How do you account for the ultimate success or failure of mergers and acquisitions? Many factors are critical: you need to buy the right company for the right price at the right time. Even with all of the correct elements in place upfront, a corporate marriage “made in heaven” can turn into the “honeymoon from hell.”

In the article below, Mitchell Lee Marks focuses on a factor that is key to a successful combination—the process through which integration is executed. Reprinted with the permission of the author, portions of this article also appear in his book, Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances, co-authored with Philip H. Mirvis. Dr. Marks, head of JoiningForces.org (www.joiningforces.org) in San Francisco, regularly advises executives on issues related to organizational change and transition.

Please feel free to forward this newsletter to friends, colleagues and networking contacts. (Go to www.focusbankers.com for newsletter archives.)

Active FOCUS Deals

Although our firm has over 22 years experience across many verticals, FOCUS currently has active transaction engagements in the following specific business sectors:

• Business Services
• Construction
• Consulting and Government Contracting
• Distribution
• Government Contracting (multiple assignments)
• Healthcare
• Healthcare Business Services
• IT Outsourcing
• Leisure
• Manufacturing (multiple assignments)
• Medical Devices and Equipment (multiple assignments)
• Public Affairs Software and Services
• RFID Technology
• Security (multiple assignments)
• Software
• Specialty Flooring
• Supply Chain Management Solutions
• Systems Integration
• Video Surveillance and Network Integration

Our transaction process provides us with up-to-the-minute market knowledge in these sectors that may be corporate development of interest to you.

Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-785-9404, x 341 or by fax to 202-785-9413.

The Merger Post-Mortem: Learning from an Acquisition
By Mitchell Lee Marks, Ph.D.

Many factors account for the success or failure of mergers and acquisitions: buying the wrong company, paying the wrong price, making the deal at the wrong time and so on. Another factor, however, can be at the core of many disappointing combinations—the process through which integration is executed.

With first hand involvement in over 100 combinations, I have seen my fair share of both successes and failures. While there is no “one-size-fits-all” prescription for managing a merger or acquisition, a recent case sheds some light on how to prevent a corporate marriage “made in heaven” from turning into the “honeymoon from hell.”

GOOD INTENTIONS GONE AWRY
HD Solutions, a computer software development firm, fared the bursting of the technology bubble much better than most of its competitors (while the events described here are factual, the names have been fictionalized at the request of the companies involved). Both of its business lines were leaders in their niche sectors and the company registered consistent earnings during a period when many Silicon Valley firms went on a roller-coaster ride of expansion and contraction. CEO Dan Stiller was pleased with his company’s performance, but concerned that one business unit accounted for nearly three-fourths of the company’s revenues.

Guided by outside advisors, Stiller concluded that he had to bulk up the smaller business unit but that internal growth would not achieve the desired critical mass quickly enough. So, the CEO adopted a strategy of growth by acquisition. A business broker shopped an opportunistic acquisition to Stiller.

Sanchez Software had sound products that nicely complemented those of HD’s smaller business unit, but had very little marketing muscle and never realized the full potential of those products. As a result, the company was on the ropes financially and in need of a buyer to avoid a dive into bankruptcy. Here was the perfect acquisition, thought Stiller—a firm that had good products and was available at a good price. As a condition of doing the deal, CEO Donald Sanchez insisted on staying on board after the acquisition. Stiller had no problem with that, and consummated the acquisition.

Nearly a year to the date after the acquisition became legal, I received a call from HD Solution’s CEO Dan Stiller. “Productivity has just plummeted since we made the acquisition,” lamented the CEO, “the cultures are still clashing and key talent from both sides has jumped ship. Is there anything you can do to help us understand what went wrong, both to fix this acquisition and prevent us from going down the same path again?”

I replied that there is much that can be done to put a combination that has gone awry back on a successful path. But the first step is to learn what went wrong with the integration. “Sort of like conducting a post-mortem on a deceased patient,” noted Stiller. “Yes,” I agreed, “but we have a chance to resuscitate this one.”

FINDINGS AND ACTIONS
One-on-one interviews were conducted with several senior executives and middle managers, as well as a few focus group interviews with other employees. The vast majority of interviewees came from the HD business unit that had absorbed Sanchez, but I also spoke with some individuals from the other business unit. Clearly frustrated by the integration, executives and employees alike were eager to share their perspectives on what led to its disappointing results.

The post-mortem identified three key problems in the combination process: the partners did not have a shared view of the desired end state of the integration, integration planning teams produced meager recommendations and leadership was denying or ignoring the human and cultural issues in the integration.

LACK OF SHARED VIEW OF DESIRED END STATE
Executives from the combining organization did not have a shared view of the desired end state of the integration. The people I spoke with from the buying company used language like “acquisition” and “integration” to describe the deal. Counterparts from the selling company, in contrast, spoke of “merger” and “hands off.” When I shared this finding with CEO Stiller, he confessed that he and Donald Sanchez “were not on the same page when we initially discussed the combination, but I assumed that he would come around during the integration process.” This is wishful thinking. My experience is that if executives do not have a meeting of the minds during merger negotiations, there is no reason to believe that they suddenly will after the ink dries on the acquisition contract.

As a first step in resuscitating the integration process, I coached Stiller to put a stake in the ground by clarifying his expectations for the combined organization. To assist him in doing this, I showed the CEO a figure* called “Defining the Post-Combination End State” and asked him where he saw the combined HD/Sanchez organization landing. Corporate services—areas like finance, marketing, IT, and human resources—were to be HD way, with the acquired company conforming to the acquirer.

Stiller wanted to build on the strengths of both partners in the core area of software development, however, and pointed to the “Best of Both” cell in the middle of the figure which indicates that the area is additive from both sides. Nowhere was there to be a “hands-off” relationship between the combination partners.

(*A copy of the figure, "Defining the Post-Combination End State," is available by writing to info@focusbankers.com.)

Next, Stiller convened a meeting of key executives of Sanchez and the HD business unit into which it was being integrated. He carefully outlined his rationale for the acquisition and then presented his desired end state as a “non-negotiable.” He invited questions and comments about the degree of integration he was looking for, but ended the meeting with a clear message that each individual in the room either had to “sign up or ship out” for the desired end state.

After a weekend of soul searching, acquired CEO Sanchez came to Stiller and committed to supporting the integrated organization. While one acquired executive quit in protest, the large majority of Sanchez executives followed their leader in supporting the desired end state. The lesson learned from the post-mortem: straight talk from the buyers up front prevents wishful thinking by the sellers from delaying integration.

UNPRODUCTIVE INTEGRATION TEAMS
Soon after the acquisition became legal, Stiller convened six task forces to identify integration opportunities. As occurs in most combinations these days, these teams were supposed to recommend ways to achieve the objectives of the integration. Based on reports provided during the post-mortem interviewees, however, the output from these teams was abysmal. Interviewees cited three specific complaints—the teams suffered from unclear charters, poor leadership and dysfunctional group dynamics.

Integration planning teams can make or break a combination. Either team members have a positive experience and report back to their constituencies how they are working well with new counterparts and producing high quality work; or, they go back and report negative experiences of domination, politicking, and low quality decisions. This sets the tone for how the vast majority of employees not directly involved in integration planning view the combination.

At HD, three steps were taken to revive the integration planning process:

Re-focus the process. Stiller set up an Integration Steering Committee to spell out clear charters for integration teams and specify the criteria that would be used to evaluate the team’s recommendations. The teams’ charters were linked to the newly articulated desired end state for the combination.
Re-staff the teams. Initially, integration teams were staffed with function heads and their direct reports. This perpetuated status quo thinking rather than openness in deliberations. I advised Stiller to select integration team leaders who were more diplomatic than dominating. Even with teams with charters which specify that the lead company’s ways will predominate, the style brought to team meetings by leaders who reach out and listen to participants from the acquired organization makes all involved feel more like architects of change and less like victims.
Re-start the teams. Comments about how the transition teams were conducting their work included common complaints about ad hoc decision making teams—hidden agendas, multiple conversations, and members agreeing to something in the room and then badmouthing it outside the meeting. When the stakes are high in integration planning, it is difficult for team leaders and members to keep an eye on team process (how the team goes about its discussions) along with team content (what the team is discussing).

DENYING OR IGNORING HUMAN AND CULTURAL ISSUES
The merger post-mortem revealed symptoms of what Organizational Psychologist Philip Mirvis and I have dubbed “The Merger Syndrome”—tremendous employee uncertainty and stress, constricted communications, distraction from performance and the clash of corporate cultures. (Our research has shown that the merger syndrome occurs in even the most carefully planned and best managed integrations.)

Employees spoke of their upset with leadership for keeping them in the dark on integration activity, expressed concern about how the integration could adversely affect company performance and cited examples of on-going culture clash ranging from very different compensation philosophies to meeting starting times.

Senior executives can “win back” employee support by clearly acknowledging, rather than denying or ignoring, the human and cultural dimensions of the combination. To demonstrate awareness of the human and cultural issues raised in the post-mortem interviews, Stiller asked me to conduct venting meetings with employees. These sessions let people blow off some steam by expressing their concerns about the acquisition, but also engaged employees in understanding why the deal occurred and how they could contribute to its success.

“Maintaining Productivity During Transition” workshops for team leaders were initiated to help them keep their employees focused on short-term business objectives. Culture clarification activities were used to educate both sides on their partner’s values, interpersonal behaviors, and business practices, overcome misperceptions about the culture and take a step toward building a “one company, one team” mindset. This put culture “into play” and, after Stiller articulated his “cultural non-negotiables,” engaged employees from both sides to discuss how to build a shared culture within that context.

ON THE ROAD TO RECOVERY
It is still too early to tell whether these and other activities will put the HD-Sanchez integration on the path to success. One thing is certain, however: new life has been breathed into the combined organization. The energy of managers that had gone into bickering and politicking about whether this was a “merger” or an “acquisition” now is being directed toward offering combined products and services.

Transition team members are reporting productive meetings resulting in consensus and high quality problem solving. And, rank-and-file employees are having fun with the work of building a new corporate culture that benefits from the partners’ strengths and addresses their weaknesses. The feeling among all involved is that this patient is making an excellent recovery and is well on the road to a long, prosperous life.

A merger or acquisition often exposes on-going issues that linger in organizations. It also presents an opportunity to address them as the organization moves through the integration process. However, as the HD-Sanchez case shows, doing so requires the collection of accurate data, the acceptance of the data and the commitment of senior executives to back up the data with their actions.

Mitchell Lee Marks, Ph.D., heads JoiningForces.org in San Francisco (www.joiningforces.org). He is the co-author of Joining Forces: Making One Plus One Equal Three in Mergers, Acquisitions, and Alliances and regularly advises executives on issues related to organizational change and transition. He can be reached at 415.436.9066 or at MitchLM@aol.com.

Mark Capaldini Becomes a FOCUS Equity Partner

Washington, DC, April 20, 2004--Marshall Graham, Chairman, FOCUS Enterprises, Inc. today announced that Mark Capaldini became an equity partner in the firm effective April 1st.

“We are delighted with Mark’s decision to become a FOCUS equity partner. Our association with Mark goes back a few years when he was associated with Holland & Knight Consulting. Mark showed a real enthusiasm for assisting HK with developing its consulting and M&A activity. We are fortunate that Mark has joined FOCUS where he is supplying the same enthusiasm, dedication and leadership,” explains Graham.

Graham continues, “Since joining FOCUS, Mark has made a real contribution in the areas of strategy and the firm’s market positioning. He really has been an informal member of he firm’s management team. Today, we are formalizing Mark’s management contribution by appointing him as Chief Marketing Officer.

“The job of a FOCUS equity partner demands personal execution of multiple client assignments, spending a great deal of time selling new prospects, and dedicating time assisting the firm with its overall growth objectives. Mark has demonstrated that he can balance all of these activities very well. We welcome Mark’s future contribution working closely with us to meet and exceed our growth plan,” concludes Graham.

REALIZING & PRESERVING VALUE: A New Workshop for Business Owners

To help business owners and CEOs assess the risks and opportunities of selling a business, FOCUS Enterprises, along with four other firms – SES Advisors; Bernstein Investment Research and Management; McCullough & Nicholas, P.L.C.; and Planning and Strategic Solutions, L.L.C. -- is hosting Workshops exclusively for business owners and CEOs.

Business Owners and CEOs Gain a Wealth of Valuable Information
Whether you’re driving your business to the next level, considering corporate finance options or M&A activity or simply planning your personal finances, this new Workshop supplies excellent take-home value. Workshop participants will learn how to:

• Position a company to maximize the valuation multiple
• Prepare a company to maximize the sale price
• Time when to begin preparing for the sale
• Minimize personal taxation on the transaction
• Determine exactly how much is needed to retire comfortably
• Execute the process successfully

You’ll gain useful and actionable information in intense, interactive half-day Workshops meeting from 7:30 am through 1:30 pm. In the Washington DC area, the program also is being presented in two shorter breakfast sessions from 7:30 to 9:15 am.

The Program and Format Ensure Value for Participants
We can’t over-emphasize the value of careful advance planning, even for events that may be two or three years away. For example, you need to set up trust structures well in advance of a transaction. Also, in order to understand the right "threshold value" for an M&A transaction, pre-transaction planning on income is required.

As a Workshop participant, you’ll receive materials that supply the tools you need to assess your own specific situation, opportunities and needs during the course of the Workshop. In each session, you’ll also have ample opportunity for asking questions. At the close of the Workshop, a panel discussion features a general Q&A session. Presenters also are available for informal discussion during breaks and at the end of the Workshop.

Each Presentation Will Contribute to Your Understanding of How to Maximize, Realize and Extend Value

BUILDING VALUE
DISCOVER THE FACTORS THAT DRIVE UP THE VALUE OF A BUSINESS
Doug Rodgers, Managing Partner, and Mark Capaldini and George Shea, Partners, FOCUS Enterprises, Inc. (www.focusbankers.com), will outline both operating and transaction drivers that build the value of a business. A “scorecard” for the Twelve Value Drivers in a business will be shared with Workshop participants. Various transaction types, including negotiated transactions, the auction, mini-auction, and the partial sale also will be discussed.

CONVERTING VALUE
ADVANTAGES OF A LEVERAGED ESOP TRANSACTION FOR PRIVATELY HELD COMPANIES
James F. Higgins, Jr., a principal and shareholder of SES Advisors (www.sesadvisors.com), will explain the ESOP process with special emphasis on the advantages to a privately held company and its shareholders. You will learn about ESOP feasibility analysis, transaction design and execution, raising debt capital, and plan record keeping ensuring that your ESOP transactions are optimally structured to address your ownership transition objectives.

SHIELDING VALUE
STRATEGIES TO MANAGE THE TAX IMPACT OF LIQUIDITY EVENTS
John E. McCullough, Esq., and Stefan C. Nicholas, Esq., partners at McCullough & Nicholas P.L.C. (www.mntaxlaw.com), will introduce a variety of legal strategies important to business owners: (a) Selling Your Company and Preserving Your Wealth: Tax-Deferral Strategies for Sales to Third Party Buyers and ESOPs; (b) Estate Planning for Retirement; (c) Family Limited Partnerships; and (d) Other Estate Planning Vehicles.

PROTECTING VALUE
PROFIT FROM INNOVATIVE EXIT AND RETIREMENT STRATEGIES
David M. Bekenstein, Managing Director, Planning & Strategic Solutions, L.L.C. (www.pandss.com), will reveal innovative exit and retirement strategies for small to medium-size businesses designed to affect tax deferred cash withdrawal or sale of a company using insurance, investments and annuities to manage taxes during and after exit.

PRESERVING VALUE
HOW MUCH DO YOU NEED? A UNIQUE APPROACH TO PLANNING AND PERSONAL WEALTH MANAGEMENT
Joseph M. Perta, Vice President, and Michael A. Bono, Vice President, Bernstein Investment Research and Management (www.bernstein.com), will bring together a sophisticated understanding of the capital markets and in-depth knowledge of how various estate planning vehicles work, sharing a framework to help business owners best meet their personal financial objectives, both during and after the transaction planning process.

June 22nd Workshop in Washington, DC is being Co-sponsored by the U.S. Chamber of Commerce
The June 22nd Workshop will begin at 7:30 am and continue through lunch until 1:30 pm. Two Washington DC breakfast Workshops (Sept. 21 and 28) split the content into two 7:30 to 9:15 am sessions.

June 22 Washington, DC Half-Day

Sept. 21/28 Washington DC Breakfast Workshop

*The U.S. Chamber of Commerce does not endorse the participating Workshop partners or their products.

Who Should Attend?
Individuals who will benefit most from this unique Workshop include presidents, CEOs and owners of companies who are considering some type of sale or recapitalization within one to five years. Relevant companies are: private companies, public companies with revenues under $100M, government contractors, venture-backed companies, individual- or family-owned companies and companies who have or are considering ESOPs.

Reserve Your Workshop Now
Participation in the half-day Workshop or the two breakfast sessions, strictly limited to company owners and CEOs, is $275 each for the first participant and $125 for each additional person from the same company, payable in advance. Members of the U.S. Chamber of Commerce will receive a $50 discount when registering for the June 22nd Workshop.
Register online at www.focusbankers.com, call 202-785-9404, Ext. 233, or send an e-mail to B.Fleisher.Workshops@focusbankers.com.

About FOCUS Enterprises, Inc.

For 22 years, FOCUS has successfully assisted clients with corporate development consulting assignments; merger, acquisition, and divestiture engagements plus capital raising and capital formation assignments. In a mixture of services uniquely beneficial to clients, FOCUS integrates consulting and transactional expertise with superb research capabilities and precise, proven methodologies.

Unlike larger investment banks, FOCUS processes are optimized and proven effective in our target marketplace -- private companies or operating units with revenues in the $5 million to $100 million range. Eleven full-time FOCUS Partners provide well over a century of C-level operating experience in a variety of industries. Operating nationally and internationally, FOCUS works with buy- and sell-side corporate clients, private equity groups, holding companies and early stage venture capital firms in the following areas:

• Aerospace
• Government Contracting
• Healthcare
• Manufacturing and Distribution
• Media and Communications
• Retail
• Technology (hardware, software and services)
• Telecommunications

Your comments, suggestions and questions are welcome and encouraged. We want to hear from you.

You are receiving this newsletter because you have had personal contact with a FOCUS Enterprises partner or principal or have requested this newsletter on our website or have been contacted by FOCUS on behalf of a buyer, seller, corporate finance client or consulting client.

• Please contact us at: info@focusbankers.com
• Visit the Focus website at http://www.focusbankers.com