definition puts it another way:

"A merger occurs when one corporation is combined with and disappears into another corporation. For instance, the Missouri Corporation, just like the river, merges and disappears corporately into the Mississippi Corporation. Missouri Corporation stock certificates are turned in and exchanged for Mississippi Corporation stock certificates. Holes are punched in the Missouri certificates, and they are all stuck in the vault. The Missouri Corporation has ceased to exist. Missouri is referred to as the decedent, while the Mississippi Corporation is referred to as the survivor." (Reed, S.F. and Lajoux, A.R, 1998).

Acquisition, on the other hand is a generic term used to describe a transfer of ownership. Here, the two parties in the transaction may continue as entities in some form or other after the acquisition.

Measures of Failure

In Deals From Hell, Robert F. Bruner (2009:6) lists three outcomes of M&A failure:

Destruction of market value. Such as share value in comparison with the rest of the stock market.

Financial instability. Where the buyer overeaches its financial stability.

Impaired strategic position. So that flexibility, market share and positioning are worsened rather than improved.

Organizational weakness. When resignations, defections and miscommunication occur.

Damaged reputation. The merged organization may lose market recognition or be regarded negatively if the merger has been acrimonious.

Violation of ethical norms and laws. Corporate scandals or civil/criminal litigation.

Bruner considers M&A failures to be in the minority, with worst cases being when the market is 'hot' - which is certainly not the case at the time of writing.

Due Diligence

Lajoux and Elson (2000) state that:

"The term due diligence originated in so-called common law, also known as the case law - the law that develops through decisions of judges in settling actual disputes. (...) The precise origins of due diligence are lost in the mists of time. Black's Legal Dictionary defines due diligence as "the diligence reasonably expected from, and ordinarily exercised by, a person who seeks to satisfy a legal requirement or to discharge an obligation."

The nature and extent of due diligence varies of necessity with the size of a merger or acquisition. According to Lajoux and Elson:

"The due diligence work in the acquisition of a large, diversified, global manufacturer listed on several stock exchanges is obviously far more extensive than the work involved for a small, single-product, domestic service firm that is privately owned. Due diligence in public companies can be more complex than due diligence in private companies. Manufacturers have greater legal exposure than many service companies. Finally, transaction type can limit the due diligence effort, since stock purchases trigger more due diligence responsibilities than do asset purchases."

• Mergers and Acquisitions - the HR Dimension
• Mergers and Acquisitions - Project Planning
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Deals from Hell: M&A Lessons that Rise Above the Ashes

by Robert F. Bruner. It's common knowledge that about half of all merger and acquisition (M&A) transactions destroy value for the buyer's shareholders, and about three-quarters fall short of the expectations prevailing at the time the deal is announced. In Deals from Hell, Robert Bruner, one of the foremost thinkers and educators in this field, uncovers the real reasons for these mishaps by taking a closer look at twelve specific instances of M&A failure. Through these real-world examples, he shows readers what went wrong and why, and converts these examples into cautionary tales for executives who need to know how they can successfully navigate their own M&A deals.
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The Art of M&A Due Diligence