BUSINESS MANAGEMENT: Mergers and Acquisitions - Choosing the Right Partners

Oct. 27, 2008

IN A WORLD of new and growing competition, combined with a greater number of mature companies, mergers and acquisitions are on the minds of many.   Approximately 70 percent of organizations in the security industry have had some involvement with a merger or acquisition according to the October 2007 Industry Analysis Report.  

Mergers and acquisitions can generate synergies that are attractive financially and strategically and may allow the ability to increase market share through new customers and service offerings.   To ensure the right company (or partner) is chosen during a merger or acquisition it is prudent to review several due diligent factors including the brand, market opportunities for current and changing customer needs, new competitive directions, financial viability and the cultural operating environments of each organization.

It is through a concerted effort in all of these areas that success is attained.   However, for many company owners the focus can often revolve solely on financial metrics such as the multiple paid for recurring monthly revenues (RMR), the risk of attrition from the transaction and the operational savings after the transaction has been completed.  

After speaking with organizations that have recently participated in an acquisition or merger, their key advice is to make sure companies truly understand the organization's cultural behavior and the brand of each other.   Without this, each party may not achieve the synergistic results they initially thought they would.   KPMG International, a Swiss advisory firm, reported that 83 percent of organizations failed to achieve the pre-acquisition or merger results.   So what can be done – what can you do to increase the odds for a successful transaction?

The key to success for both parties is to ask the right questions up front, observe and understand the cultural behavior of the other organization and to clearly define the expectations of the merger or acquisition after the transaction.

“Two companies coming together are like two artists coming to a blank canvas to paint,” stated the president of a large security company who recently completed an acquisition transaction.   “Each company must know what the other organization is looking to create on the canvas and what they are willing and unwilling to do.” Just what are you willing (and unwilling) to do?   Will the painting be a vibrant, reciprocal relationship, benefiting the customers, employees and shareholders alike?

  The following provides a brief overview of areas to focus on when completing the cultural due diligence:

1.     The Employees – what do employees think?

         • Do employees have the right skill sets for the new business and if not, what plans are in place for training?

         • How will employees be communicated with
             on the new direction?

         • How are employees compensated and moti -
                    vated , both monetarily and non-monetarily?

         • What type of succession planning and
             training is in place for emerging leaders?

         • What is the employee perspective of the
             organization's culture, morale, ethics,
             behavior, vision and expectations? How are
                    they treated? Do they like the company they
                    work for?

         • Who are the key contacts with customers
             and what type of relationships do they

         • Who are the influencers with customers
             and employees?

2.   The Business Structure – the organiza -
         tional chart does not say it all.

         • What are the key drivers of the organization
               – financial and non-financial?

         • Does the vision, mission statement
             or internal expectations match
             the actions of the owner, managers and employees?

         • Who or what may be affected by the trans-
             action from a job change or loss perspective and what
                    impact will this have on the organization and customers?

         • Is community involvement encouraged or fostered by
             the company?

         • Does the business structure breed customer
             loyalty and empower employees?

         • Will there be sufficient
             employees to manage the com-
             bined customer accounts and
             new business following the
             merger or acquisition?

         • Is business conducted ethically?

         • What is the perception that
             suppliers/vendors have about
             the company? Is the company
             easy to do business with?

3.   The Customer Base – what do the customers think?

         • What a company says they do and what they actually deliver can be two different things – does the company branding match their actions?  

         • Customers can be your best resource for predicting what will happen – what do they say about the potential transaction you are making?

         • Do the customers like doing business with the company?

         • How are customers treated regarding types and frequency of communications, expecta tions and actual perceptions of customer service and the set- ting of new pricing structures for installation, service and RMR if required?

It is important to begin the cultural conversations early in the process to ensure that each organization has the same expectations of the end results.   It is through a focused effort in all areas including financials, legal implications, intellectual property and market opportunities combined with cultural due diligence that the right partner will be chosen and true success attained.

Cathy Rempel, president and chief executive officer of The Summit Group in San Diego with input from George De Marco, vice president of the California Alarm Association