Coatings World - March 2010

again. In alerting the reader to these issues, and sharing approaches we have found effective for averting these problems before they begin to derail performance, I hope it may be possible for the reader—whatever side of the deal he or she may be on—to enhance the likelihood of success for a future acquisition or to better diagnose why an existing acquisition/integration may be ailing.

Last year, 2009, reflected a down year for acquisitions, mostly brought on by the numerous external, economic related issues described earlier. Recent surveys have shown that in the middle of 2009 less than 16% of participants felt confident about the U.S. economy with 35% of the opinion that things would improve in 2010. Participants in the survey were essentially split on the issue of how the Federal Government’s actions within the past 12-months have impacted the U.S. M&A market. Twenty-seven percent think the Federal Government has made a positive impact, or increased activity, while 22% think it has made a negative impact, or decreased activity. The greater percentage of respondents think that government’s actions have made little to no difference in the overall level of M&A activity. Most of the deals that did not close last year were due either to financing issues or a material change in the business conditions of one of the parties.

Although 2010 is not expected to be a particularly strong year for M&A activities, it should show some small increase over 2009.

There is an old saying that states, “Everything has a price and everything is for sale at the right price.” While the validity of this statement may be in question the simple truth is that, in general, it’s much easier to acquire a business than it is to make that acquisition work as the buyer expects. Companies tend to spend enormous amounts of time and money on the front end of the M&A process (i.e., negotiation, due diligence, etc.) and precious little if any time in developing an integration plan for both sides to follow. Often the personnel involved in the purchase part (negotiation, due diligence) are not involved in the integration and worse, those individuals involved in the integration are often precluded from being a part of the pre-close portion. This action alone makes for a very messy if not awkward hand off between the two parts of the M&A process which in turn interjects a potential for missteps and miscommunication between parties. Research has shown that most of the root causes for acquisitions failing to meet expectations owe their origin to issues that existed in the pre-close portion of the process. Unfortunately, since many buyers do not involve their integration people and/or don’t have an integration plan it becomes somewhat difficult to look for these potential caused of failure.

INITIAL CONCEPT AND PLANNING

There isn’t a “magic bullet” that will ensure ultimate success for any given acquisition. However, there are a few things that the buyer and seller can do to help improve the odds.

With every acquisition, the problems encountered in the integration process are more likely to be associated with

people than with things per se. People, unlike equipment, buildings or other hard assets are unpredictable in terms of their response to a change brought on by an acquisition. Most acquisitions are made to acquire skills, competencies and experiences that the buyer does not possess. If in the process of making an acquisition the buyer loses a good portion of the knowledge that resides inside people who are being let go, chose to leave on their own or are considered to be redundant, then the value of the acquisition is diminished and the potential for failure will increase.

Experience has shown that employees on both sides of an acquisition have three important questions that they want answered. In fact, until these questions are answered to their satisfaction, chaos, uncertainty and loss of productivity will likely occur. These questions are: • What is happening to me?

• What is expected of me?

• What is in it for me?

It is strongly suggested that the buyer develop suitable answers for these questions well in advance of closing. On day one post closing, a lot of people will want to hear the answers to these questions. I’ll talk more about this in future editions of this subject matter.

RESOURCE ALLOCATION

In my experience I have found that most upper level managers feel that their people can do almost anything. Although on the surface this sounds like a good thing it can set the stage for false expectation. The buyer would be well advised to remember that the employees that are chosen to participate in the acquisition effort most likely have a full time job. Although everyone can work 110% for short durations, they cannot keep that level of intensity up for long periods or else productivity starts to decline. Before embarking on an acquisition the buyer should conduct a skills inventory to ensure that there are sufficient resources available to support the acquisition effort including the integration phase as well as keeping the current business intact. In some acquisitions whereby resources of the buyer or seller are stretched a bit thin, competitors can often take advantage of that situation and chip away at major pieces of business without fear of reprisal. It’s the old “bird in the hand versus two in the bush” scenario. Buyers cannot afford to give up what they have today in the hopes of gaining much more in the future via an acquisition. For most companies, having an adequate resource allocation plan is vital to the success of existing strategies and to any future acquisition endeavors. If the buyer discovers that there are missing skills or that there are significant gaps in the total resource plan there exists the option of bringing in outside personnel to act as a temporary bridge, and thereby ensuring that momentum on all fronts is properly maintained.