Done right, acquisitions create value and accelerate a company’s growth setting you up for long-term success. However, experience tells us about 77% of acquisitions fail. Deals often fall apart before they close or fail to generate their expected value. Here are three common reasons why acquisitions don’t work out and how you can avoid them.

1. Focusing on Financials

Acquisitions that are based purely on financial engineering rarely generate lasting value. Cost cutting will certainly help top-line growth, but you can only cut costs once. In the long term how will you grow revenue once you’ve cut costs? While many acquisitions do result in cost synergies from combining back office operations, this is should not be your primary reason for acquisition. Successful acquisitions are based on strategy rather than cost-cutting.

Another common mistake price-conscious acquirers make is to search only for cheaply priced companies. Often these companies are in distress, but because of the low price, the acquirer might be willing to overlook other critical issues such as liabilities or cultural issues that could affect the deal’s long-term success. While acquiring a healthy company today might seem more expensive, the chance for long-term success tends to be greater.

Solution: Strategy First

Instead of focusing on costs, smart acquirers focus on strategy first and all other factors second. Without a strong strategic rationale, you risk slipping into the 77% of failed acquisitions. Acquiring the wrong company is an expensive mistake and you would be better off if you had never done the deal in the first place.

2. Lack of Strategic Rationale

Acquirers who make this mistake tend to fall into one of two camps. Either they have no reason for acquisition or they have too many. With no reason for acquisition, you risk buying whatever opportunity happens to come along simply for the sake of acquisition and with too many reasons, you risk diluting your efforts. In both cases, without a single clear purpose guiding your acquisition, you risk acquiring a company that does not advance your growth strategy in a meaningful way.

Solution: Have ONE reason for acquisition

For each acquisition you pursue, you should only try to fulfill ONE strategic need. Trying to meet multiple needs means you may end up meeting none of them. Think about how you hire employees: if you have various positions in sales, accounting, and operations, you would hire three different people. In the same way, if you have multiple strategic needs, you should pursue three different acquisitions instead of lumping them into one deal.  For achieving a profitable result, be sure to select only one reason for acquiring a company.

3. Integration Challenges

Integration is incredibly tricky to master and there are many moving pieces to consider from operations to employees to branding to suppliers to customers. There is no one fool-proof way to seamlessly merge two entities into one and even the best integration plan will have a few hiccups.

Solution: Plan Early

Overcome this obstacle by planning for integration early in the M&A process so you can anticipate challenges, develop solutions and establish a plan for moving forward. Far too often companies think of integration as an afterthought, but the reality is if you are planning for integration on Day One after the transaction closes you are already too late. On Day One, you should already have developed an integration plan and begin putting it into action. Addressing integration early on gives you plenty of time to identify problems and opportunities, develop solutions, and create your 100 day plan. The first 100 days after closing are a critical time and you must move swiftly to implement your plan in order to be successful.

While this is by no means an exhaustive list, addressing these key issues can be the difference between success or failure when it comes to growing your business through strategic acquisitions. Make sure to learn from the mistakes of others.

Photo Credit: Roman Drits Barn Images

From the somewhat plausible to the downright outrageous, rumors abound whenever a transaction is announced. While some rumors may be innocuous, unfortunately others may have lasting, damaging effects on your company and employee morale so it’s important to quickly put a stop to them.

Here are three practical steps to kill gossip and reduce confusion.

1. Communicate Early

Of course the best way to stop rumors from spreading is to prevent them in the first place. On day one of the acquisition, publish and distribute your 100-Day Plan, your integration program for the newly merged company, so that employees understand what to expect including changes to benefits, payroll, and operations. No one likes being left in the dark and in an information vacuum people will likely imagine the worst. You don’t have to share every last detail of the deal, but you should let employees how they will be affected by the transaction.

2. Set up an Anonymous Hotline

A toll-free hotline or an online or physical question box, is a great way for employees to anonymously voice their frustrations, concerns, and questions without fear of repercussions. You’ll also be able to answer relevant questions rather than allowing employees to fill in the blanks on their own or through the grapevine.

3. Be Honest

Don’t lie. This simple principle most of us learn as children is vital to establishing and maintaining trust in a company. The truth will come out eventually and the consequences of lying will be worse than if you had told the truth in the first place. Although it might be bad news, it’s best to rip the band aid off quickly. We once had a buyer tell an entire plant they were losing their jobs because the buyer was shutting the factory down as a result of the acquisition. Of course people were upset, but they respect our client’s honesty and had ample time to plan next steps in their career rather than being blindsided.

Change is hard, but by communicating early, addressing questions, and remaining honest, you can prevent rumors from spreading after an acquisition.

For more advice on integration, download our special report “Planning for Integration – Begin at the Beginning.”

While it’s an important milestone, a signed letter of intent does not guarantee a successful acquisition. Just ask Pfizer who withdrew its $150 billion bid to acquire Allergan after signing a LOI. Pfizer ended up paying a breakup fee of $150 million.

After the LOI is signed, you still have a few major steps to take before the acquisition closes including due diligence, final valuation drafting the purchase agreement, and integration planning. In this final stage of the M&A process, consulting with external advisors such as lawyers and valuation experts is important, however you must remain actively involved in the process and continue leading the acquisition. At the end of the day you, not the lawyers – will own the company and have to live with the decision.

It is important to take a thorough look at these technical issues and consult experts while maintaining your leadership and guiding the acquisition. Don’t let some mistakes you make during this final phase derail the months or even years of hard work you’ve put into the deal. Gain confidence in your decisions in our webinar “M&A: From LOI to Close” on November 10 and learn how to navigate these steps move the deal to the finish line. This webinar will provide insight any professional involved in M&A will want to know.

After completing this webinar, you will be able to:

  • Explain the structure of an LOI and how to make it beneficial to your situation
  • Describe how to manage the Due Diligence process from both the viewpoint of the Buyer and the Seller
  • Utilize strategies to negotiate an agreement that is beneficial to both sides
  • Identify how valuation is affected during the Due Diligence and Closing processes
  • Recognize what is expected at Closing
  • Begin to execute your Integration game plan

M&A: From LOI to Close

Date: November 10
Time: 1:00 PM ET – 2:15 PM ET
CPE credit available

Photo Credit: Simon Law via Flickr cc

One of the challenges of due diligence is that you often do not have access to all the data. Of course you want to know every last detail about the acquisition prospect so you can make the best decision. Unfortunately, the real world is never perfect. The prospect may have an incomplete or no record of the requested information or may be unwilling to share in-depth details.

In these situations, you must focus on obtaining the information that is critical to you. Think back to your one reason for acquisition. Your acquisition strategy should drive your integration strategy and the information you collect in due diligence. For example, if your strategy in acquiring the seller’s organization is to add a new technology, most of your due diligence and integration questions should be focused on technology. You may not be as concerned about gathering in-depth information on their sales department.

Quite frankly, getting all the information is unrealistic. And even if you did have access to every last detail, you have to remember that some of them are more valuable to you than others. It’s important to establish priorities and focus on what matters to you.

Due diligence will go on forever…if you let it. We once had a situation where the client had been in due diligence for over a year. At that point you have to ask yourself, “Do you really want to do a deal?” Letting due diligence drag on for months and years is can be tiresome and pointless. If due diligence lasts too long people start getting frustrated and momentum dies down. You need to strike the balance between thorough and exhaustive.

Remember, due diligence is not an academic exercise. Your purpose during due diligence is not to find 100 percent of the data for the sake of information gathering. The goal of due diligence is to learn enough about the company so you can properly evaluate it and decide if an acquisition makes sense.

Photo credit: KatieThebeau via Flickr cc 

Just this Sunday, I received an email about the Ritz-Carlton Rewards and Marriott Rewards combining with Starwood Preferred Guest. According to the email and Marriott’s website, the three loyalty programs will be linked, but operate as independent programs. Marriott does not expect to merge the programs any time before 2018.

Marriott Rewards Email

Screenshot of the email announcement on combining the Ritz-Carlton Rewards and Marriott Rewards with Starwood Preferred Guest.

Marriott International first announced it would buy Starwood Hotels and Resorts Worldwide for $12.2 billion on November 11, 2015. The acquisition, which just received anti-trust approval from Chinese regulators, creates the largest hotel company with more than 5,500 owned or franchised hotels and more than 1.1 million rooms. In recent years, the hotel industry has faced competition from alternate lodging like Airbnb, making consolidations more attractive in order to save off competition and leverage economies of scale. Together Marriott and Starwood will generate $2.7 billion in fee revenue and are estimated to save $200 million in the second year post-closing.

Integration Planning Begins at the Start

Even prior to the deal closing, it’s important to begin integration planning. The Marriott and Starwood acquisition closed on September 23 and on day one, they rolled out their loyalty program integration. You can bet they already had this plan in their hip pocket.

The ability to successfully integrate largely depends on planning for and considering integration issues way back at the start of the entire acquisition process. Waiting until the day after the acquisition closes to begin thinking about integration. By then, you should already be executed your plan; it’s too late to begin planning.

The loyalty programs are just one small component of a larger plan to combine Marriott and Starwood. Even in this small piece of the plan, we see Marriott taking a phased approach by linking, but not combining Rewards with SPG. Marriott and Starwood both own a number of high-profile brand name hotels. Marriott faces the challenge of keeping Starwood’s loyal customers, many of who were upset about the merger, so keeping SPG running independently, rather than folding into Marriott Rewards, makes sense.

Determining how much to integrate depends on your strategic reason for acquisition. You may choose to have the seller integrate all of your processes, but other times you may choose to leave the seller alone. In other cases, you may even adopt best practices from the seller. You may also choose to adopt various levels of integration in different parts of your business. While Marriott has chosen to operate the loyalty programs independently, it’s likely it will combine departments like accounting and finance.

Photo credit: Phillip Pessar via Flickr cc

Walmart will acquire web retailer for $3.3 billion in order to boost its online business. The deal is the largest ever purchase of U.S. e-commerce startup. While Walmart has plenty of bricks and mortar stores, the company has struggled to grow its online business. Walmart knows it needs to be competitive with Amazon who has branched out into selling groceries and other consumer goods traditionally bought at stores. It’s no secret that e-commerce is on the rise. We now have a whole generation of shoppers who grew up with the internet and are very comfortable with and may even prefer buying ordinary staples online instead of going to a physical store.

There are a couple of interesting points to note about this transaction from an integration standpoint.

1. Keeping Key Employees

It’s important to assess key employees at the seller’s organization and put plans in place to keep them post-closing. Keep in mind, the best person for the job might be in the seller’s organization. Jet founder Marc Lore will take a senior leadership position in Walmart’s e-commerce division while Walmart’s top online executive Neil Ashe will leave. Part of the reason for acquisition is the expertise of a star player who will help Walmart be more effective at e-commerce.

2. Adapting to the Seller

The amount of equity you acquire in a company does not indicate what you should do from an integration standpoint. Just because you acquire 100% of a company does not mean you should force the seller to comply with all of your practices.

It would not make much sense if, after the acquisition, Walmart expected Jet to comply with the Walmart way of doing things. Why did Walmart acquire Jet in the first place? They wanted the knowledge and expertise. Walmart plans to keep and operating as separate websites. It also plans to integrate Jet’s software into its own website.

A critical component to being successful at integration is understanding what level of integration you need. You must be disciplined and understand why you are buying the company whether is for their expertise, culture, members, etc. Whatever the case may be, keep in mind you may need to integrate your organization to the seller’s.  This sets the tone for the way you will be thinking about integration. Don’t assume that everything the seller does needs to change.

Photo Credit Mike Mozart via Flickr cc

One of the primary reasons acquisitions fail is because of integration challenges post-closing. Implementing your integration plan smoothly and effectively is key to realizing the synergies of your acquisition. In a KPMG survey, U.S. executives cited a well-executed integration plan as the top factor that leads to deal success.

Integration is a massive undertaking that you should begin planning long before the deal closes. There are many moving pieces to consider from combining IT systems and product lines to overcoming cultural differences to branding of the new company. In addition, you must clearly communicate with your employees and customers. If you are just beginning to think about integration when the acquisition closes, you are already too late.

Looking back on their past acquisitions, 80% of executives surveyed by EY would have sped up the integration process and 58% said they would have communicated their integration plan more clearly. Failing to focus on integration can be a costly mistake that can undo months or years of work. Don’t let that happen to you: plan for integration now.

Learn how to build and execute a successful integration plan in our upcoming webinar,Keys to Integration Success” on August 11.

In this webinar you will be able to:

  • Explain the different levels of integration in order to decide how much to integrate after the deal is done
  • Begin to develop a 100-Day Post-Closing Plan
  • Explain effective communication strategies for integration success
  • Define cultural differences in organizations and how to bridge them
  • Utilize secondment to your advantage

Date: Thursday, August 11, 2016
Time: 1:00 PM ET – 2:00 PM ET

Photo credit: Willi Heidelbach via Flickr cc

You’ve developed your strategy, identified the right markets, negotiated with the owner and papered the deal. If you think once you sign on the dotted line your job is done, you are mistaken. The M&A process doesn’t end when the deal closes. M&A is really a journey “from beginning to beginning” where the consummation of a deal is actually a fresh beginning for the newly merged company. Ensuring the pieces of both organizations mesh the correctly during integration is crucial to the success of an acquisition.

Poor Integration Can Ruin An Acquisition

Integration issues can plague a company long after the deal closes. Take United Airlines as an example. Although it’s been five years since the merge with Continental Airlines, the company is struggling to integrate its workforce. United’s flight attendants are still operating as if they worked at two separate companies, which has created operational challenges, damaged employee morale and company profit, and created unnecessary complications. Since the merger, about six percent of United flights have been delayed due to issues such as crew scheduling or maintenance problems. Understandably employees are frustrated. The failure to integrate effectively has eliminated the synergies – such as economies of scale and scheduling flexibility – that one might derive from having a larger workforce.

Why Do So Many Companies Struggle with Integration?

Leaders tend to think about integration as an afterthought, when really they should begin thinking about integration long before the deal closes. When it comes time to implement, they are “suddenly” faced with unanticipated challenges that could have been avoided or planned for had they started looking at integration earlier.

“What almost always gets underestimated, though – and often overlooked altogether – during due diligence is the actual integration of the new capabilities and how (or whether) it will work,” says John Kolko, Vice President of Design at Blackboard.

And as Kolko points out, if you don’t begin thinking about integrating prior to closing the acquisition, you may end up acquiring something that isn’t aligned with your strategy.

When you start thinking through integration issues and what the newly merged company will look like, you can get an idea of if and how the acquisition will operate post-closing. Will you let the company operate as a standalone business? Will you train employees to use your sales system? How will you leverage a new capability with those you currently have? Use your strategic rationale for acquisition to guide your decisions on integration.

Develop a 100-Day Plan

Thinking about integration early also allows you to be prepared and swiftly implement your plan once the deal closes. As the buyer, you only have one chance to make a good first impression with your new employees. The first 100 days of an acquisition are a critical time period when employees are less resistant to change. You have a unique opportunity to make sure everyone is in alignment during this time. Develop a 100-day plan prior to closing so you are not scrambling to put something together when it comes time to execute.

Photo credit: David Goehring via Flickr cc

Poor communication can really hamper your integration efforts, especially when you have to break bad news to your employees. When it comes to sharing an unpopular message, some executives try to sugar coat or beat around the bush. In my experience, avoidance tactics are not effective and just make employees angrier once they eventually find out the truth.

Pulling the Band-Aid Off

The best way to break bad news is to pull the Band-Aid off very quickly. Get bad news out early on in the integration process. Many people often assume the worst when they hear their company is being acquired so they might not be as shocked earlier in the process. If you wait until later, you’ll likely face more resistance from employees who are starting to feel comfortable again.

You might feel uncomfortable with the “pulling the Band-Aid off” approach, but it does work. I was once part of an integration program where we were on the floor of a unionized factory the morning after we closed on an acquisition. Unfortunately, the plan was to shut down this particular factory. I remember standing there, waiting for the new owner to give them the bad news and wondering how he would deliver it.

To my surprise, he stood up and said, “I want you to know that we intend to shut down this facility. Most of you are going to lose your jobs in the next six to nine months.”

At first, there was a lot of anger, frustration, and confusion. But as the buyer walked them through how things were going to work and told them about the career placement, counseling, and benefits available to them during the transition, the workers began to calm down. They were still angry, but they respected the fact that they weren’t lied to. They appreciated the early communication, which gave them time to prepare and plan for how the integration would impact them.

Sharing the bad news early also helps you eliminate confusion and prevent the rumor mill from starting. As bad as your news may be, the rumors will be ten times worse.

Advice for Breaking the Bad News

Of course each situation is different, but generally, there are a couple of things you can do to break bad news in the “best way.”

1. Be Certain – First, make sure that you have thought through the decision and are certain you wish to move forward. Once you proceed down a path, it’s very difficult to reverse the ship, so be sure that in the long run this is the best decision for the newly merged company.

2. Write it Down – Once you have arrived at the decision, write it down. This way you can get people comfortable around the message and make sure everyone is saying the same thing. This is especially helpful if people are not particularly passionate or excited about the decision. Effectively you are giving people a script so there will be symmetry in your communication.

There’s really no good way to break bad news, but it’s important to be honest and not to drag it out. The sooner you tell people, the sooner you can move forward toward success.

Photo Credit: John Haslam via Flickr cc

With every acquisition you have a choice of how you will integrate the two entities. Often buyers assume a “winner-takes-all” approach where they impose their systems and culture on the acquired company. This is not always the best way to successful integration. In fact, it may be best to integrate some of the seller’s practices into your own organization.

In our new M&A Express Videocast, I advocate a strategic approach that leverages the best from both entities. I will also introduce the power of the 100-day plan in achieving a successful integration.

How Far to Integrate

April 5, 1:00 pm – 1:20 PM ET

About M&A Express

M&A Express is a high-impact series of videocasts presented by David Braun, founder of Capstone and author of Successful Acquisitions. Each videocast runs 20 minutes or less, and delivers cutting-edge insights on proven growth strategies for middle market companies. M&A Express is free! M&A Express is free! Visit our website for more information.

Watch previous Videocasts on-demand:

  • Why You Need a Roadmap
  • Where to Start Your Search
  • When to Walk Away
  • The Hidden Power of Minority Ownership
  • Cultural Due Diligence
  • The Letter of Intent: A Key Milestone

Whenever I am consulting on an integration program, I introduce a critical component I call the 100-Day Plan. I’ve found that when companies get the 100-Day Plan right, the likelihood for a successful integration is extremely high. But if you don’t implement the 100-Day Plan at the beginning, integration generally doesn’t go well.

Why is that? Think about a new employee starting work at your company. What are they like the first day, the first week, the first month? Chances are, they’re pretty agreeable. They’re probably listening and observing as they adapt to their new environment. After all, they’ve got to figure out basic aspects of your company’s culture, like how coworkers prefer to communicate throughout the day or when they typically go to lunch. Is the office quiet or talkative? How will they fit in with the existing workforce?

The same thing is true of the newly acquired company. During the first hundred days, the people at the company are generally going to be in listening mode. They will want to see how much you, the buyer, will be changing their company. In the meantime, they’ll be fairly agreeable.

Now consider your hypothetical employee six months after hiring. At that point, they’re feeling a lot more confident. Maybe they’re inviting coworkers to their choice of restaurant for lunch or taking on a leadership role within their department. They’ve started pushing back when other people are pushing forward.

After about a hundred days, people at the company you acquired will start getting comfortable and begin saying, “No, no. Wait a second. I’m going to push back a little on that.” Your first hundred days are critical in terms of getting people on board, aligning them with what you’re trying to do, and showing them what your vision is for the integrated companies.

This is why the foundation of a successful integration is built on the 100-Day Plan.

Photo Credit: Barn Images with modifications by Capstone

Effective leadership plays a critical role in integrating companies following an acquisition. Challenges abound, for instance when disagreements arise between the executive team and the rest of the staff. How do you bridge the gap? Communicate painful decisions? Maintain calm during a period of change?

As the leader of an integration process, you should:

  • Be aware of the key challenges and opportunities
  • Recognize that different management styles can bring new value to the combined organization.
  • Be good listeners. Those who aren’t decision-makers need to be heard and to hear from their leaders in response.

Leaders who bulldoze their way through integration breed resistance within the acquired company and are likely to be frustrated by a lack of progress. This can be avoided by adopting a collaborative approach.

That isn’t to suggest that as a leader you should simply acquiesce, but rather that you balance the input of executives and employees and make decisions that best serve the interests of the organization.

Leaders choose which issues may be negotiated, and which are beyond discussion. They must clearly communicate how decisions will be made and how information will be disseminated.

Consider the challenges of integrating Kraft and Heinz following completion of their merger last July.  The Wall Street Journal reports Kraft Heinz is closing seven facilities, including Kraft’s former headquarters near Chicago, and cutting 2,600 jobs. In situations like that, leaders must make tough choices, combining two companies with strong cultures and entrenched staff. Cost cutting, innovation and automation may be essential to the success of the integration, but so is the way in which these dramatic changes are implemented.

The quality of leadership can make or break an integration program.

Culture can often be neglected simply because it is difficult to measure, especially when compared to hard facts such as number of employees or company revenue. After all, what constitutes a “good” culture? Definitions may vary from company to company and even among members of your own acquisition team.

Despite this challenge, company culture should not be ignored; it is an important characteristic of the acquisition target and a significant factor in the success of the transaction.

I have found the best way to measure culture is to use objective criteria and concrete metrics. This way, everyone on your acquisition team will be on the same page when evaluating a potential acquisition target. Below I’ve listed three example criteria to consider:

  1. Communication Style – Observe how employees and management typically communicate during the acquisition process. Is there truly an “open door” policy where all suggestions are welcome? Does it take a long time to come to a decision or does the company make decisions swiftly? Consider this communication style lines up with your own.
  2. Entrepreneurial vs. Mature Company – Is the original owner still at the company or does the seller have a professional management team? Also be sure to take a look at employee turnover, benefits and compensation. These items will give you a better understanding of the target’s culture.
  3. Conflict Resolution – Does the company have a formal process in place? If so, how does it compare to your own process?

There are, of course, other criteria you may wish to consider when evaluating the seller’s organization. And, there is no one right answer when it comes to measuring culture. Your criteria and metrics will be different depending on your strategic rationale for acquisition and you own company’s growth goals.

I’ll be discussing some more tips on measuring company culture my upcoming videocast on “Cultural Due Diligence” this Thursday, November 5. Don’t make the mistake of omitting culture from your M&A process.


Cultural Due Diligence Videocast
1:00 – 1:20 pm ET
November 5, 2015

Photo Credit: Creative Sustainability via Flickr cc

Culture clashes can make or break a deal. Just think about a few infamous deals that fell apart, such as the Time Warner-AOL merger in 2001. In Deals from Hell, Robert Bruner analyzes the reasons for failure in depth along, including examples of deals that failed due to cultural issues.

In fact, cultural issues are still cited as one of the top reasons for acquisition failure, which often means the breakdown comes at a late stage in the process. This is hugely wasteful. Clearly, there’s no point in closing a deal only to have it collapse during integration.

With so much at stake, it’s important to ensure a successful integration of the two cultures involved. Here are just some of the questions that arise:

  • How can you avoid culture clashes?
  • Should you only purchase companies that share a similar culture as your own?
  • How can you evaluate the culture of an acquisition prospect before the deal closes?

You don’t have to purchase a company that’s exactly the same as yours. In fact, you may be buying a business specifically for its unique culture. However, you should always conduct cultural due diligence when evaluating a potential acquisition to maximize your chances of success. The place to start that due diligence is on your own turf: Before you even evaluate the culture of a target company, you need to look within.  By understanding your own business culture you’ll be positioned to talk to the right people in the other company, and ask the questions that will give you valuable insights about its culture.

Learn more about what questions to ask and what to do with the information gained during cultural due diligence in my upcoming M&A Express videocast on November 5.

Cultural Due Diligence Videocast
1:00 – 1:20 pm ET
November 5, 2015

I’ll also be answering any questions you may have at the end of the videocast. I look forward to seeing you there.


Photo Credit: Paul Hudson via Flickr cc

It seems as though the employee vs. contractor issue is popping up all over the news. Virtual assistant startup company Zirtual just fired over 400 employees by email because the company couldn’t sustain its payroll once it converted contractors to employees. The Wall Street Journal has also highlighted the many startups that are now grappling with some version of this issue.

The employee vs. contractor question needs to be considered during due diligence, especially as the issue becomes more common.

You may wonder, why does this matter? And if it’s so difficult to convert contractors to employees why are companies doing it?

“1099 Employees”

Many companies today have what we call “1099 employees,” which of course is an oxymoron. You can have 1099 independent contractors, or you can have employees. Unfortunately, some businesses have been treating contractors as if they were employees, primarily to save on costs like healthcare and benefits, which employers are required to provide for employees. It sounds like a good plan, especially for small startup companies with low margins, but you run into legal trouble when your “contractors” actually work as full or part-time employees.

If the company is employing “1099 employees” (contractors who should really be employees), and you are forced to convert them, the costs can be significant. The founder of Zirtual, Maren Kate Donovan, said in a LinkedIn post, “Simple math is add 20-30% on to whatever you pay an IC [independent contractor] to know what it will cost to have them as an employee.”

In addition, a business that is using contractors as if they were employees is exposed to myriad legal issues. Homejoy Inc., a startup cleaning company, was unable to raise more venture capital due to four lawsuits. The business was forced to close.

Take a Closer Look at Workers

A simple way to start your workforce due diligence is to find out how many contractors vs. employees work at the company. A lot of contractors at the seller’s company should raise a yellow flag. It doesn’t guarantee that something is amiss, but you should investigate further.

That’s not to say you have to walk away from a company that uses contractors, or even one that is using contractors as employees. It’s simply an area that needs to be explored. If contractors used by the company should really be re-classified as employees, what would it take to convert them? Does this change the deal for you?

One option is to convert all contractors to employees before the acquisition closes. If the problem is serious enough, you may even decide to walk away from the deal. Whatever you choose, return to your objective acquisition criteria before making your decisions.

People usually think about financial due diligence, but in light of recent news I encourage you to take a second look at the seller’s workforce. You don’t want to discover post-acquisition that all your contractors need to be reclassified as employees. Find out BEFORE you close the deal.

What is the best way for your due diligence team to characterize the seller’s leadership and incorporate key leaders into the integration plan?

Leadership is critical to M&A success (or failure). Last week we explored these themes in our new webinar, “Leadership Essentials for Successful M&A” led by Dr. J. Keith Dunbar. Keith’s groundbreaking research identified the following leadership predictors:

M&A Leadership Predictors

Leadership skills critical to M&A success identified by Dr. Dunbar’s research.

In the webinar, Dr. Dunbar emphasized that to increase the likelihood of success in acquisition, strong leaders with the M&A skills listed above should be identified at both the acquirer and seller.

Here’s how your due diligence team can find key leader at the seller’s organization and include them in your integration plan.

First, identify your leadership risk and strength areas and the specific leaders in your organization.

Then, align leaders at your organization with leaders at the target company. Focus any important areas of the business that are extremely critical for integration and retention of talent.

For example, let’s say you acquire an engineering software company and the technology is critical to the acquisition strategy. You find that your leaders rank highly in the skill “build relationships” but the target’s leaders do not. Your leaders should work closely with the target’s leadership, serving as coaches and mentors to bridge the leadership risk area, close gaps and help the target assimilate as quickly as possible.

Stay up-to-date on the latest in M&A. Subscribe to the blog.


About Dr. J. Keith Dunbar

Dr. J. Keith Dunbar is the author of “The Leaders Who Make M&A Work” and CEO and Founder of Potentious, an M&A leadership consulting firm.

Dr. Dunbar serves as Director of Talent Management at Leidos, supporting more than 23,000 employees. Prior to this role, he was Director of the Leadership Academy and Global Learning Solutions Group with the Defense Intelligence Agency. Dr. Dunbar retired from the U.S. Navy in 2006 after a celebrated 21-year career in naval intelligence. He received his Doctorate of Education from the University of Pennsylvania in 2013.

There are many different ways to handle brand integration – whether it means discarding the target’s brand in favor of your own, keeping both brands, or creating a new one. Each strategy is valid, depending on your brand equity and strategic rationale for acquisition.

Let’s look at a live example: In its $2.5 billion stock-for-stock acquisition of Trulia which closed on February 17, 2015, Zillow has chosen to keep both brand names.

CEO Spencer Rascoff discussed branding in a recent interview:

“Trulia will very much be its own brand but won’t be its own company. The Trulia website will remain but, over time, the listings inventory and the advertising sales will come under Zillow. Trulia will still have a consumer-facing team to grow audience. The analogy I would make sort of relates to my old stomping ground of online travel, where a lot of companies — including Expedia and Orbitz — have different front-end facing sites but the inventory on the back end and other functions are a shared services.”

Here we have an example of leveraging two well-known brand names in order to dominate the online real estate market. By keeping Trulia and Zillow as separate, consumer-facing brands, the combined company reaps the benefits of both brands’ equity, while realizing the cost-saving synergies of consolidating back-end operations.

Learn more about brand integration at our webinar – Brand Integration: An Acquisition Challenge

Photo Credit: roarofthefour via Compfight cc

Once you’ve closed the deal on a new acquisition, what do you do about the brand? Keep it as it is? Replace it with your brand? Create a hybrid? Something else…?

The brand is one of the assets you acquire when you buy a company. It may be worth a lot. Or little. Or nothing. (It may even be a liability).

It’s important to recognize that a brand is much more than a name and logo; it’s the “meaning” of a company to its customers and stakeholders: the promise that it holds for them.   A major acquisition can change the meaning of the company you acquire — it can also impact the meaning of your own organization.

Join us for a new webinar on brand integration presented by Capstone Branding Advisor Jon Ward. Jon has served as a consultant and creative marketer for over 30 years, with clients ranging from one-person startups to billion-dollar corporations.

After this webinar you will be able to:

  • Discover ways to evaluate brand value
  • Expand your options for branding the newly merged organization
  • Create your own brand integration strategy
  • Plan your acquisition to obtain maximum brand equity

Date: February 19, 2015
Time: 1:00 PM ET

Can’t attend this webinar? Sign up anyway and we’ll send you the recorded archive.

Click here for more information and to register.

When it comes to integration, people often think equity ownership should determine their approach.

If they own 100% of the business, they should change all the target’s practices to their own.  In a strategic alliance where neither side can force the other side to do anything, they might not integrate any of the practices.

But really, equity doesn’t have to dictate the level of integration. You shouldn’t be asking what or how many changes you can enforce but about which changes are right to make.  Owning 100% of the company doesn’t mean you should make the business you just acquired just like you. One reason you bought this company may be that it is completely different from your own.

Let’s take a look at a recent transaction: Coach will acquire Stuart Weitzman in order to drive topline growth in high-end, luxury women’s shoes.

In this case, Coach will be very careful about what they change initially. Although Coach owns 100% of the company, they most likely will not force Stuart Weitzman to adapt to all of their practices during integration. If the company changes Stuart Weitzman’s brand, pricing, or selling model, they might just be killing the goose they paid a lot of money for.

In addition, Stuart Weitzman (the company’s CEO and creative director) will continue to contribute his creative talent to the company under new ownership. If you’re like Coach and talent acquisition is critical to your deal, you better have a good employee retention plan that makes sure talented employees like Weitzman are committed to staying with the company afterward.

We need to change the way we think about integration. Avoid a mentality that “the spoils go to the conqueror.” Rather, you should identify star employees and practices from the seller that are better than your own and recognize that as the buyer you might adapt some of these practices yourself.

Focus on what you’re trying to get out of the integration. Then your strategic outcomes will drive your approach, not the amount of equity

The closing of a deal is the fruition of months — even years — of hard work. But closing is just the beginning of integrating a newly formed company. Combining companies is a major operation that requires skill, diligence and patience.  In fact, CEOs and executives often cite integration as one of the most challenging aspects of M&A.

Learn how to successfully plan and execute the integration of two companies in our first webinar of 2015 on January 14.

After completing this course, you will be able to:

  • Evaluate the different levels of integration to decide how much to integrate after the deal is done
  • Begin to develop a 100-Day Post-Closing Plan
  • Explain effective communication strategies for integration success
  • Define cultural differences in organizations and how to bridge them
  • Utilize secondment to your advantage (you’ll learn how that works)

Don’t let a rocky integration spoil the fruits of a partnership that has been primed for success. Let Capstone help you understand how to plan and prepare for a happy marriage of two companies!

Date: Wednesday, January 14, 2015
Time: 1:00 PM ET

Can’t attend this webinar? Sign up anyway and we’ll send you the recorded archive.
CPE credit is available.