Mergers and Acquisitions For Dummies (89 page)

Failure to record liabilities correctly:
Often, Buyer may claim Seller didn't properly record employees' accrued (that is, unused) vacation.

If Buyer disputes the value of working capital and asks for a substantial post-closing adjustment, Seller may have to live by the terms of the purchase agreement. This situation can be costly for Seller; a Seller in this predicament should consult with his attorney.

The Buyer's post-closing working capital calculation can be a classic “Seller beware” moment. An aggressive Buyer may create some issues by claiming Seller didn't properly account for certain assets or liabilities.

Balance sheet discrepancies may be due to changes in accounting software and treatment. A Seller may use a relatively simple off-the-shelf accounting package and a local accounting firm. A Buyer, often larger and more sophisticated than a Seller, may use a far more robust accounting program and may employ one of the big-time accounting firms (colloquially referred to as
the Big 4
). This difference in sophistication can lead to a discrepancy in results.

Breaches of representations or warranties

In a typical purchase agreement, Seller provides Buyer with a slew of promises known as representations (reps) and warranties (see Chapter 15). A breach occurs when Buyer disputes one of those reps or warranties. Essentially, Buyer is claiming, “The business wasn't as I thought it was.”

Common disputes can include undisclosed pending litigation, financial statements with mistakes or omissions, an undisclosed material liability (such as a large unpaid bill of the company), and illegal immigrant employees.

If Buyer claims a breach of a representation or warranty, she usually makes a claim to money held in escrow (see the following section). But escrow is only Buyer's first recourse. If the breach is egregious enough, Buyer may end up suing Seller.

The purchase agreement defines Buyer's recourse. If Buyer suspects Seller of breaching the purchase agreement, Buyer should immediately speak with her attorney.

Making claims against escrow

The myriad representations and warranties Seller provides Buyer in the purchase agreement forms the basis of what, if anything, Buyer can claim against escrow. In other words, if something Seller says is inaccurate or false and causes harm to Buyer, Buyer can make a claim and recoup money from the escrow account.

If Buyer discovers a problem or suspects a breach by Seller, Buyer usually informs Seller, and Seller has some amount of time to either reimburse Buyer for the damage or to contest the damage. If Buyer and Seller are unable to settle the issue, the issue may go to court.

The purchase agreement lays out the process for Buyer to make claims against escrow as well as the recourse for Seller to dispute those claims. Consult with your attorney about how best to proceed with making a claim against escrow or disputing a claim.

Chapter 18

Come Together: Integrating Buyer and Seller

In This Chapter

Creating a plan to ensure a successful integration

Streamlining the parent and acquired company's products and services

Bringing together operations, accounting, and technology

Handling cultural differences between Buyer and Seller

Instituting and enforcing new rules and accountability measures

B
uying a company can be a time-consuming, complex, and frustrating process, but integrating that company with the Buyer's existing company can be surprisingly time-consuming, complex, and frustrating, too.

Buyers often think that after the deal is closed, the two entities will somehow naturally fit together with little or no work. But going into the post-closing phase of the M&A process without proper preparation can be fatal to the company. Far too many M&A deals fail for wont of proper planning and realistic expectations.

In this chapter, I introduce you to the world of post-closing M&A integration. I cover some of the operational aspects deal-makers face (technology, products, accounting, and so on) as well as the far-too-often underreported area of personnel issues and personality conflicts. This may be the most important chapter of the book.
Note:
Although this chapter primarily offers advice for Buyers, I strongly encourage Sellers to read it as well. Regardless of what side you're on, the information here can help smooth your integration process.

Don't let your own worldview bias you. Don't expect other people to work and think the same way you and your colleagues do; how would you feel if someone came in making such assumptions about you?

Planning the Integration

Two companies don't integrate unless the managers of those companies work together in a coordinated fashion to figure out how, what, and even whether to integrate. Making the integration issue trickier is the fact that no two integrations are the same.

The following sections break down some of a Buyer's integration considerations.

Assembling a Buyer's transition team

In preparation to take over a company, you should have a dedicated transition team in place. I recommend assembling this team as early as the due diligence phase (see Chapter 14). This team generally includes the following members:

A financial person (often the CFO or another high-ranking financial executive) interfaces with the acquired company and answers questions pertaining to banking, payroll, working capital, and so on. The financial person also may or may not be able to handle questions regarding operations (order processing, customer service questions, vendor relations, and so on).

If the financial person isn't the one to answer operations questions, a separate operations executive should be available.

A human resources (HR) person should be available to help the employees of the acquired firm with any paperwork they need to complete (401k, tax information, insurance documents, new hire paperwork, and the like). The HR person also distributes the employee handbook and is on hand to answer questions, which may involve some handholding for some of the employees. A change in ownership can be a shock for some people, and they may need a little extra attention to help them deal with the new situation.

You want an IT person available to help the employees of the acquired company with any technological issues (phone, Internet, computers, software, e-mail, and so on). This team member is especially important given the prevalence of computers and the Internet in almost every facet of almost every job today.

Determining the level of autonomy

One of the most basic questions you face as a Buyer after the deal closes is, “What the heck should I do with what I just bought?” On paper, combining two entities may seem easy, but in reality, that integration is much more complex. Further, the level of integration varies greatly from Buyer to Buyer.

Financial Buyers, such as private equity (PE) firms, usually allow the acquisition to maintain a level of autonomy, especially if they're not integrating the acquired company into another firm but rather running it as a standalone business. These Buyers are in the business of buying and selling businesses and therefore aren't in the same industry as their acquisition; although they may make some operational changes, financial Buyers typically let the acquired company run itself.