How to M&A

Early in my career I discovered that a MERGER could be spelt MURDER if you were not careful. The massive Food and Beverage business for which I worked employed around 145,000 people, mostly in the British Isles. That made them big acquirers – but not always successful ones. In fact, they had acquired an average of a company a day for nearly five years when I joined them. One classic story is about a business that the company acquired in 1969.

It wasn’t a major acquisition – about £16million, not insignificant for those days but nothing very grand. The Chairman bought it on his own over dinner at the Savoy on a promise of £4.5million profit before tax. It should have fitted nicely into the portfolio of grocery businesses that we had at the time. Part of the deal was that the business would be left alone for four years – a crazy term to agree to but it was written into the purchase agreement. My company honoured it. Rumour soon told us that it was in trouble but nobody saw the figures or met the people so we didn’t know.

One day, four years after we bought the business, the Chairman called me. On the phone he said that the last senior manager had just left the business and please could I go there and take over. He added that if I didn’t know the way the Personnel Director would give me a map!

On arrival I found the garage empty except for six drivers standing around smoking. I parked in the most convenient space. A driver sidled up to my car as I was getting out and said “I wouldn’t park there if I was you”. I asked why. He said it was the bosses parking space. I told him I expected the car to be cleaned, filled up and oil checked by the time I returned in one hour. When I returned, it had been done. This was the first instruction that had come from the acquiring business. It was four years overdue.

Clearing up the shambles that had brought the business to just break-even took several more years. The culture change required to make it work again was profound. The old shibboleths that surrounded the company included the top management dining room lunch being served at 1.50pm exactly. A former Chairman had enjoyed watching the noon sports report on television before tucking into his repast. He was long-since dead but the rule persisted.

If KYC is important for bankers, KYA (Know Your Acquisition) is critical for acquirers. Due diligence done properly tells you something, but it is only the surface of the acquired. Below this superficial assessment is a history of failure, learning and rule-making about half of which is inappropriate today. The other half may constitute excessive protection from threats real or imagined. “It is the barbed wire of aggressive protection that stifles business progress.”

In my story above, the place we learnt the facts about the company we had bought was in the canteens of the factories, in the pubs near our distribution points, in the industrial lounges where local managers repaired after work for a coffee or a glass. Rationalisations we might have made often turned out to appear to be barbs of interference for minimal gain. The old belief that rationalising the services would save you a lot of money was a myth. It often paid not to disrupt these pettifogging things until the major benefits of acquisition had been realised.

R&D synergies were welcomed by the acquired as was meeting managers of greater experience and breadth. Inevitably there was competition and challenge but this could be handled by not making the mistake of thinking that the acquirer was superior. We set about convincing our managers that the acquired company executives were guests at our table and were to be treated as such. I also learned early that the way they recorded their accounts was preferable to trying to make them conform to our financial presentations. Getting them to explain their accounting process was the quickest way to establish if the acquired really knew their business.

Finding the line between excessive disruption and inadequate rationalisation was never easy because it was a moving target. We paid a lot of attention to it and it turned out to be the biggest single non-people factor in turning the business around.

When we got it right it proved to be justification for the price paid.

It’s true for any business that’s been acquired.