M ER G E R M A N I A A pro shares his insight on what it takes to succeed. By Milton H. Barbarosh

Buying a company or forming a partnership with another is one of the most complex strategic moves a company can make. Whether the deal involves two small local businesses with a combined 20 employees or medium-sized companies with just under 100 people, it requires much more than simply putting the two pieces together.

The potential rewards are many. The new relationship can help a company grow by broadening product lines, increasing market share, strengthening financial posi-tion, stabilizing a cyclical or seasonal busi-ness or providing a key executive or tech-nical talent.

But despite the number and size of headline-making deals in recent years, sta-tistics show that fewer than half of the mergers and acquisitions succeed.

Why? Going forward with a merger and acquisition strategy is risky. In addition to the more typical business uncertainties (competition, pricing volatility, product obsolescence), acquirers of all sizes face three additional risks in varying degrees:

Operating risk. The acquired business does not perform as well as forecasted after the transaction has been completed. If the acquirer does not have a sound post-acqui-sition integration plan, or execute that plan well, it will be hard to reach the operating goals needed to justify the purchase price of the acquisition.

Overpayment risk. Many situations can lead an acquirer to overpay for a company, such as over-estimating the market poten-tial of its products, under-estimating the impact of competition, over-estimating the synergies between the two companies (which can lead to overly optimistic projec-tions of cost cuts or operating efficiencies) and haste driven by a desire to "do the deal" or to beat the competition.

Financial risk. Mergers and acquisitions can be financed in many ways. In cases where debt is used either to finance the transaction or assumed as part of the trans-

Milton H. Barbarosh is the president of Stenton Leigh Group, Inc., of Boca Raton, Florida. The company is a financial advisory firm with mer-chant banking capabilities. It provides in-depth con-sultation services requiring a wide range of related corporate expansion and re-organization services.

action, there is the potential that the com-bined organization will not have sufficient financial resources to meet debt service requirements.

So how does a company considering a merger or acquisition reduce or avoid these risks? Start with sound, targeted objectives. Mergers and acquisitions that strengthen a current business are more likely to succeed than those that diversify and expand into related markets and products.

But sound objectives don't necessarily guarantee success. Companies must also thoroughly address two critical chal-lenges—integrating the two companies and then strategically leading the new company.

Integrating the two companies involves detailed planning from the outset, identify-ing sources of value and how to capture them, managing the inevitable challenges of cultural change and ensuring expert leadership.

Once the merger is complete, the new leaders must identify, enhance and leverage the unique capabilities of the new entity to maximize profit and growth. They must then create a vision for the new company—either as a leader in its industry or as a com-petitor in a new way going forward. Both elements are necessary for success.

The following are some of the specific best practices of companies who have suc-cessfully merged with or acquired other companies:

Build a robust plan detailing integration activities: On average, two-thirds of merg-ers that lacked specific implementation plans prior to closing the deal were unsuc-cessful.

Prior to closing, the companies should clearly define their objectives and create a detailed, time-specific battle plan that encompasses all integration activities. This could include consolidating finances, learn-ing the business and establishing priority projects.

Appoint a strong executive to lead the integration process: A company needs a strong leader to "sell" the new company's vision internally, unify and direct the man-agement team, and establish confidence with employees, customers and the general public. The executive should use this time to create new vision, strategy, business opportunities, as well as long-term sustain-able growth. Senior management or key

personnel should also be involved. Compress change duration by taking

bold strokes early: People expect change during a merger or acquisition, so the faster a company can implement it the more con-fident investors, employees and customers are with the new company. Slower integra-tion may cause frustration and doubt and encourage many to jump ship.

Set out credible milestones and maintain pressure for progress: It's hard for manage-ment and employees to perform to their potential without knowing what's expect-ed, especially in times of uncertainty.

Move quickly with regard to personnel changes: The faster the company's team is implemented the faster it can capitalize on new capabilities and create profits.

Adopt best practices from either compa-ny or external source: In joining two com-panies, each will bring certain proven strengths, be it product development, employee training, internal communica-tions or management techniques. Once owners or executives decide on which best practices to adopt, task forces with people from both companies should begin inter-acting as soon as possible.

Emphasize the transfer of critical capa-bilities to capture value. Every business has key factors that have made it success-ful; management practices, operating effi-ciencies, equipment specifications. These must be seamlessly transferred to the combined entity to be successful. Whether a merger or acquisition is on the scale of a Time Warner/AOL or two local entrepreneurs who have been friends for years, the same challenges, pitfalls and therefore guidelines apply. These deals are not for the faint-hearted. But for those who are willing to put in the time and energy to meticulously go through the extensive process, the rewards can be substantial. •

Walt McGovern

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