Winning at Mergers and Acquisitions: The Guide to Market-Focused Planning and Integration / Edition 1

by Mark N. Clemente, David S. Greenspan

Overview

A comprehensive new framework for winning at Mfrom up-front planning to postmerger integration
The challenges of mergers and acquisitions can be daunting-but the opportunities and benefits they offer forward-thinking companies can be tremendous. Winning at Mergers and Acquisitions offers a critical new approach to strategic M&A based on the authors' pioneering concept of marketing due diligenceSM. Covering every stage of market-driven M&A planning and integration, this book shows how to look beyond the quick hit to focus on long-term growth rather than short-term cost-cutting. Featuring dozens of real-life case studies-including both failures and extraordinary successes-plus inside comments from leading M&A specialists, this book contains crucial guidance on:
* Predeal planning-how to identify your strategic needs and pinpoint the merger candidate(s) that will help you meet them
* Sizing up targets for acquisition-how to examine the essential marketing, sales, and product issues that will determine a good company "fit,".strategically and culturally
* Revenue enhancement planning-how to identify ways to drive top-line growth and develop action plans to generate near- and long-term revenues
* Filling the pipeline-how to prioritize and actualize the critical steps necessary to drive shareholder value
* Developing communication programs-how to design and execute communication strategies to garner support for the merger by employees, customers, and other stakeholders
* Building a comprehensive postmerger integration plan-how to align diverse corporate cultures, develop training and reward programs, and move beyond the turf wars and lack of productivity that hamper the success of mergers and acquisitions.
Last year more than 7,000 mergers and acquisitions were completed, with a collective price tag estimated at more than $800 billion. And although they are known as highly effective means of achieving corporate growth and strategic advantage, these transactions are fraught with pitfalls: Statistics indicate that a third of these deals will fail and another third will not bear out the expectations of the merger partners. What can businesses looking to undertake strategic mergers and acquisitions do to ensure that they do not fall victim to confusion, multimillion-dollar losses, declining market share and profits, or any number of other negative results of failed transactions?
The answers are in Winning at Mergers and Acquisitions, a pioneering step-by-step guide to growth-driven planning and swift, effective post-merger integration. Challenging the conventional emphasis on cost-reduction synergies, this book presents the authors' groundbreaking blueprint for mergers that yield strategic synergies and high returns in meeting long-term growth, increased market share, and revenue generation objectives.
Mark Clemente and David Greenspan explore in detail the marketing, sales, and organizational issues that are vital aspects of successful M&A ventures. They take executives through the entire strategic M&A process-from setting objectives, to evaluating target companies, to aligning corporate cultures in an effort to ensure problem-free integration. They show how to maintain a sharp focus on the markets that will be reached by the merger-and they offer invaluable advice on charting a steady course through the often tumultuous period of integration, when organizational chaos can cause the merged company to lose momentum, market share, and the backing of customers, prospects, and shareholders.
Winning at Mergers and Acquisitions is essential reading for CEOs, managers, deal makers, and others looking to capitalize on one of the most important methods of effecting corporate growth in business today-while staying focused on the people, product, and process issues that power that growth.

Product Details

ISBN-13:	9780471190561
Publisher:	Wiley
Publication date:	03/23/1998
Pages:	352
Product dimensions:	7.24(w) x 10.35(h) x 1.25(d)

About the Author

MARK N. CLEMENTE, president of Clemente, Greenspan & Co., Inc., has twenty years of experience in marketing, business development, and acquisition planning. He has handled consulting assignments for Fortune 1000 clients and major middle-market firms, and is the author of The Marketing Glossary: Key Terms, Concepts, and Applications.

DAVID S. GREENSPAN, cofounder of Clemente, Greenspan & Co., Inc., has spent more than fifteen years analyzing companies as targeted investments and acquisition candidates. He has developed strategic marketing, sales, and communication programs for companies engaged in mergers, acquisitions, and corporate restructurings. Mr. Clemente and Mr. Greenspan are frequent speakers before major business groups on the topics of predeal planning and postmerger integration.

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Note: The Figures and/or Tables mentioned in this chapter do not appear on the web.

Part One
STRATEGIC PERSPECTIVE
ON M&A PLANNING

"Marketing Due Diligence"
in Strategic Mergers and Acquisitions

In the 1990s, seemingly not a day goes by when the business press does not report on multimillion-dollar mergers and acquisitions. Companies of all sizes and all industries worldwide are seizing the opportunities to broaden their competitiveness by forging corporate combinations with strategically synergistic partners. The goals of achieving growth, tapping into new markets, and creating unassailable strategic advantage underlie each transaction.

Corporate merger and acquisition activity continues to thrive, with the annual dollar volume of M& A transactions steadily increasing. For example, in 1994 there were approximately $350 billion in M& A deals in the United States. In 1995, that figure rose to almost $400 billion. The year 1996 saw total deal volume in the United States exceed $620 billion, a figure based on the dollar volume of known deals and projections of unannounced transactions and deal prices. And in 1997, M& A transactions totaled more than $900 billion.

Several factors are fueling the continuing explosion in merger activity. The ability of businesses to successfully achieve economies of scale, broaden geographic market coverage, and more effectively compete globally have helped create an aggressive acquisition marketplace. In addition, the search for cost reductions through M& A--particularly in such matureindustries as retailing, banking, and health care--is being used to offset companies' inability to increase profits through price or production increases. In all like-lihood, the merger mania of the late 1990s will carry over into the new millennium as these and other factors drive corporate growth planning.

Today's merger wave is unlike others seen throughout the 20th century. The focus of M& A today is in stark contrast to the conglomeratization mergers of the 1960s and the frenzied hostile takeovers and leveraged buyouts of the 1980s. Both eras saw dramatically more long-term failures than successes. Studies show that 60% of the cross-industry, conglomerate acquisitions that occurred between 1970 and 1982 were sold or divested by 1989.

Reports of the major LBO deals of the 1980s typically cite the downfall of those organizations, which collapsed under the weight of the heavy debt incurred in financing transactions driven by the promise of quick monetary gain rather than to ably secure long-term strategic advantage. As a means of longer-term corporate growth, mergers and acquisitions have understandably gotten a bad name. Bad numbers underscore M& A's sour reputation. History has shown that 35% to 50% of all deals ultimately fail. Why such a disastrous track record?

The simple fact is mergers and acquisitions are usually easy to envision, but incredibly complex to execute. Even when the synergies exist on paper, problems can occur almost anywhere in the prolonged M& A process. Managers today must closely oversee every phase of predeal strategic analyses and postmerger integration activities. Of particular importance is the initial due diligence process, which, when inadequately conducted, prevents merging companies from ever becoming truly integrated, market-focused organizations.

TRADITIONAL DUE DILIGENCE: STRATEGIC SHORTCOMINGS

Due diligence is the series of exploratory activities used in evaluating a target company prior to finalization of the merger or acquisition. The traditional approach to due diligence focuses on several key areas: financial, legal and regulatory, and accounting and tax. Without question, each of these areas is highly complex, and scores of business and academic textbooks have been devoted to the topics. Broad treatment of them is beyond the scope of this book. Yet it is important for readers to understand the fundamental financial and legal orientation toward due diligence investigations in order to identify its principal shortcoming.

Strategic considerations mark the focus of most M& A deals today. But as we will see, insufficient attention to strategic marketing issues is a pervasive flaw in traditional premerger due diligence.

When a merger or acquisition is first envisioned, the focus is on whether or not it makes financial sense. In due diligence, legal and accounting experts are retained to identify potential fiscal, regulatory, and tax-related liabilities of the target company. Concurrently, investment bankers are devising the financing strategy, determining where and how much capital must be raised to complete the transaction, while auditors pore over the books of the target to arrive at the most accurate valuation. Clearly, traditional due diligence is largely focused on making the numbers work. Company man-agement will not pursue a transaction unless assurances are provided that a detailed examination of the target company's financial affairs has been conducted. In the broadest sense, the goal of due diligence is looking at and beyond the numbers to identify hidden vulnerabilities.

Due diligence in public company transactions requires analyzing a host of Securities and Exchange Commission (SEC) filings. These include Forms 8-K, 10-K, and 10-Q, as well as other documentation providing historical financial data and information on the quality of earnings. A main focus of due diligence is on identifying under-or over-valued assets and liabilities, which may take the form of property, plant, and equip-ment; inventory levels; marketable equity securities; work in progress; excess pension plan assets; and intangible assets such as licenses, franchises, trademarks, and patented technology.

Accountants play a central role in this phase of the due diligence process. Serving as financial experts on the team, they spearhead the process of identifying the tax consequences of given transactions, offer insights on different types of deal structures, and determine and fulfill regulatory reporting requirements. Attorneys play a critical role in the due diligence process, as well. Legal issues have a direct impact on the timing, structure, and viability of different transactions. These issues include differences in the jurisdiction of incorporation of the merger partners, whether the partners are publicly traded companies, and securities law ramifications of how the transaction is to be financed and structured.

Other M& A-related legal concerns involve antitrust considerations, a central issue in all sizable deals involving mergers of horizontal competitors. Attorneys advise on the likelihood of challenges to the proposed merger by governmental authorities--potential constraints imposed by federal antitrust laws, particularly Section 7 of the Clayton Act. This statute prohibits acquisitions "where in any line of commerce ... in any section of the country, the effects of such acquisitions may be substantially to lessen competition or to tend to create a monopoly." Many factors combine to determine the competitive environment in a given market. However, the government primarily relies on measures of "market concentration" in evaluating mergers and acquisitions between competing, horizontally aligned companies.

Markets are considered to be either "unconcentrated," "moderately concentrated," or "highly concentrated." For instance, under the 1968 Justice Department guidelines, an industry was deemed to be highly concentrated if the four largest companies held at least 75% of the total market. Although this evaluative policy enabled companies to quickly gauge the government's stance toward a potential merger, it was deemed overly rigid. Its shortcoming lay in its inability to fully and accurately predict the level of decreased industry competitiveness in the wake of the merger of two competitors.

In 1982, the Justice Department introduced the Herfindahl-Hirschman Index (HHI). Instead of simply citing the market share levels of proposed merger partners, the HHI offers more insights on measuring the merger's impact on industry concentration and overall competitiveness. Analyzing antitrust laws obviously focuses on a basic marketing variable--market share.

This is important to note since market share is one of the few marketing-related aspects of conventional due diligence examinations.

Companies undertake due diligence to dot the legal "i's" and to make sure the accounting figures work. However, the merger partners have, in most cases, not sufficiently assessed the strategic marketing variables that lie at the heart of the deal.

When everything in the examination process checks out from a financial, legal, and regulatory standpoint, the merger partners typically plunge forward. They assume that the strategic benefits of the merger will necessarily fall into line along with the numbers. Statistics on the dramatic failure rate of M& A transactions suggest this is erroneous thinking.

M& A decision making now requires much closer scrutiny of strategic issues in the process of evaluating merger opportunities and individual target companies. Achieving the elusive "strategic fit" is typically marked by efforts of the merging companies to augment product lines, broaden geographic coverage, gain new distribution channels, and penetrate entirely new markets. These goals relate directly to marketing. Consequently, there is a greater need today for "marketing due diligence" in the current context of strategic mergers and acquisitions.

Marketing due diligence can be defined as an analytical methodology that assesses target companies' sales and marketing strengths and weaknesses to ensure the success of strategic mergers and acquisitions. By success, we mean that the deal has met the financial, operational, and strategic objectives of the companies involved. The process of marketing due diligence is critical for two main reasons:

1. It helps companies avoid the delays, missteps, and resultant multimillion-dollar losses that can result from inadequate strategic examinations of target companies and the markets in which they operate.
2. Marketing due diligence's fundamental orientation toward revenue growth--as opposed to cost reduction--is necessary to ensure the true long-term success of the transaction.

Today, strategic marketing consultants must work side by side with the investment bankers, lawyers, certified public accountants (CPAs), and others who have historically comprised the due diligence team. Corporate development officers (CDOs), too, require the input of M& A-focused marketing specialists to help in assessing the strategic attributes and potential of different M& A candidates. Even more so, financial buyers--who typically purchase a company as an investment--have sought the guidance of strategic marketing specialists to help them identify new revenue sources for their investment. It is becoming increasingly commonplace to have marketing advisers assist financial buyers in projecting and uncovering future growth initiatives that can justify more aggressive bids. By all accounts, marketing due diligence brings a different perspective and analytical eye to predeal planning and postmerger integration.

The importance of assembling a broad-based multidisciplinary team that includes marketing and sales specialists is becoming critical.

As we have seen, standard due diligence focuses in large part on a target company's financial assets and liabilities and how they meld with the acquirer's balance sheet. Some marketing-related variables are examined, but too often they are merely sketchy assessments of the target's product sales volume and margins and the general competitive environment.

Marketing due diligence, however, is based on analyzing in significantly greater depth these characteristics and numerous other attributes resident in both the acquirer's and the target's marketing systems and capabilities. For instance, marketing due diligence involves looking at not only both firms' products, but also the promotion behind them as a determinant of those products' past success. It involves examining not only both firms' markets, but also the macro-and microenvironmental trends that will affect those markets' future characteristics. It involves not only studying each firm's customer base, but also analyzing the extent to which they have--or can be--penetrated with different product and service offerings.

Conducting financial and legal due diligence is typically the last phase of the M& A process--after the letter of intent is signed and before the transaction closes. Marketing due diligence, however, is rightfully one of the critical first steps in premerger assessments of potential merger candidates. This is because marketing due diligence generates important information that should be factored into target company valuations--which are undertaken soon after the transaction is envisioned and preliminary discussions between the would-be merger partners have commenced.

Let's now look at target company examinations and how marketing due diligence is useful in supplying information to help calculate an organization's current worth and its future potential as part of the merged company.

VALUATION PROCESS: ROLE OF MARKETING INTANGIBLE ASSETS

Valuation--determining the fair market price for a target company--is an initial, integral phase of the premerger process. Valuation is almost exclusively an arithmetic exercise, the key focus of which is assessing the target's physical assets, analyzing its current earnings performance and cash flow, and devising future projections based on current figures. The financial data studied include statistics on capital expenditure requirements, working capital requirements, and fixed and variable costs. In addition to financial information, operations-related data are collected. These include figures on the current and projected structure of the target's costs, personnel-related expenditures and current and future requirements, and labor expenditures. General industry information is also gathered to assess the impact of key trends on revenues and costs.

INSIDER'S OUTLOOK
Success in M& A requires assembling a comprehensive due diligence team--one comprised of people with different skill sets and professional backgrounds. At Siemens, we have a lot of M& A specialists because we do a lot of deals. We have on-board CPAs and M& A lawyers. We have four deal-making, corporate development professionals ... including myself. We've got a human resources M& A professional--half of her job is HR and the other half is understanding all the details involved in M& A. We've got environmental professionals. So the bottom line is that we put together a very professional team. But that team really has three people at its core. It has the operating manager ... either the CEO or CFO of the division. The corporate developer, who is the deal expert. And the M& A lawyer. But above all you need people who understand that M& A is a growth alternative. You need people who understand why the deal is being done in the first place ... people who recognize the corporate growth opportunities inherent in the transaction. This fact alone is why you need people on the due diligence team who truly understand marketing and product development.

--Terence Bentley, Siemens Corporation

As predeal planning moves forward, initial financial and operational statistics are challenged, updated, and modified based on additional input generated in the target company examination process. A detailed explanation of statistical valuation methods is also beyond the scope of this book. However, a basic description of the main valuation techniques is in order. These methods include:

• Discounted cash flow analysis. The focus of this approach is assigning a value in today's dollars to future cash flow levels. This analysis lends insights into future financial performance, cash flow, and various balance sheet relationships. However, its shortcoming lies in its inability to accurately reflect pricing trends in the market.
  
  
• ° Comparable transactions. Not unlike real estate "comparables," management arrives at valuation figures based on the prices paid in past transactions involving companies of similar size or industry standing. A key problem of this valuation method lies in the quality and quantity of the comparative data. Information on past deals may be incomplete, inaccurate, outdated, or simply unavailable.
  
  
• Comparable companies. The focus here is on comparing the proposed value of the acquisition target against the prevailing market price of publicly traded companies similar to the target in terms of size, market standing, and various economic and industry-specific variables. Unfortunately, this approach largely ignores the target's expected future performance as projected by current financial or operational data.
  
  
• Liquidation analysis. This method keys on the value of the company's individual assets if they were to be sold at auction or in a liquidation. Liquidation analysis views a company solely from the standpoint of its current assets, in contrast to its ability to function as a future going concern.
  
  
• Adjusted book value. This accounting-based approach involves analyses of depreciation of assets and inventory. However, it does not factor in the company's economic value and its actual or potential earnings performance.

The valuation process focuses on identifying a company's tangible and intangible assets. Tangible assets include such items as the target's real property, machinery and equipment, and other physical attributes. The category of intangible assets includes the notion of "goodwill," which can be defined as those elements of a company's overall worth that do not appear on a balance sheet. Another definitional aspect of goodwill is that it is comprised of distinct capabilities that cannot be physically removed from the company. Some marketing-related intangibles are evaluated in the valuation process. These include such things as patents, licenses, trademarks, and customer lists.

The fact is, however, that intangible assets relative to a company's sales and marketing infrastructure can have a significant bearing on its current value, as well as its future ability to contribute significant top-line results as a part of the merged organization. Yet there is an entire realm of marketing-related intangible assets that must be pinpointed and assessed, but which are not typically viewed in traditional valuation methods--critical information necessary to supplement the conventional valuation process.

The increasing importance of the strategic marketing aspects of M& A planning requires a broadened approach to determining the value resident in the target company's sales and marketing infrastructure. Moreover, achieving long-term strategic objectives via a corporate combination requires a detailed analysis of the marketing-related variables that will affect the merged company's ability to actualize those ob-jectives. Thus, identifying and assessing a target company's "marketing intangible assets" is necessary to pinpoint specific growth opportunities inherent in a merger or acquisition situation, as well as to compare the attractiveness of different merger candidates.

MARKETING INTANGIBLES: WHERE THEY ARE FOUND

Marketing intangible assets reside in a target company's sales and marketing systems and capabilities. As detailed throughout this book, marketing due diligence is the process by which marketing intangible assets are discovered via the rigorous collection of qualitative and quantitative data on the target's people, products, and processes. Each area must be evaluated from the standpoint of its individual strengths, weaknesses, threats, and opportunities.

Qualitative Areas

The term "qualitative" denotes an attribute that cannot be assigned a numerical value. This is not always the case when analyzing marketing intangible assets, which can sometimes have dollar values ascribed to them for the purposes of valuation and for developing financial projections. For the purpose of this introduction to marketing due diligence, let's look briefly at the main areas of a target company where qualitative marketing-related assets reside.

In the area of people, and people-related variables internal and external to the target company, assets are found in:

• Marketing staff
• Sales force
• Customer base
• Distributors
• Cultural marketing orientation

Marketing staff. For instance, a high experience level, professionalism, creativity, and success rate of the marketing staff is inherently valuable. High marks and thus high worth can be assigned when affirmative answers are provided to the following questions: Is the staff an integral part of the company's operations, as opposed to being an ineffectual overhead function? Does the staff contribute to the development and execution of strategic initiatives that spark direct top-line results? Are key members of the sales and marketing team content with their positions, with little or no danger of losing them in the wake of the merger? In essence, a strong and committed marketing organization may possess much of the company's overall "intellectual property" assets.

Sales force. A well-entrenched, stable sales organization is a distinct area of value. Another aspect relates to the sales function's level of interaction with other departments, such as research and development (R& D), manufacturing, and new product development. A sales force that works closely with other corporate functions to furnish and receive market information is likely to be more successful than one that is isolated. From the standpoint of performance, the level of sales volume--collectively and by individual seller--is another indicator of value, as will be addressed in the next section on quantitative areas.

Customer base. A strong and loyal customer base is one of the most valuable intangibles a target company can possess. Companies that enjoy high customer commitment have low levels of customer turnover. Value is found in such organizations, which typically have successful programs in place to monitor and meet changing customer needs and to provide world-class customer service. Another key area of value relates to the extent to which sales are dispersed throughout the customer base. Whenever sales are concentrated with a few clients or customers, an element of vulnerability exists; major losses can be incurred if one or more of those large customers is lost postmerger. A strong and loyal customer base, where sales are spread over many different accounts, poses an element of value.

Distributors. Distributors represent a key to effective product marketing. Having smooth and solid relations with distributors (whether they are wholesalers, retailers, or other intermediaries) creates value, since products are assured of getting to market in a timely and cost-effective manner. Value can be minimized, however, when "channel conflict" exists between competing distribution arms in multiple-channel paradigms. Identifying existing and potential problems in this regard is essential in order to avoid future complications that may diminish value after or as a result of a merger or acquisition.

Cultural marketing orientation. A corporate culture marked by a broad, customer-focused marketing orientation represents a valuable intangible. Today, every person in an organization should assume marketing responsibilities to some degree. Ideally, everyone is customer-focused and employees work together to help meet customer requirements. Thus, value resides in a company where marketing is pervasive throughout the organization and is not relegated to the marketing and sales function. Cultural variables are a critical issue in determining strategic fit between merger partners, and they are discussed in great detail in Chapter 10. Yet, it is important to assess the degree to which culture fosters and enhances the process of sales and marketing throughout the entire organization.

In the realm of products, these external and internal factors are a source of marketing intangible assets:

• Market share
• Brand power
• New product development
• Marketplace perceptions
• Competition levels

Market share. The significance of market share in this context is not the numerical percentage held by the company under review. From a qualitative standpoint, occupying a leading position in a product market offers a host of important intangible benefits. For instance, high market share is a main driver of profitability. As was illustrated in the well-known Profit Impact of Market Strategy (PIMS) research program developed by the Strategic Planning Institute, the market share leader in a given category may be three times as profitable as the fifth-place company.

Profitability generates benefits in two basic ways.

1. Overall costs, including those for sales and marketing, are lower due to higher volumes.
2. Marketing-related advantages and cost savings may accrue from learning curve experience gains in product management and promotion.

Marketing due diligence, as you will see, determines the extent to which the company's market share is sustainable and expandable--and, consequently, a continuing source of potential value.

Brand power. In product marketing, there are few things as valuable as a powerful brand name. A high level of name recognition--ideally coupled with positive market perceptions of product quality and value--facilitates and maximizes sales. What's more, brand name strength of given products carries over in a positive halo effect to benefit other goods and services offered by the company. Brand power is one of the few marketing intangibles assessed in the valuation category of goodwill. Yet, its broader value to the target company's overall sales and marketing processes, and, therefore, long-term profitability, often goes unrecognized.

INSIDER'S OUTLOOK
When you are right at the very beginning of looking at a deal ... it's a good idea to brainstorm with marketing. Go over your entire deal list and get their reactions to things. Get their input on evaluating the market or markets in which given target companies are operating. Many deals eventually fail because of "Marketing 101" type mistakes. I have seen companies make strategically sound deals, but make real marketing errors ... such as pumping out products to the distribution network without making sure they were getting to the final customers. Marketing errors are often directly related to a lot of companies' problem acquisitions.

--Diane Harris, Hypotenuse Enterprises

New product development. A company that regularly introduces new products and services offers assets not found in a firm that is slow and ineffective in developing new offerings. For instance, aggressive product-driven companies are viewed in the marketplace as innovators. There is value in possessing this market perception--value that supports individual products and the organization as a whole. Moreover, strong product development capabilities typically indicate that assets reside in the strong working relationship between the corporate functions that jointly create and market new goods and services, such as R& D, engineering, manufacturing, customer service, and sales. Of course, the rate of new product introductions is not as significant as the actual success rate of those items in the market. Nonetheless, a high degree of product innovation typically illustrates progressiveness and aggressiveness--two valuable traits necessary to achieve and maintain competitiveness, thus increasing the probability of new product success.

Marketplace perceptions. The positive perceptions the market holds toward a company's products represent a fundamental marketing intangible. These may relate to product quality, value, customer service, or other variables. Positive perceptions also relate to the company as a whole. Is the company viewed as being a good corporate citizen? How is the company perceived in terms of its relations with labor unions? Has the company experienced significant public relations (PR) problems in the past? Determining the strength and ultimate value of positive market sentiment requires gauging the views of customers, shareholders, and the business community at large.

Competition levels. A weak or decreasingly intensive competitive environment represents a marketing asset in itself. For example, not having to constantly fend off competitive threats enables a company to take an offensive rather than defensive position in the market. Program planning and implementation are not hindered by the disruptions of competitors' inroads, which may necessitate countermeasures that drain important resources from ongoing initiatives. Naturally, the competitive environment is continually changing. Consequently, the search for marketing intangibles requires evaluating key market trends and their potential impact on the target's ability to maintain and bolster its competitive standing in the future.

In the area of processes, the following represent sources of marketing intangible assets:

• Marketing and sales planning
• Advertising and marketing communications
• Marketing information systems
• Technology applications and customer databases
• Outsourced relationships
• Organizational communication

Marketing and sales planning. Almost every company develops marketing and sales plans. The extent to which a company actually, and regularly, achieves the goals detailed in those plans represents a growth-related intangible asset. Marketing planning is just one area. Long-term corporate strategic plans, as well as short-term action plans for specific promotional or product initiatives, should also be assessed from the standpoint of their substantive foundation, practical execution, and tangible results.

Advertising and marketing communications. The bottom-line effectiveness of individual advertising, PR, direct mail, and other marketing communications programs can often be measured. From a broader standpoint, the marketing department that consistently produces creative, impactive, sales-generating marketing campaigns possesses an important intangible asset.

The extent to which products and product lines are well positioned in comparison to competitors' offerings is another key asset. Many otherwise viable products fail over time because the market does not have a clear understanding of their competitive differentiating characteristics. Of course, a product's positioning strategy may be sound while the communications execution of that strategy is not. Marketing due diligence addresses that dichotomy and determines methods of closing that gap.

Marketing information systems. Data relating to a company's markets, customers, and competitors should be regularly collected. Surprisingly, many companies do not have even the most rudimentary process of accumulating and disseminating intelligence to key sales and marketing decision makers.

The degree to which the target company gathers and applies marketing information goes well beyond the maintenance of conventional customer lists--another of the handful of marketing-related intangible assets assessed in traditional valuation and due diligence. Significant quantity and quality of marketing information is a key intangible asset. This is particularly true if that information is maintained in sophisticated, technology-based systems.

Technology applications and customer databases. Today, information technology (IT) is central to a company's operations. Yet, the degree to which IT is effectively deployed for marketing purposes--for example, in a marketing information system--often points up a valuable intangible.

The issue, however, is not whether the company uses technology for sales and marketing. The issue is how well that technology is applied to solve marketing problems and to support ongoing and future initiatives. For instance, the era of customized marketing has come upon us. The tool that enabled companies to move from mass marketing to individualized selling is the customer database--a system that tracks customers' demographic composition, geographic locations, and, most important, their buying history and patterns.

One can argue that a database is a tangible entity on which a dollar value could be placed. However, a company's customer database should not be viewed as a physical asset, but rather as a compilation of critically important information (an intangible) whose potential benefit transcends the value of the hard drives or disks it is stored on.

Outsourced relationships. A target company's roster of marketing services agencies--such as those for advertising, media buying, PR, direct mail, and sales support--is an integral, albeit external, element of its marketing infrastructure. The quality of the output of those agencies is significant. But the true intangible value lies in a corporate marketing department whose management effectively makes outsourcing decisions; that is, what functions to outsource and to what vendors they should be outsourced. By all accounts, managerial skill is needed to select and manage the work of outside advisers. There is substantial value in that ability, yet no listing on a company's balance sheet.

Organizational communication. Channels of internal communication are an important asset when they report information that directly supports the company's sales and marketing efforts. The channels, types, and media through which communications are disseminated in the target company must be assessed. The more an organization imparts sales and marketing news, such as new product introductions and selling strategies, the greater the likelihood that it functions as a customer-focused organization across all levels and locations.

Quantitative Areas

As the foregoing illustrates, much of the data collected in identifying marketing intangible assets is qualitative in nature. Some marketing intangibles, however, are discovered via statistical analyses. There are three main categories where quantitative measurements point up potential marketing intangible assets. The existence and strength of given quantitative intangible assets can be gauged by developing one or more of the following ratios:

• Marketing investment ratios
• Producivity ratios
• Efficiency ratios

Marketing investment ratios. In essence, these ratios relate to resource allocation decisions by the target company for sales and marketing programs. Marketing investment ratios range from information on general marketing expenditures (e. g., growth or decline of advertising expenditures in a given time period) to data on specific marketing resource allocation decisions (e. g., comparisons of spending on different promotional and marketing communications mix elements). How much and how well money is invested for marketing--and the return on those past investments--point up intangible assets from both a strategic and a managerial standpoint.

Productivity ratios. These ratio analyses involve measuring the success, or lack thereof, of sales and marketing programs and special initiatives such as strategic alliances and marketing tie-in programs with key stakeholders. For example, these ratios are used to pinpoint revenue gains resulting from specific advertising campaigns, sales promotion programs, direct marketing efforts, and database marketing activities.

The most frequently calculated productivity ratios relate to sales performance--both for individual sellers and for entire sales teams assigned to different corporate divisions or subsidiaries. Therefore, sales productivity can be assessed by analyzing overall sales growth (or decline), average order size by customer, sales volume by individual sellers (e. g., volume in comparison to the number of sales calls made), and other criteria.

Efficiency ratios. A number of marketing areas must be assessed in terms of their operational efficiency. One measurement relates directly to customer satisfaction. Quantitative data, for example, can be collected on warranty costs as compared to net and gross sales to identify customer sentiment toward different products and product lines. Qualitative input must also be generated via interviews with customers, and this information must be viewed against the quantitative findings.

Another example of an efficiency analysis relates to the stability of sales and marketing staff. Thus, an employee turnover ratio can provide insights into whether or not the sales and marketing function is being well managed--as well as indicate potential personnel-related problems that must be addressed as you effect postmerger integration.

In each of the qualitative and quantitative areas of investigation, data should be collected from the immediate past and, if possible, as far back as five years. Historical information must be collected and studied in order to spot positive and negative trends that will impact future initiatives, as well as to point up other relevant strengths, weaknesses, and potential threats and opportunities.

However, all marketing-related data on a target company must be assessed two ways. The target must be viewed first as an entity unto itself, then as a component of the merged company. This constitutes the fundamental orientation to growth-focused M& A planning.

On the one hand, areas of weakness in the target company may be mitigated if your company has particular strengths to offset those shortcomings. On the other hand, strengths resident in the target company's sales and marketing infrastructure represent areas that can conceivably be bolstered as the firms merge and take shape as a forceful new corporate entity.

Marketing due diligence's unique focus offers you the ability to identify strengths and weaknesses that are critical to both predeal analyses and postdeal integration and growth planning. Initially, the qualitative and quantitative data culled are valuable in assessing the target company's worth from a valuation standpoint. Going forward, this information is essential for developing forecasts, financial projections, and plans whose focus is forging growth strategies to generate near-and long-term revenues.

Without question, the emphasis on growth represents one of the most dramatic shifts in merger and acquisition planning and execution over the past 10 years. Growth through M& A is the driving force of marketing due diligence and the underlying focus of the guidance provided throughout this book.

INSIDER'S OUTLOOK
We run the due diligence process very rigorously. One of the keys is getting the appropriate experts on the team. We have people who are experienced in every aspect of a business's operations. We have experts in law, finance, tax, environmental compliance, human resources, marketing, sales, and operations. We also use outside advisors to gather specific information on subject areas we may not be totally familiar with. Over all, the due diligence team is multifunctional, multidisciplinary.

--Mufit Cinali, AT& T

REVENUE ENHANCEMENT OPPORTUNITIES

The increasing emphasis on marketing due diligence is consistent with an emerging tenet in M& A today: Cost-reduction synergies, which are often realized through achieving economies of scale, are becoming much less important than strategic synergies that can generate near-and long-term revenues.

The process and benefits of marketing due diligence to support growth initiatives is best illustrated by a new concept that provides a frame of reference--and represents the methodological underpinnings--of this new approach to evaluating all merger or acquisition opportunities: the "revenue enhancement opportunity" (REO).

Effecting synergies is the goal of any merger or acquisition. But what exactly are synergies? And are there different types?

Certainly, every deal offers different financial and situational benefits to the companies involved. However, whether the deal is of a strategic or financial nature, the orientation that focuses on long-term growth as opposed to short-term cost cutting requires that we view the term "synergies" in a new light. The strategic M& A perspective has spawned a new emphasis on the synergies that can lead to significant top-line revenue gains--REO synergies.

An REO can be defined as: A newly created or strengthened product or service that is forged by the fusion of two distinct attributes of the merger partners and which generates immediate and/ or long-term revenue growth.

The process of identifying and realizing REOs is a driving focus of marketing due diligence and, consequently, is treated in detail in Chapter 3. For now, it is important to understand that REO analysis and identification is a key perspective in growth-focused M& Aplanning.

Marketing due diligence concentrates on delivering instant payoff, but also a filled and prioritized pipeline of revenue enhancers and growth opportunities. It aids in the process of forecasting and delivering revenue growth immediately upon finalization of the deal. But the prioritization aspect allows for the ongoing achievement of successive REO synergies--as will be discussed in detail in Chapter 3--at appropriate points in the postdeal integration timetable. Acknowledging the pipeline concept in the premerger planning stages is critical. It allows the acquirer to focus on revenue enhancers that will deliver both quick hits and incremental gains to stakeholders over the short term, while never losing sight of the revenue enhancement opportunities that will produce a steady stream of future sales. More on this later.

IDENTIFYING SOURCES OF VALUE

The search for marketing intangible assets, revenue enhancement opportunities, and other sources of value to ensure the success of strategic mergers and acquisitions requires an exhaustive review of a target company's overall infrastructure. Effectively conducting this analysis, however, requires adopting a new frame of reference, which is set forth in Part One of this book.

Part Two addresses in detail each element of a target's operations that will point up marketing-related strengths, weaknesses, threats, and opportunities. In a sense, the forthcoming guidance resembles a conventional Strengths, Weaknesses, Opportunities, Threats (SWOT) analysis--a methodology employed in conducting basic strategic plan-ning. There is an important difference, however. In this context, the analysis is linked directly to the considerations unique to up-front, predeal planning and postmerger integration.

The focus is on analyzing:

• Market dynamics and company performance. Analyzing the markets in which a company operates is a standard area of any acquisition analysis. From a marketing due diligence perspective, however, market analysis takes on an important new dimension. It determines not only where the company is situated in the market, but, more importantly, how the company got there (and where it is going). In other words, it focuses on assessing how well the organization is responding to its particular marketplace threats and opportunities. Attention is paid to a target company's overall marketing effectiveness as one determinant of its current value and future potential as part of the merged company (see Chapter 4).
  
  
• Product and service lines. Products and services are the lifeblood of any company. It is necessary to evaluate a target company's products and services to identify the strategic fit with your own offerings and to assist you in product-related decision making in the postmerger environment. Various qualitative and quantitative measures are used in assessing product lines. In particular, variables such as product line strengths and vulnerabilities, product life cycle stages, and marketing communications tactics supporting individual offerings must be evaluated (see Chapter 5).
  
  
• Customers. Tremendous sources of value and revenue gain opportunities exist in a company's current customer base. A detailed examination of the firm's existing and prospective buyers (those with whom the company has had dealings, as well as those it is actively attempting to transform into buyers) must be conducted. The customer base should be analyzed in terms of the categories the merged firm will serve (e. g., consumer, industrial, government); composition (e. g., geographically, demographically, psychographically); and size (e. g., revenues, average purchase amounts, levels of purchase frequency, and the number of employees in an organization). When analyzing the customer base, particular attention must be paid to cross-selling opportunities that will exist vis-à-vis the merged company's product mix (see Chapter 6).
  
  
• Employees. A company's most valuable asset is its employees. Premerger marketing due diligence addresses such analytical areas as departmental structure, lines of reporting, staff size, geographic location, and demographic composition of the employee base. Extensively analyzing the target's employees is critical in one very important respect: determining the skills and capabilities held by employees--relative to the strategic imperatives of the merged company itself--in order to determine those people's role in the new organization going forward (see Chapter 7).
  
  
• Management functions and processes. Skills and capabilities reside not only in a company's people, but also in the managerial structure and procedures of its various functional units. Marketing due diligence explores the key areas of a target's management infrastructure for two compelling reasons: to determine outstanding practices and capabilities that can be imported into the new organization, and to determine the extent to which particular managerial processes can support the merged company's strategic growth initiatives (see Chapter 8).

POSTMERGER INTEGRATION:
PROTECTING AND CULTIVATING SOURCES OF VALUE

The core focus of marketing due diligence is spotting sources of value inherent in a target company. And, as stated, value resides in a company's people, products, and processes.

Identifying those sources of value is the primary task in growth-focused premerger planning. The other essential responsibility is protecting and transferring value and skill sets in the postmerger environment. Whereas Part Two addresses how to identify sources of value, Part Three addresses the ways to harness and cultivate those capabilities in the future. Guidance is provided in the following areas:

• Understanding the challenges of integration. The obstacles to postmerger integration continue to be widely chronicled in the business literature. Employing a best-practices approach to effecting integration first requires understanding the typical roadblocks and problem areas and how to overcome them (see Chapter 9). In addition, understanding the dynamics and attributes of different corporate cultures is critical to avoiding the well-publicized "culture clashes" that have killed many a strategically sound transaction. Evaluating the process-and personnel-related variables of an organization's culture is a crucial means of identifying the critical success factors for successful acquisition integration (see Chapter 10).
  
  
• Aligning products and services. In horizontal mergers, there are invariably product line overlaps that require determining which goods and services will be supported post-merger. Even in vertical mergers, there are situations where limited monetary and human resources will preclude management from supporting every product and service the combining companies offered prior to the transaction. A disciplined approach is necessary to make sound product and service line decisions relative to integrating the merging companies' offerings. Moreover, this approach must be based on evaluating the critical considerations of product management, such as branding strategies, pricing, promotion, and distribution (see Chapter 11).
  
  
• Internal communication strategies. A detailed employee communication program must be planned and implemented as part of the integration process. Devising and executing a communications program helps ensure that employees remain committed, moti-vated, and productive in the wake of the merger's close. Communications are also an essential means of effecting understanding between disparate employee bases to support the melding of corporate cultures and to provide a foundation for successful execution of the merged firm's strategic growth initiatives (see Chapter 12).
  
  
• Training and development curricula. Training is imperative to effect the all-important transfer of skills that will help the merged company realize the strategic gains sought. Well-designed and well-executed training and development curricula can directly support growth planning initiatives and--like communication--can facilitate integration and the alignment of corporate cultures. And, different forms of training techniques should be employed based on employees' different staff classifications and the nature of the training content itself (see Chapter 13).
  
  
• Reward and recognition programs. Employees who support and help facilitate the merged firm's integration program should be recognized for their contributions and rewarded for loyalty in the midst of change. Companies' failure to overtly acknowledge and reinforce such positive behavior is often a key cause of flawed or delayed integration programs and key personnel defections. Reward programs must be structured differently for employees at different levels of the organization. These initiatives must be promoted widely and monitored closely (see Chapter 14).
  
  
• Postmerger external communications. The content and the timing of external communications aimed at the merged company's various stakeholders are critical. Messages must be carefully articulated based on the informational needs of different audience segments. Media must be selected to effectively reach those audiences. Media planning strategies must be devised to ensure audiences' receipt of the intended messages. Of paramount importance is communications planning aimed at the merged company's existing customers, who will likely be courted by competitors immediately upon announcement of the deal and in the weeks and months following its close (see Chapter 15).
  
  
• Designing the merged firm's organizational structure. The consummation of a major merger or acquisition poses the opportunity to begin competing in the marketplace as a formidable new entity. Inherent in this opportunity is the need to revamp the organizational structure of the new firm to capitalize on the human and procedural assets and resources it now has at its disposal, and to directly support the strategic drivers of the transaction itself. A number of fundamental considerations must be addressed in terms of devising new job classifications, determining the nature and number of managerial layers for ongoing oversight of company activities, and establishing the channels and flow of information to maximize operational efficiency (see Chapter 16).

INSIDER'S OUTLOOK
[In due diligence] every team member knows what he or she is supposed to do. They know who they are going to talk to at the target company. They know how much time they are going to spend reviewing documents and visiting facilities. We use extensive checklists in order to do the most comprehensive interviews with all key managers at the target company. And we ask some very tough questions. On, say, a $100 million deal, we probably have a team of a dozen or two dozen people visiting the target company at different times. And we spend as much time as we need to get the information we want. On very complicated deals, we may spend several weeks. On less complicated deals, we'll spend a little less time.

--Mufit Cinali, AT& T

SUMMARY

In the past, marketing due diligence issues were viewed as peripheral. In the context of strategic M& A today, they are central.

As the foregoing illustrates, marketing due diligence comprehensively supports each aspect of the predeal planning process:

• It provides qualitative information that can be factored into quantitative analyses of a target company's current value and future contribution as part of the merged entity. That is, it generates additional data for use in computing acquisition premiums and financial forecasts.
• It identifies strategic synergies whose foundation is revenue generation, not cost reduction.
• It helps facilitate postmerger integration, thereby enabling speedier attainment of potential sales and helping to ensure the ultimate success of the merger itself.

This last point is critical. It reinforces the widely increasing acceptance that adequate predeal planning leads to expeditious postmerger integration. Granted, integrating all corporate functions in the wake of a deal is an enormous undertaking. But of all those functions, sales and marketing is perhaps the most important.

The merged company must have its marketing organization and plans in place in order to swiftly launch growth programs upon consummation of the deal. A delayed or problem-plagued rollout can cause the merged entity to lose momentum, market share, and the backing of customers, prospects, employees, and shareholders. Even worse, the merged company can fail to realize its strategic vision.

Comprehensive predeal marketing due diligence helps expedite postmerger integration, the foundation for launching growth-focused programs that can lead to near-and long-term, top-line revenue gains. By identifying key revenue-building strategies--and planning for their swift attainment after the deal closes--the merged company can immediately begin maximizing its sales potential.

Conversely, inadequate predeal planning can severely delay the company's ability to operate at its peak marketing and sales capacity. The expression "time is money" is indeed appropriate here.

If projected sales in the postmerger environment are $10 million a month, a two-month-long marketing integration period will flow to the bottom line faster than a six-month-long integrationÑ$ 40 million in accelerated income, to be exact. Clearly, the merged company has to hit the ground running from a marketing and sales standpoint. In the context of strategic mergers and acquisitions, however, the "run" is a marathon, not a sprint. Effecting expense reductions is an important, albeit short-term, consideration. Realizing and prioritizing revenue enhancement opportunities is the critical factor in ensuring the long-term viability of the deal. By ensuring that these REOs are quickly in place, you will be in a stronger position to satisfy both your short-term cash flow needs and your longer-term growth initiatives.

Marketing due diligence identifies valuable assets inherent in a target company and is focused on harnessing those assets to effect revenue growth. Insights gained regarding the target's hidden marketing strengths are critical. Equally important, however, is marketing due diligence's ability to spot marketing weaknesses that can lead to dramatic financial losses.

A well-publicized M& A failure of the mid-1990s serves as the ideal reminder of the need for extensive marketing-focused examinations of a target company and the markets in which it operates.

Late in 1994, the Quaker Oats Company acquired Snapple Beverage Corporation for $1.7 billion. Quaker, already the leader in the sports drink beverage arena with Gatorade, looked to lock up the New Age beverage market as well. Snapple was at the peak of its meteoric rise, having increased revenues 400% since 1990. At the time of the acquisition, Snapple's sales were approximately $700 million. Two years after the acquisition--and billions of dollars in losses later--Quaker, having purchased a one-product company in a saturated market, was forced to unload Snapple for a paltry $300 million!

Several key marketing-related factors combined to make this one of the most ill-fated deals in the history of corporate mergers and acquisitions.

At the time of the transaction, so-called New Age beverages like Snapple were losing their market momentum as competition was intensifying. Aggressive sales efforts were being launched by Snapple's major competitors--Fruitopia beverages by Coca-Cola; Lipton iced teas, a joint venture of PepsiCo and Unilever--as well as New Age beverage upstarts like AriZona iced tea and Mistic. In addition, Quaker Oats angered Snapple's network of bottlers by taking too long to finalize its new distribution system. This delay forced bottlers to reluctantly work in the first quarter of 1995 without a distribution plan in place, which led to irretrievable market share losses for Snapple.

Marketing due diligence's focus on spotting weaknesses and vulnerabilities from a product management standpoint would have helped Quaker Oats avoid the massive set-backs it suffered. Consider, for example, these examples relative to the three main areas of investigation--people, products, and processes (the "three Ps of Marketing Due Diligence").

• People. The people-related aspects of marketing due diligence include assessing a company's relationships with key stakeholders (e. g., vendors, suppliers, channel intermediaries). Marketing due diligence would have determined the critical importance of Snapple's network of bottlers, and would have forecast the negative attitudes held by them because of Quaker Oats's lack of a distribution strategy, which proved so costly to the company.
  
  
• Products. Acomplete study of a target company's products, vis-à-vis such considerations as the competitive environment, is central to effective marketing due diligence. Performing detailed marketing due diligence would have spotted the competitive inroads being made by the beverage behemoths Coca-Cola and Pepsi, a factor that would have a direct bearing on Snapple's future revenue stream, as well as fundamental marketing strategies and investments.
  
  
• Processes. Quickly developing new marketing communications is a key element of postmerger growth planning. In the Snapple acquisition, a change of advertising strategy was needed since the popular TV spots featuring "Wendy the Snapple Lady" were decidedly regional in their appeal. Quaker Oats's goal to bolster Snapple's sales beyond the East and West coasts required refining--but not totally revamping--its overall marketing communications approach. Interestingly, it was a full two years after the transaction was finalized that a new national ad campaign was launched. But this new ad campaign mistakenly did not include Wendy, who had become a veritable brand icon. Snapple's two most successful radio pitchmen, Howard Stern and Rush Limbaugh, also were not utilized in this campaign. Each had regularly spread the word of Snapple for years on their national radio shows. Marketing due diligence would have identified the need to have this campaign in place much sooner to immediately reposition the product and to help keep pace with the onslaught of competitors' advertising. Additionally, it would have pointed up the value of Wendy the brand icon and the selling power of two syndicated radio stars.

It is unfair to single out Quaker Oats as having performed inadequate marketing due diligence. The absence of marketing-focused premerger examinations and swift post-merger launches of sales and marketing programs has been an expensive shortcoming in an endless number of deals.

This chapter has looked at the strategic orientation of M& A transactions today and how conventional approaches to due diligence and company valuations now require a much stronger focus on key marketing variables. The overriding goal of strategic M& A is achieving strategic advantage and enhanced competitiveness and profitability. Of course, there are various ways to do so. The next chapter explores how to determine which approach is most appropriate given your company's current standing and future strategic destination.

The focus of this book is on identifying the ways to ensure "strategic fit" with potential merger partners. We must first, however, define precisely what that amorphous, often overused term means. Ultimately, the challenge is determining what strategic fit means to your company and identifying the potential M& A partners that represent the best possible match. Nonetheless, you must first determine what it is you need before you set out to find and evaluate the M& A candidate that can potentially provide it.

Table of Contents

STRATEGIC PERSPECTIVE ON M&A PLANNING.

"Marketing Due Diligence" in Strategic Mergers and Acquistions.

Quest for Strategic Advantage Through Mergers and Acquisitions.

Essence of Strategic Mergers and Acquisitions: Focusing on Revenue Enhancement.

ANALYZING TARGET COMPANIES.

Evaluating Market Dynamics: Starting Point of Target Company Examinations.

Analyzing a Target Company's Products and Product-Development Capabilities.

Analyzing the Target Company's Customer Base.

Evaluating a Target Company's Employees: A Skills-Based Approach to Personnel Decision Making.

Analyzing the Target Company's Management Functions and Processes.

STRATEGIES FOR INTEGRATION.

Understanding and Acting on the Challenges of Postmerger Integration.

Analyzing and Aligning Corporate Cultures.

Aligning Products and Product Management Processes.

Employee and Organizational Communication Strategies.

Training: Catalyst of Integration and Skills Transfer.

Reward and Recognition Programs and Employee Motivational Techniques.

Postmerger External Communication Strategies Supporting the Merger's Launch.

Designing the Merged Firm's Organizational Structure: A Framework for Decision Making.

Appendix.

Index.