CORPORATE GROWTH AND SUCCESS

THROUGH ACQUISITION

Herbert Thweatt, D.B.A.

Executive SummaryThis project will examine acquisitions and mergers (M&A) with the goal of justifying the

acquisition approach to business growth and success. An acquisition is when two companies

combine together to form a new company altogether. An acquisition may be private or public,

depending on whether the acquired or merging company is or isn't listed in public markets.

Important elements of M&A include the following:

Strategic Planning – Strategic Planning is an organization's process of defining its strategy, or

direction, and making decisions on allocating its resources to pursue this strategy, including

its capital and people. Various business analysis techniques can be used in strategic planning,

including SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats).

Financial Instruments or methods to finance M&A and these include payment by

cash and payment in the acquiring company's stock.

Due Diligence or the process of reviewing the Firm being acquired and relevant

areas of concern which include financial, legal, labor, tax, IT, environment and

market/commercial situation of the business.

Merger integration or post-merger integration – and this area refer to the

aspect of an organizational merger that involves combining the original socio-

technical systems of the merging organizations into one such newly-combined

system or business. The process of combining two or more organizations into a

single organization involves several organizational systems, such as people,

resources and tasks.

IntroductionIt’s very important to understand that many Firms select to grow profits via Mergers and Acquisitions

for example on March 9, 1987, Chrysler agreed to buy Renault's share in American Motor Company (AMC),

plus all the remaining shares, for about US$1.5 billion. Holusha, J. (10 March 1987). AMC became the Jeep-

Eagle division of Chrysler and it was the Jeep brand that Chrysler CEO Lee Iacocca really wanted…in particular

the ZJ Grand Cherokee, then under development by Jeep engineers, which proved highly profitable for

Chrysler the nameplate remains in production today. Additional benefits included AMC's recently

modernized factories, which offered Iacocca the opportunity to increase his company's production capacity;

the AMC dealer network, to strengthen Chrysler's retail distribution (many AMC dealers switched to selling

Chrysler products); and AMC's underrated organization and management talent, which Chrysler quickly

assimilated (numerous leading Chrysler engineers and executives were ex-AMC).

In 1998, Chrysler and its subsidiaries were purchased by German-based Daimler-Benz AG, creating

the combined entity DaimlerChrysler AG. "Chrysler History". JB car pages (nd). Under DaimlerChrysler,

the company was named DaimlerChrysler Motors Company LLC, with its U.S. operations generally

referred to as the "Chrysler Group". On May 14, 2007, DaimlerChrysler announced the sale of 80.1% of

Chrysler Group to American private equity firm Cerberus Capital Management, L.P., therefore being

known as Chrysler LLC, although Daimler (renamed as Daimler AG) continued to hold a 19.9% stake.

Synopsis: An acquisition is when two companies combine together to form a new company altogether.

An acquisition may be private or public, depending on whether the acquired or merging company is or

isn't listed in public markets. An acquisition can be friendly or hostile. Whether a purchase is perceived

as a friendly or hostile depends on how it is communicated to and received by the target company's

board of directors, employees and shareholders.

Strategic Planning Process in Acquisitions and Mergers

Strategic planning is an organization's process of defining its strategy, or direction, and making

decisions on allocating its resources to pursue this strategy, including its capital and people. Various

business analysis techniques can be used in strategic planning, including SWOT analysis (Strengths,

Weaknesses, Opportunities, and Threats ), PEST analysis (Political, Economic, Social, and

Technological), STEER analysis (Socio-cultural, Technological, Economic, Ecological, and Regulatory

factors), and EPISTEL (Environment, Political, Social, Technological, Economic and Legal).

Strategic planning is the formal consideration of an organization's future course. All strategic

planning deals with at least one of three key questions:

"What do we do?"

"For whom do we do it?"

"How do we excel?"

In business strategic planning, some authors phrase the third question as "How can we beat or avoid

competition?” (Bradford and Duncan, page 1) But this approach is more about defeating competitors than

about excelling. In many organizations, this is viewed as a process for determining where an organization is

going over the next year or more typically 3 to 5 years (long term), although some extend their vision to 20

years.

In order to determine where it is going, the organization needs to know exactly where it stands, then

determine where it wants to go and how it will get there. The resulting document is called the "strategic

plan." It is also true that strategic planning may be a tool for effectively plotting the direction of a Firm;

however, strategic planning itself cannot predict exactly how the market will evolve and what issues will

surface in the coming days in order to plan organizational strategy. Therefore, strategic innovation and

tinkering with the 'strategic plan' have to be a cornerstone strategy for an organization to survive the

turbulent business climate. The following is an example of a basic strategic plan outline:

Analysis of the current situation - past year

1. Business trends analysis

2. Market analysis

3. Competitive analysis

4. Market segmentation

5. Marketing-mix

6. SWOT analysis

7. Positioning - analyzing perceptions

8. Sources of information

Marketing plan strategy & objectives - next year

9. Marketing strategy

10. Desired market segmentation

11. Desired marketing-mix

12. TOWS-based objectives as a result of the SWOT

13. Position & perceptual gaps

14. Yearly sales forecast

Synopsis: Strategic planning is an organization's process of defining strategy and or direction, and making decisions on allocating its resources to pursue a

venture.

Financial Instruments in Acquisitions and Mergers

Acquisitions are generally differentiated from mergers partly by the way in

which they are financed and partly by the relative size of the companies. Various

methods of financing an M&A deal exist and they are the following:

Payment by cash – transactions are usually termed acquisitions rather than

mergers because the shareholders of the target company are removed from the

picture and the target comes under the (indirect) control of the bidder's

shareholders.

Payment in the acquiring company's stock, issued to the shareholders of the

acquired Firm at a given ratio proportional to the valuation of the latter.

Equity and Debt Financing and Sources

Debt vs. equity financing is one of the most important decisions facing managers who need capital

to fund their business operations. Debt and equity are the two main sources of capital available to

businesses, and each offers both advantages and disadvantages. "Absolutely nothing is more important

to a new business than raising capital.

Debt financing takes the form of loans that must be repaid over time, usually with interest.

Businesses can borrow money over the short term (less than one year) or long term (more than one

year). The main sources of debt financing are banks and government agencies, such as the Small

Business Administration (SBA). Debt financing offers businesses a tax advantage, because the

interest paid on loans is generally deductible. Borrowing also limits the business's future obligation

of repayment of the loan, because the lender does not receive an ownership share in the business.

However, debt financing also has its disadvantages. New businesses sometimes find it difficult

to make regular loan payments when they have irregular cash flow. In this way, debt financing

can leave businesses vulnerable to economic downturns or interest rate hikes. “Debt vs. Equity

Financing: Encyclopedia,” (2010). Carrying too much debt is a problem because it increases the

perceived risk associated with businesses, making them unattractive to investors and thus

reducing their ability to raise additional capital in the future.

Equity financing takes the form of money obtained from investors in exchange for an

ownership share in the business. Such funds may come from friends and family members of the

business owner, wealthy "angel" investors, or venture capital firms. The main advantage to

equity financing is that the business is not obligated to repay the money. Instead, the investors

hope to reclaim their investment out of future profits. The involvement of high-profile investors

may also help increase the credibility of a new business.

The main disadvantage to equity financing is that the investors become

part-owners of the business, and thus gain a say in business decisions. As

ownership interests become diluted, managers face a possible loss of autonomy

or control. In addition, an excessive reliance on equity financing may indicate

that a business is not using its capital in the most productive manner.

Synopsis: Financial Instruments enable acquiring Firms in paying for M&A.

Acquisitions are generally differentiated from mergers partly by the way in

which they are financed.

The Due Diligence Process in Acquisitions and Mergers

Due Diligence is research and analysis of a company or

organization done in preparation for a business transaction (as a

corporate merger or purchase of securities). Due Diligence is the last

stage in the business-buying process: "The Final Frontier". This is the

time when all of the company's books, records and files are accessed.

There should be a pre-determined due diligence period

in which to investigate the information to ensure that it is

true and accurate.

The Basic Steps in Due Diligence Process

In business transactions, the due diligence process varies for different types of

companies. The relevant areas of concern may include the financial, legal, labor, tax, IT,

environment and market/commercial situation of the company. “Diligence-Checklist-Guide,”

(2010). Other areas include intellectual property, real and personal property, insurance and

liability coverage, debt instrument review, employee benefits and labor matters, immigration,

and international transactions. The follow are basic steps in the Due Diligence Process:

1. Develop a due diligence timeline: A lot of time and money can be wasted unless both

parties are in agreement about the timeframe for due diligence and the due diligence

deliverables. A decision roadmap for due diligence should be defined and

understood by both the buyer and seller in every transaction.

2. Clear contingencies, as satisfied: As the due diligence process moves forward, contingencies should be

cleared and the due diligence schedule should be updated, if necessary.

3. Maintain deal momentum: A common adage is that time kills deals. Clearing contingencies is one of the

best methods to keep momentum in the deal. Momentum generates goodwill between the parties and

this comes in handy when tough issues need to be handled.

4. Negotiate and secure third-party contracts or agreements: At the appropriate time, there should be a

plan to approach, negotiate and finalize the details of any third party contracts, such as; property leases,

equipment leases and service plans. This should be the last set of contingencies to tackle.

5. Attorney phase: Once the business terms and contingencies have been satisfied the time is right to have

your attorney prepare final documents for the business-for-sale transaction. You

should meet with your attorney well in advance of this step so that he or she

knows what is being contemplated, but refrain from spending lots of money on legal

documentation until you are certain you are going to buy the business.

6. Post-transition plan: Just prior to closing, the buyer and seller should have

a meeting(s) to design a 90 to 180 day ramp-up plan. A good plan

contemplates how the new owner will be introduced and the important

tasks during transition. It should ensure that there is minimal disruption to

the operations and a smooth transition for employees, clients and vendors.

Synopsis: Financial Instruments enable acquiring Firms in paying for M&A.

Acquisitions are generally differentiated from mergers partly by the way in which

they are financed.

Post-Merger and Divestitures in Acquisitions

Merger integration or post-merger integration refers to the aspect of an organizational merger that involves combining the

original socio-technical systems of the merging organizations into one such newly-combined system. The process of combining

two or more organizations into a single organization involves several organizational systems, such as people, resources and tasks.

The process of combining these systems is known as 'integration'.

Well-intentioned acquirers often opt for a merger integration strategy or plan that involves a slow, measured pace in

making changes. The logic influencing executives to proceed in this fashion appears sound, but is deceiving. The rationale, as

explained by executives, is that too much change, coming too quickly, could be overwhelming for employees. They conclude that

it would be better to make incremental changes in a deliberate, carefully staged fashion, allowing time for a dose of change to be

assimilated before administering another. But instead of worrying about having people “OD” on change, the primary concern

should be to finish the merger and put an end to the suffering. It’s the uncertainty

and ambiguity that create the most stress—not knowing what will happen, when it

will happen, or how one will be affected. The longer these issues go unanswered, the

more merging firms are likely to lose productivity, as well as their people.

Human beings can handle a high level of change. They adjust and adapt remarkably well—if there is something solid

they can adjust to. But people have an uncanny, intuitive feel for when the transition and change of a merger is actually

over. Certainly they are savvy and perceptive enough not to be lulled into thinking that carefully paced changes are

somehow less threatening to their careers.

Companies that string out the integration process invariably come under criticism from people at all levels of the

organization. Given their preference, employees would vote in favor of expediting the process—for example,

integrate, consolidate, terminate, reorganize, or redirect as necessary. They just want to get on with it, so they can get on

with their careers and make their personal adjustments to whatever happens to them as individuals.

Another very strong argument for moving rapidly in making merger-related changes relates to the “time window” for

change. It works like this. Being acquired or merged has a strong impact on the target company. The window of

opportunity is open only for a brief and unspecific period of time. People are expecting change, and the circumstances are

right. Top management should seize the opportunity before the window closes. The same changes, sought at a later date,

after the time window has shut and the organizational dissonance has faded, can meet with extreme resistance. “The Most

Common Management Mistakes” (2010).

Divestiture in M&A Defined is the disposition or sale of an asset by a company. A company will often

divest an asset which is not performing well, which is not vital to the company's core business, or which is

worth more to a potential buyer or as a separate entity than as part of the company. An example would be

the Bell System divestiture, or the breakup of AT&T, was initiated by the filing in 1974 by the U.S.

Department of Justice of an antitrust lawsuit against AT&T. Frum, D. (2000). The case, United States v. AT&T,

led to a settlement finalized on January 8, 1982, under which "Bell System" agreed to divest its local

exchange service operating companies, in return for a chance to go into the computer business, AT&T

Computer Systems. Effective January 1, 1984, AT&T's local operations were split into seven independent

Regional Holding Companies, also known as Regional Bell Operating Companies (RBOCs), or "Baby Bells".

Afterwards, AT&T, reduced in value by approximately 70%, continued to operate all of its long-distance

services, although in the ensuing years it lost portions of its market share to competitors such

as MCI and Sprint.

Synopsis: Merger integration or post-merger integration involves combining the

original socio-technical systems of the merging Firms into one newly-combined system .

ConclusionThe friendly acquisition is the most appealing approach to business success and overall

harmony. This form of acquisition occurs when two Firms agree to the deal and they go forward as a

single new company rather than remain separately owned and operated. The shareholders usually

have their shares in the old company exchanged for an equal number of shares in the merged entity.

The Art of Financing and Refinancing a Merger or Acquisition requires a firm understanding of

Financial Instruments because it takes money to buy a company successfully. All transactions during

M&A are paid for with cash, stock, and or notes. The knowledge of funding sources, equity sales as

a source of capital, and debt is essential. Also, understanding

how leveraged buyout (LBO) financing works can minimize

buyer borrowing and improve profitability at the end of an

Acquisition.

As the buyer of a business the Due Diligence process is one of the most important steps during acquisition. The creation of

a Due Diligence Checklist is a great place to start during the process and the buyer should understand that the list will change

and should be revised as new information is found regarding the business under review. The business buyer or acquirer should

be very thorough during Due Diligence and the following should be reviewed:

Financial Statements,

Management and Operations,

Legal Compliance,

Documents and Transactions.

The reason for a detailed review is to assist the buyer in the prevention of problems after the

transaction or deal is closed.

Additionally, Post-Merger integration should be a swift process and delay can influence cost and success of the merger. A

Firm’s Communications to stakeholders and the public about its integrations plan can avoid misinformation that would affect the

Company’s image and reputation. M&A can involve companies, governments, charities, trade unions and hospitals. Also, close

detail should be paid to benefits plan and divestitures because at the end of the day they can mean overall success or failure of

an acquisition project.

References Holusha, J. (10 March 1987). "Chrysler is Buying American Motors; Cost is $1.5 Billion". The New York Times.

http://www.nytimes.com/1987/03/10/business/chrysler-is-buying-american-motors-cost-is-1.5- billion.html?

scp=1&sq=American%20Motors%20Corporation&st=cse Retrieved 2010.

Chrysler History JB car pages http://www.jbcarpages.com/chrysler/history/ Retrieved 2010.

Diligence-Checklist-Guide, Retrieved from http://www.diomo.com/due-diligence-checklist-guide.html (2010).

(Bradford and Duncan, page 1). http://www.ask.com/wiki/Strategic_planning Retrieved 2010.

Debt vs. Equity Financing: Encyclopedia www.enotes.com/management-encyclopedia/debt-vs-equity-financing Retrieved

2010.

Diligence-Checklist-Guide http://www.gaebler.com/Process-for-Conducting-Buyer-Due-Diligence.htm Retrieved 2010.

The Most Common Management Mistakes – Retrieved 2010 http://www.mergermanagement.com/HR-Management-Merger-

Training/The-Most-Common-Management-Mistakes-in-Mergers-and-Acquisitions .

Frum, D. (2000). How We Got Here: The '70s. New York, New York: Basic Books. p. 327. ISBN 0465041957.