Mergers & Fold-ins

One of the fastest ways to create – or destroy - value is to merge with a competitor or other company in a closely related industry.  VR can help companies contemplating a merger assess the potential benefits and risks, navigate these complex transactions, and overcome the substantial financial, organizational and negotiating challenges.

When successful, mergers can create extraordinary value.  Locally, in 1995, four of the top real estate companies on Oahu merged to create Coldwell Banker Pacific Properties.  Coldwell still leads the market 13 years later, and was itself recently acquired by Cendant.  Central Pacific doubled its earnings after acquiring City Bank in 2004.  Similar transactions, on a much smaller scale, occur regularly in Hawaii.

A common misperception about mergers is that the companies involved need to be of the same size, resulting in equal ownership. More commonly, the businesses bring significantly different levels of resources to a merger and accordingly the owners do not share equally in the new company. A "fold-in" is a variation of a merger in which a subset of the assets of a smaller company, such as customer accounts, select employees and certain equipment are "folded in" to the larger company and the smaller company ceases to operate.

Mergers with companies in the same or closely related industries (e.g., customers and suppliers), can add value in a number of ways:

• Improved economies of scale in countless areas, including advertising, purchasing, transportation, warehousing, recruiting, etc.
• Increased control over prices (by reducing competition)
• Ability to offer a more comprehensive suite of products or services to customers
• Cross selling of one merger partners products or services to the other partners’ customers
• Enhanced quality and reliability through vertical integration
• Increased brand awareness
• Improved lifestyle for owners, as added management talent enables reduced workload and more vacations
• Dramatically higher valuations.

Unfortunately, mergers fail at an alarming rate, both in the process of consummating the merger and in execution after the fact.  Obstacles to consummating a successful merger include:

• Rumors of a potential merger of acquisition start to circulate among employees, customers, suppliers or others, damaging the businesses
• Reaching agreement among the various owners on the division of equity, titles, responsibilities, compensation, etc. in the combined entity
• Gaining agreement on what confidential information will be exchanged as part of negotiations and due diligence, particularly when there is still great uncertainty on whether a deal will happen
• Reaching agreement on the integration and rationalization of staff, facilities and equipment, product and service lines, etc. in the combined entity
• Establishing trust that the owners can work together effectively after years of competition
• Developing consensus on an exit plan, buy-sell agreement and other contingency plans.

Assuming the above problems are overcome and the merger is completed, numerous additional challenges may arise after closing, including:

• Difficulties integrating product and service offerings, critical operational systems, procurement and billing functions, inventory management, incompatible computer or software systems
• Conflicts between the two former owners
• Culture clashes and disputes among employees in the two entities
• Employee departures, and/or fear among remaining employees about job security and stability
• Loss of customers or suppliers concerned about the impact of the merger or resulting from declining service levels from above issues
• Failure to realize expected synergies.

In short, a merger with a direct competitor, or another company in a closely related industry, is often the ultimate high risk, high reward strategy.  Given the extraordinary stakes and formidable obstacles, we believe it is imperative to obtain the assistance of an experienced, professional intermediary.

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