Adventures in Mergers/Acquisitions & Joint Ventures

In 1998 there were approximately 9,200 mergers and acquisitions involving U.S. companies. These activities had a value of about 1.3 trillion dollars, representing a 13 percent average annual increase in the number of such individual transactions over the last three years. Joint ventures have become a key method utilized by companies to expand or strategically increase a segment of their business. As a part of this, some companies may want to grow fast and move quickly through mergers, acquisitions and joint ventures, sometimes failing to look at what they are buying or joining into.

Mergers, acquisitions and joint ventures can be methods used to allow companies to achieve company strategies (i.e., diversification, market entry, new technology, etc.). Companies need to carefully consider these approaches because of the large amount of time and monetary investments required, legal concerns that may arise and the potential consequences of possible over-diversification.

Principles of Engagement

In any merger or acquisition planning you need to understand what you are getting into (Do I go ahead? Adjust the price? Walk away?). This is your one shot to understand the business before you close the deal. You also want to reduce any post-acquisition surprises (what will we need to work on after acquisition; integration issues, personnel issues, obsolete equipment requiring replacement, warranty exposures, major contracts, customer base). An important key to remember is “It’s not only the numbers!!”

In joint ventures, you need to pursue and understand strategic analysis before you commit (what are you trying to accomplish through the joint venture; does this really meet long-term strategic objectives?). For international joint ventures you must understand the local culture (identify risks, personnel issues) and make sure you understand how you must do business in that local environment. You also need to ensure the joint venture is aligned with your company’s Corporate Strategy (What problems may occur in integrating the joint venture into your business?). It’s also important to understand the specific competitive environment that the joint venture will be operating in as well.

In addition, selecting the right joint venture partner and what you are getting into with your joint venture partner is very important (will that partner help you with new business and local country issues?). In concert with that potential partner you also need to select the right location to do the joint venture (infrastructure, availability of resources/ employees, political environment, etc.).

It is important to form the right team, including experienced professionals, key disciplines, including internal audit (the team needs to have multiple disciplines perhaps engineering, legal, accounting, internal and external audit, human resources, etc., specifically experienced senior staff). You need to set an appropriate scope based on size, and significance of specific mergers, acquisitions and joint ventures, also considering the time factor available to perform your review. It is important to read and understand all potential purchase agreements (what are you all acquiring, asset purchase only, assuming liabilities?). Team roles need to be clearly defined (meet prior to review and understand roles and all requirements of review). And of course you must always be persistent and skeptical.

Critical Issues

In any merger and acquisition you need to focus on financial statement issues (what is the potential exposure, understanding what you are buying) and the control environment (understand weaknesses and how this may impact future operations, what are the risks?). Additionally, a focus needs to be placed upon financial and operational integration concerns (will major restructuring and integration be required, how difficult will it be to integrate new acquisition into our business?). Also, information systems issues can be key areas of concern (compatible systems, major integration costs after acquisition, old equipment).

Other issues are marketing (will customers stay? What will it take to support customers?), legal (any pending suits and exposures?), business processes (do good processes exist? any integration concerns?) as well as human resource issues (combining different corporate cultures, handling downsizing of combined organizations and the potential of losing key personnel, differing benefit plans, etc.). In addition, are there any anti-trust regulatory/tax issues requiring analysis?

In joint ventures there are several things to be concerned about, in particular for international ventures: Local bureaucracy and red tape, local staffing, finding qualified people, development and training of local staff, local site evaluation (local availability, raw material availability, personnel availability, infrastructure issues) as well as cultural considerations (the need to understand cultural differences and how to react to them).

Other critical concerns are instituting strong financial and operational controls (usually lacking, especially in emerging markets), potential economic overheating (major financial devaluation), social upheaval, raw material shortages, lagging infrastructures (lack of roadways, waterways, other forms of transportation, etc.) and the financial ability of partners and/or customers of the potential joint venture.

In addition, after the joint venture has been formed, it is important to have continuous risk and life cycle analysis. Joint ventures change the longer you are in them and they go through various changes from start up to maturity. You need to continually monitor, as risks are likely to be different over time.

In planning for a successful joint venture, a decentralized approach to establishing joint ventures (handle at country level, not corporate) may be more appropriate, depending upon circumstances. You need to meet local business needs. It is also important to have integrated joint venture teams and a good skill mix on these teams (to be successful, you must support the local joint venture partner with technical and product skills). Likewise, one must not forget about linked communications, which move through your segments and divisions as well as your corporate headquarters.

Conclusion

Analyzing and understanding what you are getting into is very important with mergers, acquisitions and joint ventures. There are both risks and rewards, which must be carefully analyzed and understood. Of all the issues involved both you and your management should be interested in three (really only one).

“No surprises!!”

If you follow the premises above you should not get the question “Where were the auditors?” six months after the acquisition, merger or joint venture. The goal is to hear from your senior management “Excellent job!”, “The key issues were identified and understood!”, and “Job well done!”