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The Ins and Outs of Mergers & AcquisitionsIMPORTANT CONSIDERATIONS IN FORGING NEW RELATIONSHIPS

WHILEthere are many metaphors that could describe the type of

experience a business merger or acquisition provides, one that

seems most applicable is that of "family" A corporate merger is

quite similar to a marriage, and the acquisition of a business has

many parallels to adoption. Each of these business transactions

results in not only new relationships on a personnel level, but also

on an "entity" level. Regardless of which

type of these your company becomes a

party to, there are common issues in all

mergers and acquisitions that you should

be aware of, plan for and resolve.

Artificial Life

First, we have to understand what a

"business" is - an artificial being.

Secondly, we need to understand that

each of these artificial beings was givenlife under certain conditions and rules.These conditions and rules are set out in

the corporate statutes of the state of

birth (incorporation), and the Articles

and Bylaws of the company Manage-

ment (humans) of the company are

given the responsibility of seeing that

the company develops and exists under

those conditions and rules. During the time of its artificial life,

those rules may have been ignored, bent or broken by the

company. Or maybe no laws were broken, but the business diet

was poor and exercise nonexistent. Consequently, this artificial

life may have developed severe complications, sicknesses or

addictions that are not easily detected.

Family of Companies

Whether you are marrying (merging) or adopting (acquiring), you

certainly want to be concerned about your future spouse, parent orchild. In the case of human life, as responsible adults, we take

familymembers to the doctor for a thorough check-up. In the case

of artificial life, such as companies, we turn to attorneys and

accountants, and perhaps other specialists such as business valua-

tors, market analysts or management specialists. Regardless of who

is involved, the key is to find out as much as possible so you can

know exactly what you're getting your company into by creating a

new "relationship." Scrapes and bruises can be patched up. Broken

bones can be reset and given time to heal. Even deep cuts can be

sewn shut. All the foregoing involve varying degrees of time, energy

48 january2004

I

By Nathan Drage

and money But what about infectious and incurable diseases?Arti-

ficial persons (companies) can have those too. You, as a member of

a management team, will have to decide how much illness, if any,

your company can handle. Its not unusual for management to

believe they are going into a marriage with a partner of Olympic

strength and skills, only to later find out that it was all due to

steroids, or that the new partner is even

a different gender than originally

claimed. You certainly want to keep

those honeymoon surprises after the

marriage (closing) to a minimum.

Mergers

From a legal standpoint, a merger is

exactly that: two separate legal entities

becoming one. In the case of themerger, the parties will decide which

entity will cease life under the state of

its birth (incorporation). Thus, a New

York company may merge into a Utah

company. In doing so, the New York

company is no longer recognized as

"living" - it ceases to have legal exis-

tence as a New York entity Because a

merger requires that two companies

become one, tensions often arise. According to Ronald Poelman,

an experienced corporate/securities attorney at Jones Waldo, "In a

straight merger, the thing everyone fights about is control. Two

companies must become one. There is an inevitable fallout. Whowill be the members of the board of directors? Who will be the

CEO and CFO? These negotiations become personal and can evenkill the deal."

This merger of liabilities coinciding with the merger of busi-

nesses makes the "due diligence" process critical. The owner of a

restaurant should think carefully before merging with the inde-

pendent hamburger stand that has pending lawsuits for food

poisoning. All the assets of the restaurant will now be subject to the

litigation existing, pending or yet unfiled against any business

Regardless of who is involved, thekey is to find out as much as possibleso you can know exactly what you'regetting your company into by creatinga new "relationship."

entity it merges with. Fortunately, identifying

existing litigation against a company is noweasier to learn about than it wasjust several years

ago. Many states now make court filings accessi-

ble through the Internet. But, there is more to

due diligence than just lawsuits. Financial state-

ments and the story they tell are also critical

factors. Having experienced accountants reviewthe financial statements will be an important

aspect of the due diligence process.

"Ina straight merger,the thing everyonefights about is control.Two companies mustbecome one. There is aninevitable fallout... Thesenegotiations becomepersonal and can evenkill the deal."RONALD POELMAN, JONES WALDO

According to Dallis Christensen, CFO of

Layton Construction, so-called "legal" and

"accounting" issues are sometimes easier to iden-

tify than other issues that are equally significant,

such as strategic value and cultural fit. "When

someone is selling their business to your

company,make sure you have a firm grasp on the

reason why," he says. The reason "why" may

appear clear on the surface, but digging deeper

may reveal conditions the sellers didn't disclose,

whether intentionally or because they were only"sensed" on a subconscious level by the owners.

'Trend analysis is critical. Indications of trends in

any direction, whether toward profit increases or

decreases, requires thorough analysis. Thats why

due diligence is so important," says Christensen."Youfirst have to find the trend on paper, and

then have the seller explain what they see and

why Then, after reaching your own conclusions,

you have to decide what it all means to the over-

all strategic reasons for purchasing the company

in the first place."

Accounting problems of your intended

merger partner, including misstatements ofrevenues, costs and profits, will all become inte-

grated into your company So, particularly in

the case of mergers, Christensen notes, "Plan for

a sufficient amount of time for accounting due

diligence."

Acquisitions

In contrast to a straight merger, an acquisitionallows for the two businesses to retain their sepa-

rate legal existence. One company simplybecomes the "parent" to the other company This

structure keeps the liabilities of the new

subsidiary separate from the assets of the parent

and thus is often the preferred method for busi-

ness combinations. But, even though the busi-

nesses will remain as separate entities, one

company is "adopting" the other. Consequently,even an acquisition requires all the strategic and

cultural integration of a straight merger. It will

also require some integration of management

personnel. Finally,just as in a straight merger, the

parties to an acquisition should conduct thor-

ough due diligence of each other.According to Poelman, "In an acquisition, a

larger company is usually acquiring a smaller

one. But most larger companies use their ownstock to do the deal. This means that both

companies are really buying each other. For thisreason, I recommend that each side thoroughlycheck out the other. After the deal, there will be

a parent and a subsidiary, but the shareholders

will usually all be combined."

Happily Ever After?

A merger or acquisition will affectyour company

Management should discuss the length of time

from engagement (Letter of Intent or

Merger/Acquisition Agreement) to the date of the

marriage (closing). During that time, see each

other frequently (meetings, on-site visits). Get to

know the person (company) very,very well. Andconsult your doctors (attorneys and account-

ants). Otherwise, you just never know what you

might find out after the ceremony You may getexactly what you wanted and live happily everafter. Or not. Which leads to a final point. You

think marital divorce damages lives?A business

divorce can be just as bad - or worse.

Nathan W Drage is a corporate and securities

attorney in Salt Lake City.

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