Transcript Strategies for Small Companies

Mergers & Acquisitions
from the Small Company
Perspective
Doug Adams
SOLX, Inc.
Preparation is the Key
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Getting your house in order (business model)
Legal/Financial/Governance
Due diligence needs and concerns
Dealing with the “pimples”
The needs of a public buyer (Sarbox)
Re-forecasting
Understanding the buyer’s value drivers
The Seller’s Process
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Assembling the Advisory Team
Usage and role of Intermediaries
Valuation and Objectives
Before the “Letter of Intent”
Reaching Targeted Buyers
Managing the Due Diligence Process
M&A Phases
Typical Emphasis
Successful Emphasis
Pre-M/A
FINANCIAL
• Worth of firm
• What price to accept
• Structuring financial
aspects of deal
Negotiation POLITICAL
• Price & payout method
• Legal structure
• Levels of autonomy
• Positions for key
managers
STRATEGIC
• Strategic Fit
• Business Potential
• Organizational Compatibility
INTEGRATION PLANNING
• Integrative mechanisms
• Joint interaction
• Focus on achieving synergies &
desired benefits of the combination
Doing the Deal: Decision Points &
Challenges
• The Deal: Deal Structure (Financial/Economic) vs. Deal
Dynamics (Friendliness/Hostility, Integration Strategy)
• Post-Combination Management: Takeover vs. Merger
• CEO Mindset: “Deal” Mentality vs. Integration
Perspective
• Cultural Alignment: Collisions vs. Collaboration
• Orientation to Individuals: Collateral Units vs.
Organizational Resources
• Information Frenzy: Staying Ahead of the Media vs.
Confidentiality in the Information Age
Selection of “Right” Partner:
Due Diligence
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Hard Data
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Financial statements: Do they reflect a capacity to uphold financial commitments?
Relations with vendors/customers: Do bills get paid on time?
Court filings: Is the company continually involved in legal hassles?
Governance: Does the board of directors support the decision to form an alliance?
Will this support or undermine the CEO?
____ Agreements with other companies: What licenses, alliances are currently relevant?
Soft Data
____ Industry reputation: What is the company known for? Does it have a reputation
for quality & excellence?
____ Quality & longevity of top managers: Do they have a good track record? Is there
high turnover?
____ Critical strategic decisions in the past: Does the company have a record of
excellent judgment?
____ Core organizational values: company integrity, teamwork, loyalty, etc.
____ Company Values Statement: Does the firm have one? Does it stick?
Preconditions for Success
Company Conditions: Our company ...
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has something very valuable to offer a prospective partner.
has something very valuable to gain from a prospective partner.
has a cooperative corporate culture.
has insufficient resources or our company has prominent but not debilitating
strategic weaknesses.
____ desires a leadership position in the marketplace.
____ company knows that pursuit of a strategic objective is too risky to undertake
independently.
____ is doubtful of its ability to succeed without the support or name recognition of
a partner.
Style of Operations:
____ The prospective partners have similar or complementary goals, rewards,
methods of operations, and cultures.
____ Both companies have a similar or complementary style of decision making.
Support:
____ The CEOs of both partners are in full support of the transaction.
____ There is no threat of an unfriendly takeover which could jeopardize trust and a
cooperative working relationship.
Preconditions for Success (cont’d)
Industry Conditions:
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____ High capital costs result in the need to share financial risks.
____ Rapid changes in technology, customer traits, and the need for product
differentiation.
____ Decline or maturity of an industry requires consolidation to protect market
share.
____ High entry costs or entry risks make risk sharing advisable.
____ High levels of uncertainty exist in the marketplace.
____ There is a need for rapid market entry and acceptance.
____ The market is expected to respond positively to the “best product,” which can
only be produced by a team capable of combining resources and producing
excellence.
Time Orientation:
____ Both prospective partners take a long-term view.
Financial Goals:
____ The goals of the transaction are not driven primarily by quarterly or short-term
earnings.
Early Warning Systems
____ Back Burner: Partner doesn’t give priority to getting the job done; lack of
“vested interest” motivation in one of the partners or in a key individual(s)
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____ Missed Deadlines: Be alert to spiraling progression of problems that may be
throwing the alliance off course. Missed deadlines often signal poor
planning, poor management, inadequate resources, and/or lack of
commitment.
____ Role Confusion & Conflict: If the team doesn’t fully understand its
assignments, the job will not get done. The alliance champion or manager
must clarify roles & expectations immediately.
____ Winners & Losers: If one party perceives it is getting the “short end of the
stick,” the alliance is likely to fail because there is insufficient “vested
interest” motivation; realign for parity.
____ Cost Overruns: Early-stage cost overruns may signal problems in risk
analysis & planning. Left unattended, the alliance may be bled dry of
financial resources, creating friction between the partners. The alliance
champion or manager must get on top of this problem as quickly as
possible.
____ Missed Goals or Milestones: An effective monitoring should determine
how well goals and milestones are being met. Any early deviations will be
amplified over the long term. The alliance champion or manager should
address early deviations immediately.
Partners to Avoid
• Deceitful Reputation
Win-at-all Costs Orientation
Questionable Orientation to Ethics
• Companies not into Partnering
Poor Partnership History
Control-Oriented Culture
• Dependent Companies that Need You to Survive
Declining & Struggling Companies
Caution: Small, Emerging Companies can be an
exception
• Over-dominant Egos
Controlling CEOs
Summary
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Build the pedigree
Start with the end in mind
Solve an important problem
You can’t make bad deals with good
companies