Harvesting ◾ 345
purchasing agreements, or long-term supply or toll agreements, with each
party owning 50% of the intellectual property plus other non-tangible assets.
A merger & acquisition (M&A) is a general term used to refer to the
consolidation of two independent companies to form an entirely new com-
pany, while an acquisition is the purchase of one company by another in
which no new company is formed.
15.6.1 Drivers of M&A Activities
“You name the price. I’ll name the terms.”
Historically, M&A presents management with the following hard-to-resist list
of opportunities:
Geographic expansion
Market leadership position
Broadened intellectual property portfolio
Becoming a larger company
Manufacturing and distribution synergies
Immediate increase in infrastructure
Broader product offering
Every M&A transaction has its own set of unique reasons for combining
the two companies. From management’s standpoint, the underlying principle
behind an M&A transaction is deceptively simple: 2 + 2 = 5. The value of the
acquirer is $2 billion and the value of the acquired is $2 billion, but when
we merge the two companies, the market values the new entity as $5 billion.
This is classical “synergy.”
In addition to perceived synergies, there are real strategic drivers to M&A
activities. Figure15.6 summarizes the strategic picture.
15.6.2 Advantages of Strategic Alliances
Traditionally, inorganic growth can be achieved by the judicious use of
strategic alliances. Strategic alliances are multifaceted, goal-oriented, long-
term partnerships between two companies. In a strategic alliance, both risks
and rewards are shared and typically lead to long-term strategic benets for
both partners, as summarized here:
◾ Adding value to products
◾ Improving market access
346 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
◾ Strengthening operations
◾ Adding technological strength
◾ Enhancing strategic growth
◾ Enhancing organizational skills
◾ Building nancial strength
In addition, strategic alliances display other advantages, such as those
seen in Figure15.7.
Strategic Alliance Options
Interdependence (hard to reverse)
Magnitude
Gold Zone!
$$
Degree of vertical integrationHighLow
Cooperative
venture
Joint
venture
Joint
ownership
Mergers
&
acquisitions
Figure 15.6 M&A: strategic drivers—Three compelling reasons for undertaking stra-
tegic alliances.
M&A: Strategic Drivers
“Push” factors
– Technology
– Increased regulation
“Pull” factors
– Use of equity as currency
– Greater liquidity
Vertical integration
– Global presence
– Entry into developing economies
Figure 15.7 Benets of strategic alliances—Summary of benets of strategic
alliances.
Harvesting ◾ 347
15.6.3 Pitfalls of Strategic Alliances
Buying all or part of a business is one of the most complex strategic moves
a company can make. Despite the number and size of headline-making
deals in the popular press, research indicates that the success rate of strate-
gic alliances is very low. Short-term stock price results can be summarized
as shown in Table15.2 (see also Figure15.8).
15.6.4 Best Practices
There are two schools of thought regarding mergers, acquisitions, and stra-
tegic alliances. Practitioners of the rst school argue that transactions are
accomplished by the hubris of the two respective executives, with details
Table15.2 Mergers and Acquisitions by the Numbers
4
Short-term stock price Seller’s price increases, whereas buyer’s
stock price decreases
Premium over pre-merger price = 38% Announcement price reaction:
Target = +16% Acquirer = −1%
Long-term performance Over 80% lost market value in the rst
two years post-transaction
Benefits
of Strategic Alliances
1. Increased
market share
2. Rapid market
entry
1. Shared Risk
2. Broadening
product line
1. Shared
knowledge
2. Providing key
technical
expertise
1. Enhanced
competitive
advantage
2. Stabilization
of cyclicality
Increased
bargaining power
Greater contribution
to value chain
Figure 15.8 Pitfalls of strategic alliances—For every advantage, there is a corre-
sponding disadvantage of strategic alliances.
348 ◾ The Guide to Entrepreneurship: How to Create Wealth for Your Company
negotiated later by the respective company specialists. The second school of
thought recognizes the intricacies of the transaction and develops a system-
atic methodology, thus increasing the likelihood of long-term success.
The establishment of a methodology for analyzing a potential M&A is the
difference between an amateur and an experienced buyer. Table15.3 pres-
ents a summary of best practices to be followed (see also Figure15.9).
At closing, a denitive agreement is reached. In contrast to the Letter of
Intent, which is non-binding, the nal agreement is denite; that is, it describes
all the necessary details relevant to consummating the deal, and is a legally
binding contract, subject to preconditions, such as shareholder approval.
The denitive agreement is a risk management device focused only on
the completion of the transaction, and contains a number of elements in
common, including these:
1. Parties to the deal. Species players and their roles.
2. Recitals. Species what the parties wish to accomplish, and is easily
identied by clauses that begin with “Whereas.”
3. Denition of terms. Mutually agreed understanding of the terminology
contained in the agreement.
4. Description of transaction. Purchase or sale of assets or equity, or
merger. Describes exactly what is to be exchanged, by whom, and when.
5. Representations and warranties. Enumerates mechanisms by which the
two sides disclose information about each other. A representation is
a statement of fact; a warranty is a commitment that a fact is or will
be true. Together, “reps and warranties” present a snapshot of the target
and buyer at the time of the transaction.
6. Covenants. The management of risks that may arise because of the behav-
ior of the parties between signing the agreement and closing the transac-
tion. (Closing is not considered nalized until funds have been transferred.)
Covenants are mutual promises, forward-looking commitments. They are
afrmative (we promise to do this), or negative (we promise not to do that).
Breach of covenants can usually trigger litigation for damages.
7. Conditions to closing. List of conditions that each side must fulll in
order to close. Failure of one party to meet the conditions permits the
other party to terminate the deal without recourse.
8. Termination. This section outlines the conditions under which one party
will allow the other party to exit from the agreement without penalty.
9. Indemnications. Damage payments in the event of losses discovered
after closing has occurred, or even breach of provisions in the agreement.
Harvesting ◾ 349
Table15.3 Best Practices for M&A Negotiations
Common Mistakes Common Solutions
Unrealistic timetables and expectations Select an acquisitions team experienced
in cost/benet time allocation
Inexperienced M&A negotiation team Establish an acquisitions team with
dened responsibilities and authority
Lack of structured transaction process Clearly dene team member roles
Be prepared to “walk away” from a bad
deal
Disproportionate time spent on minor
issues
Focus on outcomes, not activities
Set “drop dead” dates
Incomplete or irrelevant information
Inadequate or nonexistent due
diligence
Obtain corroborating data
Engage industry experts
Inadequate sensitivity analysis Perform nancial and commercial
sensitivity analyses
Set minimums
Overlooking integration issues Thoroughly assess the impact of “culture
clashes”
Can value be created?
Poor negotiating techniques
Naïve and inexperienced negotiators
Pre-plan negotiation strategies, tactics,
and strategic objectives
Decide on deal breakers ahead of time
No meeting transcriptions or minutes
Communications failures
Include a “secretary” as note taker
Debrief other party on issues discussed
and agreements reached
Long time to reach a Term Sheet
agreement.
Deals have a life. A lengthy negotiation
for a Term Sheet is an early warning sign
of impending impasse.
This is the most signicant document in
the early stages. It should list price, form
of payment, deal structure and
management issues. The Letter of Intent
will follow the overall principles
contained in the Term Sheet.
Over-reliance on a Letter of Intent by
seller.
It is merely “an agreement to agree.”
Understanding that a Letter of Intent is a
non-binding agreement; while it is
crucially important, an agreement to agree
is not an agreement
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