Intelligent Acquisition Strategy

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Top finance executives share insights on making acquisitions work.

By Daria Meoli

From 20,000 feet, a successful acquisition is a deal that makes you more money than you spent. But on a closer look, the process of maximizing the value of the acquired company often lies in a smooth and productive transition.

At a recent CFO Studio Executive Dinner, finance executives shared lessons learned from acquisitions they’d been involved in, and the conversation inevitably kept returning to the issue of transitioning employees and knowledge transfer.

The event, sponsored by KPMG and hosted by Real Estate Strategies Corporation was moderated by Glenn Sblendorio, president and CFO of The Medicines Company.

Since 1996, The Medicines Company has completed more than 20 acquisition deals, and Sblendorio provided a wealth of insights to the group.

The Medicines Company’s first acquisitions were drugs used in hospital cardiac catheterization labs. The company worked to establish cardiac cath labs as the business’ core of expertise. From there, the company created a map of hospital functions around the cath lab and identified targets for acquisition around drugs appropriate to the labs’ functions. The Medicines Company effectively created an acquisition strategy based on a patient’s typical treatment route.

The Human Component

“Some of the toughest issues we’ve faced in any of our acquisitions have been the people issues,” said Sblendorio. “Deciding who you want to take in an acquisition and for how long — 9 months, 12 months, 16 months in certain cases — is difficult. When you do take folks from the company you acquire, it can be very costly to integrate them.”

The group discussed two human capital issues at length: knowledge transfer and company culture clashes.

Participants were divided on how to keep the employees of the acquired company engaged in knowledge transfer when they know their time with the company is limited. Sblendorio has dealt with these issues in several different ways.

The first example Sblendorio gave was to incentivize employees who work with customers or who hold positions for which the knowledge can be transferred relatively easily. At The Medicines Company, leaders did three things: determined the employees who would stay three months with pay, protected the employees’ pensions, and paid their bonuses. “To keep people for any longer than that three-to-six months, you’ve got to offer a really big check,” said Sblendorio. “Even then, people start to worry and look to get something new, so you have to have a definitive plan for every employee before implementing the transition.”

Culture clashes are a common impediment to the transfer process. “Another acquisition we did was for knowledge,” said Sblendorio. “We embraced these folks. We upped their compensation and their options. We spent a lot of time with the leaders of [the acquired] company to get them to embrace our culture. The people stayed because they had big paydays coming, but we were unable to really transition in terms of truly integrating the business and the culture. As a result, we were held hostage by the agreement because there wasn’t an adequate amount of transfer happening. They were held hostage because they weren’t going to leave until they got their big payday on their options.”

Mark Mishler, CFO, most recently at Breeze-Eastern Corporation, agreed. “The incentive plans work for the short term, but if the cultures are completely different, as soon as those incentives expire, employees are out the door,” he said. “If it’s not a fit, they’re going to get what they can out of it and move. And who can blame them?”

Another suggestion made was to document as much knowledge as possible. “Military people call it a ‘turnover folder,’” said Cheryl Marks Young, CFO of Easter Seals of New Jersey. “It’s not just asking someone what they do for a living. It is about putting all of a person’s expertise in a package and documenting what that person does day-to-day on the job. When you do a merger or acquisition, those packages get forwarded.”

Other participants discussed the value of keeping employees onboard permanently. “I’ve been involved in acquisitions where we learned the hard way that time alone isn’t enough to ensure a successful transfer,” said Eileen Black, controller at Stevens Institute of Technology. “If you grab a couple of the key people and make them part of your long-range plan, you can continue to pull the information out of them. Sometimes there’s hidden knowledge. There’s knowledge that’s not documented and that hidden knowledge can be the difference between making a product successful or not.”

Tim Anglim, president of YesCFO, agreed. “There is a lot to be said for getting the right people to stay. It’s not just about the money, they have to feel like they’re part of it.”

Lisa VanPatten, CFO of Kitara Media, expressed concern about helping employees from the acquired company to become engaged with the acquiror’s mission. “It’s so important to communicate that there is a light at the end of the tunnel,” she said. “Let people know what they are working to build and give them a vision. That is especially important when you are working with a startup culture. The reason many of these people are there is because they love that startup feeling and there isn’t a lot of red tape. You have to be concerned that your procedures and processes might change their excitement for innovation.”

“That’s the nature of evolution and growth,” said Andrew Zezas, publisher of CFO Studio magazine and CEO of Real Estate Strategies Corporation, and the evening’s host. “You go from being a family to being a corporation, and some people long for that small, intimate, and friendly culture.”

Sblendorio brought up the Roche acquisition of Genentech in 2009 as an example of how the integration of a startup into a behemoth can work. Leadership at Roche kept their distance. In fact, they did not approve any travel of executives from New Jersey to San Francisco, where Genentech was based. “Roche kept Genentech’s DNA of innovation pure,” said Sblendorio. “Roche did not want to choke their culture.”

The participants also discussed integration from an operational standpoint. “While the human element is key to the success in any acquisition, system integration also plays a very important role,” said Alnert B. Caamic, CFO and treasurer of Mitsui Foods, Inc. “Many system-related questions need to be addressed. How can the recently formed alliance provide its reporting? Will the existing reports satisfy the needs of the parent company? Can the system of the newly acquired company seamlessly flow into the parent company? Will the new company’s personnel be trained in the parent’s system? I give a lot of credit to the management of The Medicines Company. The amount of acquisition they have done within the last several years is outstanding; acquisition is not an easy task, making it successful is enviable.

Before the Deal

According to Sblendorio, the key to successful knowledge and operations transfer is to head off problems during due diligence. “We’re not just assessing the opportunity from a financial point of view; we’re looking at the operational opportunity as well,” said Sblendorio. “We may have 20 to 30 people working on due diligence. Usually one or two of our business development people will join that company as part of the transition.”

Howard Reba, now with Marlin Equity Partners, reiterated the criticality of planning for the integration of the companies at the earliest stages of the M&A process. “Failure to address sacred cows and consider all the implications of the merger at the outset can lead to a huge waste of time and transaction costs, or worse yet, a failed deal.”

Ed Schultz, principal of The Highland Group, expanded on the idea of investigating operations. “On the business integration team, you need to put together functional maestros from both the buy and sell sides who will remain with the company,” he said.

As VP, Corporate Controller and Chief Accounting Officer of Quest Diagnostics, Tom Bongiorno has supported many acquisitions. “We’ve had a very similar approach to our due diligence,” he said. “We leverage our functional subject matter experts from Quest Diagnostics as members of our due diligence team. That’s been really exciting for Quest because many employees have been able to be part of our business development efforts. For example, if you’re the head of lab operations in a region, you’ll be leading lab operations for the diligence team and step away from your day-to-day job to get involved with business development and eventually with integration efforts. That has worked very effectively at Quest Diagnostics. . Leveraging our functional subject matter experts on diligence teams has allowed us to maintain a smaller, more efficient full-time professional business development team.”

Michael VanPatten, CFO of Smart Center previously led an acquisition of a public company by another public company. Due to the Hart Scott Rodino regulations, it took the Security and Exchange Commission nearly four months to approve the deal. But VanPatten and his executive team took that opportunity to get to know the target company. “We signed a contract with them and sent in a management team to run the business for three or four months,” he said. “It was awesome because it was during that time that we got to choose people we wanted to keep. We also used that time to integrate our teams and processes as well. It was like getting engaged before you get married. It was a really great acquisition for us.”

Post-Acquisition Results

John Breeman, CFO at Voltari, spoke about the role of the sponsoring manager in making sure the transition goes smoothly. “When a deal was approved by the board, the sponsor of that deal was given 24 months to integrate the business,” said Breeman. “After that 24-month period, the business would be subject to an internal audit and the managing sponsor would have to present the results to the board. These managers knew from day one how their plan was going to be measured and that was effective in getting results.”

Bill Korn, CFO at MTBC, says his company targets businesses for acquisition that do not have their own technology. “I’m acquiring companies for their customers. We are about to triple in size by buying three more companies in the same day, which for us is less expensive than hiring a sales team and spending months courting individual customers.” he said. “We’ve said we’re not going to buy anybody that has developed their own technology. We’re not going to worry about integrating the technology. The notion here is we’ve got technology, we’ve got an off-shore team that’s very cost-effective and what we’re really doing is we’re buying scale that is cheaper than it would be through conventional sales and marketing efforts.”

If Korn’s company is acquiring for the purpose of growing sales, what if customers leave after the deal is done? “Part of each purchase agreement is a true-up which states that any customer I lose in the first year, I don’t pay for,” he said. “That means the seller has got to be involved until our people are up and running. It’s in their best interest to convince the customer they are better off with us and promote a smooth transition.”

The Speed of the Deal

The group also discussed competition for acquisition. Sblendorio said that the advantage The Medicines Company has for winning deals is speed.

Marks Young recalled when she worked at Viacom, years before Sarbanes-Oxley, getting board approval on mergers and acquisitions was comparatively simple. Today, that process has become more of a challenge.

By keeping his board well-informed and creating access to capital, Sblendorio’s business is able to act fast on opportunities. “I talked to the VC community and I talked to the investment banking community,” he said. “Our approach was to hang a sign out on the front door that said we’re looking [to acquire businesses]. It took a couple of investment conferences and it took some time to get our strategy known. After a few years, they all understood what we were doing. Over time, the balance sheet became stronger. That was another key part of this. We advertised that balance sheet, so we were able to raise some cash as well.”

The M&A Climate

Before dessert, the dinner guests discussed the economic climate for mergers and acquisitions. Tom Angell, partner at Rothstein Kass said, “We’re seeing a lot of action across industries. There has been a lot of cash sitting on the sidelines for a long time, and with the market starting to go up, a lot of people are doing deals. Banks are opening up a little bit so we have seen a lot of action in a lot of different areas.”

Breeman noted that funding for startups is beginning to increase. “You didn’t have a lot of startup funds over the last three or four years, and that’s starting to change. People are putting money to work again.”

The consensus was that in today’s market, anybody can sell a company. The issue is whether or not they get a good price.

Copyright 2017