Back in the year 2000, when mega-corporations were merging into mega-mega corporations, Inc. Magazine published an article by Ralph Ward titled “Seven Ways to Avoid Merger Blunders.” The advice was aimed at the largest business entities, but some of it applies to smaller scale and even mom and pop companies thinking of merging with another.
As Inc. pointed out, company directors, or small business owners, often take a “bet the company” approach to the merger decision, “with too little time, facts, or advice to make a fully informed call.”
The result: “More and more mergers are not only failing to create value, but are in fact destroying value, often with hidden skeletons in the closet that closer inquiry could have revealed.” Among the advice that could apply to companies of any size:
1.) During due diligence, challenge “overzealous estimates of costs saved or revenues enhanced.” One approach, according to the magazine, identify “the five greatest downside risks of this transaction, both between announcement and close, and after the close.” Then ask how you will protect against those risks.
2.) Be sure to provide “the right incentives for target talent to stay and prosper.” The article cited the merger of Daimler and Chrysler and the resulting “flight of rising talent on the Chrysler side.”
3.) Identify the “specific liabilities of the company you’re marrying into.” If your prospective merger partner operates in an arena far removed from yours, you are more likely to be “blindsided.”
4.) Determine a realistic value of the other company. Inc. quotes Robert Apgood, president of Canterbury Group: Companies considering a merger often “don’t know what price they should really pay, they don’t get a sound value for the company, and they don’t know why they really want to buy it.”
5.) Don’t be too eager. When it seems that everyone else in your category is merging, don’t rush into a deal just to avoid being the “last man standing,” as Mark Sirower, a consultant with the Boston Group, described it to Inc. “Set a firm price and stick to it — are you willing to walk away?”