Considering a merger?

INDUSTRIES NATURALLY consolidate as they mature. A slowing economy may accelerate consolidations. Smaller companies are merged into larger ones, or groups of smaller companies are combined to form larger entities. With the dollar at historical lows, U.S. companies are attractive targets for offshore buyers. Other companies are seeking capital infusions from foreign investors. Observers believe that the current year could be an ideal time to merge.

Many companies don't look any farther than their own backyard when considering merger candidates. It's one thing to acquire a business, but it's a different matter to transition the new business into the new organization. Acquiring a company in a familiar industry and with business processes similar to the buyer's reduces risk and improves the chances of long-term success.

Our clients request assistance during the research, analysis, due diligence, negotiation, and post-merger phases of their acquisition initiatives. A well-designed initiative may reduce the problems associated with integration once the business combination has been completed. The suitor can use various approaches during the post-merger planning and integration phases.

Key areas to consider include integration and continuity of the management and organization, potential overlap of business functions, internal and external communication plans, integration of information systems and reporting, and compliance issues. Effective planning requires an accurate knowledge of the newly acquired company's finances, organization, business processes, systems and infrastructure, compliance requirements, markets, customers, suppliers, and operations in order to develop an effective integration plan. Obtaining this information prior to the acquisition date may be difficult, even with a diligence process.

Some acquiring companies place a small management team at the potential merger partner for a time prior to the change in order to obtain the necessary information and work with management to develop the transition plan.

Be sure to perform a risk assessment of the soon-to-be acquired company. Examples of high-risk areas include loss of significant customers, integration problems leading to loss of revenue or critical management and staff members, or compliance issues related to financial reporting.

Most acquiring companies seek to make the transition "seamless" and "transparent" to employees, customers and suppliers. While "slash and burn" techniques have been used in the past to lower wage costs, this approach may irreparably damage the combined firms through the loss of skilled managers, critical customer and supplier relationships, and institutional knowledge.

Identifying and retaining highly skilled and effective management and staff during the transition should be factored into any transition plan.

Another area to address is integration of systems and reporting. Even if the two merger partners use the same types of operating systems, there are nearly always important differences in the IT organizations, systems of controls, policies and procedures, and configurations.

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IT is far more difficult and expensive to integrate than other business areas. Due to chronic shortage of qualified IT personnel, give great care to this area during a transition.

Most mergers fail to live up to the goals set during the selection, analysis, and negotiation phases. Careful preparation and execution may mitigate the risks during the critical first months of the transition.

Paul Engle is a senior manager with Grant Thornton's Management Advisory Services. Engle, who holds an M.B.A. in finance, has more than 25 years of experience in management, operations, product development, sales and marketing, strategic planning, and business process improvement consulting.