MERGERS&
VOL. 21, NO. 26
ACQUISITIONS
Covering M&A, distressed situations and other corporate restructurings
INSIDE THIS ISSUE Sk8 or Buy
Ask a teenager to identify Ryan Sheck-
ler, and few would have any trouble pick-
INDUSTRY NEWS ing the skating icon out of a lineup. The
KKR Adds To Infrastructure Group . . .4 same teen, however, even if they’re a
OFHEO Prompts Freddie
sports fan, would likely have more trou-
Management Change . . . . . . . . . . . . .4 ble identifying a former Cy Young award
winner, such as Chris Carpenter. Of
course, Carpenter doesn’t have his own
DEAL FLOW ALERT reality show on MTV.
Sk8 or Buy . . . . . . . . . . . . . . . . . . . . . .1 The growing popularity for activities
Can This Merger Be Saved? . . . . . . . .1 including skateboarding, snowboarding,
More SPACs Europe-Bound . . . . . . . .1 motocross, mountain biking, and other
An Antitrust Administration? . . . . . . . .3
DATA
Thomson Financial Worldwide
Can This Merger Be Saved?
Mergers & Acquisitions ........................6 In a more buoyant era, the Time
Warner and AOL merger seemed to be a
hopeful signal of things to come. The
deal, initially, was lauded by market-
Volume & Value for U.S. M&A watchers and tech mavens alike as an
imaginative merger that could provide
Last Week’s Total an archetype for future media conglom-
July 22, 2008 - July 28, 2008 erates. It’s only in hindsight, however,
$ Value (Mils): 13,213 that experts are more inclined to assign
Number of Deals: 165 different superlatives to that fateful deci-
sion to combine.
1200000
1000000
800000
More SPACs Europe-Bound
Euronext will see more Special Pur-
600000
pose Acquisition Companies (SPACs)
400000
traded in its market soon, it is under-
stood.
200000 Both Morgan Stanley and I-Bankers
2008 2007 Securities are in the process of creating
0
offerings to be listed there. This comes
# of Deals 5,430 6,669 on the heels of Deutsche Bank bringing a
$ Value (Mils) 744,560 1,175,382 ?275 million SPAC to Euronext that will
target Germany, Austria or Switzerland
YEAR TO DATE and increasing chatter in the blank check
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August 11, 2008
WWW.MERGERSUNLEASHED.COM
REPORT
extreme sports like the fare hyped on the
ESPN Network’s X Games mean that
businesses catering to these segments can
still attract buyers, even as other con-
sumer businesses flounder in auctions.
Private equity firms have familiarized
themselves in the extreme segment in the
past. Last January, for instance, Dallas
private equity firm Parallel Investment
Partners sponsored the recapitalization
of Moosejaw Mountaineering and Back-
(Continued on page 2)
One question hindsight doesn’t
answer, however, is: What if? What if the
two businesses took a different approach
to integration? What if Time Warner put
together a more realistic plan upfront?
What if the purchase price wasn’t based
on synergies that didn’t exist? Basically,
could a flawless integration have saved a
merger that hindsight tells us had no
business ever happening?
(Continued on page 12)
community that European investment
vehicles are the newest wave in this
developing asset class.
Neither bank commented when con-
tacted.
While industry experts said that the
Deutsche Bank SPAC offering would be
followed by multiple nine-digit-plus
IPOs, it was not readily apparent how
much I-Bankers and Morgan Stanley’s
(Continued page 3)
MERGERS & ACQUISITIONS REPORT
ESSENTIALS OF INTEGRATION
continued from page 1
Recent activity from strategic buyers
tells us that companies have, by and
large, taken a more realistic and mea-
sured approach to M&A since the tech
bubble burst eight years ago. Those
same strategic buyers who once threw
their hands in the air declaring M&A
triumph during the late nineties are
using those appendages to crunch num-
bers harder to eliminate every redun-
dancy, monetize unnecessary assets and,
in rare instances, perhaps squeeze the
neck of the seller, all in the name of
making smarter M&A decisions.
It’s not necessarily integration, per
se, but it’s where the integration process
begins. Before a bid is even made,
acquirers are careful to fireproof a deal
by maintaining a realistic approach to
synergy calculations. According to
Cherie Homa Smith, managing director
and group head in KPMG Corporate
Finance’s Baltimore office, company
management also needs to tether per-
formance goals to more than just a rev-
enue or Ebitda touchstone. Company
leadership, prior to close, should
already be attached to the long-term
goals involving the target’s operations.
And Smith adds that performance
objectives should include more quali-
tative benchmarks, such as cross-sell-
ing and employee retention goals.
Still, that doesn’t answer the ques-
tion of whether or not flawless integra-
tion can save a bad deal. It does under-
score, however, that bad deals can be
avoided in the first place with a focus
on integration in the due diligence
phase of dealmaking.
To answer the first question, though,
marketwatchers might consider the
merger between Hewlett Packard and
Compaq seven years ago. Initially, the
deal was met with widespread growls,
and even cost former HP CEO Carly
Fiorina her job in 2005, when the con-
sensus among deal pros and pundits
was that the merger was a dud. Today,
however, most agree that the merger
was among the best of the decade.
Business schools and consultants even
use it as a case study on integration.
12 August 11, 2008
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Stanford Business School, for instance,
produced a paper lauding HP’s pre-
merger planning efforts, while IT con-
sultant IDC cited that HP’s adoption
of Compaq’s fast paced corporate cul-
ture helped goose the combined com-
pany’s business velocity.
Michael Dell famously referred to
the transaction as the “dumbest deal of
the decade” shortly after it was
announced. After over a reported mil-
lion man-hours spent facilitating the
combination, however, the consensus
now among pundits is that it was a log-
ical marriage all along.
So what exactly goes into a happy
marriage? It is question whose answer
depends on the situation, but one uni-
versal must is for the merging compa-
nies to clearly illustrate new roles —-
and establish a contingency plan for the
likely event that someone will jump
ship. George McCormick, director of
management consultant Hay Group’s
M&A team, notes, “Management goes
through a period of shock,” further
describing that the target’s manage-
ment team is then thrust into the
uncomfortable position of coping with
lesser roles. Delta and Northwest, for
example, recently unveiled the new
management team for the combined
company, ostensibly giving the two
companies months to digest the
changes before the deal is actually sup-
posed to close.
It’s also important, experts say, to
get the target company’s management
team involved. One pro, familiar with
Adobe’s 2005 $3.4 billion buy of
Macromedia, said that the deal played
out like a highlight reel of integration
best-practices. Whereas many acquired
companies’ management will see them-
selves relegated to ancillary roles, some
of Macromedia’s execs were catapulted
to senior roles during integration. The
payoff? Once the earn-out checks were
issued, some elected not to clean out
their desks, making it more likely that
the merger’s long-term goals, like the
short-term hurdles, will also be met.
“Very often, the acquired company’s
management has better executives and
governance,” McCormick said, adding
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that recognizing and integrating talent
should be a priority for all buyers.
One of the more debatable compo-
nents to integration is the speed of
implementation. Conventional wisdom
often dictates that faster is better, and
many deal pros will cite a 100-day plan
to establish a timeframe for key bench-
marks. As the HP/Compaq combo
demonstrates, however, sometimes
mergers need time gestate. Stephen
Miles, a partner and managing director
in the leadership consulting practice for
executive search firm Heidrick & Strug-
gles, says that for mid-market compa-
nies, taking it slow and steady is the
surest way to avoid mistakes.
Miles also notes that ambition can
sometimes get in the way. He also
rejects the idea of a “merger of equals,”
calling such a deal a “death knell” for
buyers and sellers alike. Miles says that
first-timers should at first concentrate
on tuck-in deals and then progressively
go after larger targets. “When you’ve
done something over and over again,
you’re going to get better at it,” he
notes.
He emphasizes that even with larger
deals, “Someone is being acquired,”
while a merger of equals creates more
questions than answers about where
power lies.
Another area where mergers fail is in
the culture. To come into the integration
process with any preconceived notions
of how management will operate can
create boardroom rifts, Miles says. And
even for acquirers, a sure way to lose
employees is to be unclear about expec-
tations. This is one component, Miles
concedes, that requires speed. “They
derail and fail in weeks or months... not
more than a year,” he adds.
Of course, like a marriage that has
hit one too many pot holes, there are
deals that cannot be salvaged. Poor fits,
poor integration, poor planning, what-
ever the cause, some deals just aren’t
meant to be. At the same time, there
are instances in which a flawless inte-
gration can whittle a square peg to fit a
round hole. And in the end, as HP and
Compaq demonstrated, these deals will
be seen as logical all along.