CONSIDER STRATEGY, COMPATIBILITY BEFORE ACQUISITION

Think long term and think strategic fit.
That's what merger and acquisition advisers agree are the most important considerations for companies contemplating a merger.

There are many reasons companies might merge, said Ed Heys, a partner and mergers and acquisitions specialist at Deloitte & Touche LLP. "You may be trying to increase your project mix; you may want to expand geographically; you may want to gain a competitive advantage," he said.

"No matter what the reason is for teaming up," said Mark Zyla, director of Coopers & Lybrand's corporate finance services group, 'The fundamental issue for companies to consider is whether there's a strategic reason to merge. Not just because all your competitors are merging.

"You have to create value through the merger," he said. "If you're not creating value, the merger won't be successful."

Advisers agree that it's critical to thoroughly understand the business and management style of the target company - before commitments are made - in order to determine if long- term goals are compatible and if the merger is a good fit. Not only is it important to look at financial records and understand the product, but the corporate culture and human factor of the business must be examined closely - they can make or break a partnership. This entire process, which can take months, is time-consuming and can be expensive. But skipping any part of the process, experts warn, can be detrimental to a future match up.

"Get background on the management team, computer systems and strategy," recommended Zyla, who stressed that due diligence is essential.

He compared a merger consideration to a venture capitalist looking to invest in a company. "They look for management experience and management they're comfortable with," said Zyla. "In many cases, that's more important to them than the actual product."

Heys said companies should turn to professionals and experts for help. "Accountants and attorneys can perform analysis and perform due diligence. They analyze future trends, look at historical records, understand customer relationships and understand where the product is in its life cycle and what future impacts might be. It's a real team effort that exists between a company, the acquirer, and the professionals." He agreed that developing relationships with the candidate's management is necessary on the front end of a transaction to "make sure it's a management you can work with on a long-term basis."

Ron Baum, managing partner at Grant Thornton, said there are four questions to ask when contemplating a merger.

• Is there a strategic purpose? ("Don't just buy something because it's a decent business; you need to take it someplace," Baum said.)

• Will it dilute management talent?

• Is it too far away from core competencies to understand the business?

• Do you understand the cash flows of the merger and have you carefully considered the debt burden from a merger?

In order to determine the financial fit, Baum said, “Look at a detailed analysis of their books and records. If they haven’t been audited, get that done so you know where the numbers are coming from.”

Regarding timing, Terry Brown, a partner in Arthur Andersen’s corporate finance division, said it’s somewhat irrelevant when a merge happens, provided conditions are favorable for both companies. “Consolidating is used to drive momentum in the capital market,” Brown said. “But there’s no seasonality to it. Accounting and tax issues (in terms of timing) usually are secondary to the financial issues.”

Valuation of a company’s stock and appropriate pricing is one key to a successful merger, Zyla said, and the other is post-merger integration, a step that’s easily bypassed. “Once the deal is done, the work’s not over. In fact, that’s when it begins,” said Zyla. “You have to make sure the cultures mesh, make sure the strategy for the merger is implemented, make sure the computer systems are compatible and make sure the new corporation has solid strategic goals.”

For example, a company formed as a result of a merger would have to develop a consistent corporate message in their advertising so customers and clients won’t be confused.

The key element throughout the whole process, however, stays the same: strategic fit. Baum said, “Time and time again, I come across people thinking about acquiring a business, and when you ask them if it fits with a strategic direction, they give you a blank look. There are good businesses out there, but acquiring a business just to have a bigger unit is not something you usually want to do.”