By design, merger transactions can have significant strategic value to two parties with different yet complementary operating models and philosophies. While these operating and cultural differences can yield a stronger and more complete organization, they can also make for a difficult transaction process—which in turn may put at risk the great strategic potential contemplated by the combination in the first place. This article illustrates this common transactional phenomenon and proposes several techniques to ensure that tension inherent in opposing but complementary business philosophies does not prevent a stronger combined entity.
Consider the following fact pattern:
Company A, a small but growing engineering firm, achieves great success in the industrial sector as it provides the same sophisticated services offered by the largest engineering firms in the world, but with client responsiveness and agility common in smaller firms. This responsiveness and agility, combined with some entrepreneurial risk-taking, contributes to better profitability. At the same time, Company A needs a succession plan, deeper operational resources, and the resources of a large engineering firm to continue to support its growth. Company B is a $1 billion international firm with depth and sophistication of resources to support growth. Overly conservative because of adherence to strict operational processes, Company B is laden by bureaucracy and lack of responsiveness. While possessing deep marketing and other operational resources, the organization is too heavy and sluggish to penetrate the fast-growing industrial sector. Furthermore, layers of oversight and conservative decision-making contribute to limited risk taking—and lower profitability.
Like all successful merger transactions, Company A and B realize they can both benefit from becoming one. The merger gives Company A the scale and international access needed to continue its growth. For Company B, the merger introduces a culture of vibrancy and entrepreneurship that contributes to far greater profitability on its core business. However, in classic “Catch 22” fashion, the same factors that make the transaction such a synergistic fit and success make it more difficult to execute from a transaction perspective. The exact characteristics that each needs in the other turn out to be those that cause trouble during diligence and legal documentation. Company A is concerned that greater recordkeeping and other administrative burdens from integration into Company B will impair the flexibility that makes it successful and profitable; likewise, Company B is concerned that it will be unable to keep up with the more agile and entrepreneurial Company A and is uncomfortable with some of its historical risk profile. And both parties—relying upon their historical culture—are emboldened in their transactional positions, while acknowledging they need the other’s culture to survive and grow in the future.
So how can two very different parties that need each other so much ensure that the fantastic transaction benefits are not lost to cultural differences? While it’s easy to say that both parties need to understand the other’s perspective, seasoned transaction professionals know this is easier said than done, particularly in the heat of transaction negotiation. While there is no foolproof plan to ensure a transaction stays on track in this situation, a few tactics can be employed to prevent the Catch 22 from destroying a potentially perfect combination.
The cultural differences that often come with the greatest strategic fits can be exacerbated by transaction-process functions. When parties can work through cultural differences during this process, the potential for a promising partnership is assured.
© Copyrighted by EdgePoint. Paul Chameli can be reached at 216-342-5854 or via email at firstname.lastname@example.org.