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Define the new business model

1. Unify strategic direction

2. Develop new operating model

3. Set clear targets, accountability, and performance incentives

Resolve uncertainty and conflicts

4, Decide top management

5, Embrace top performers

6, Communicate to get employee buy-in

Respond to external pressures

7. Sell deal to key customers

8. Communicate with external stakeholders

9. Keep regulators satisfied

1. Define the new business model. At a high level this entails ensuring that the rationale for creating value in the deal translates into a game plan that the combined business can pursue quickly. It should identify how the businesses will come together and how each of the main synergies can be realized. Ideally, this planning will begin as part of the deal negotiations, be firmed up between signing and closing, and be ready for implementation immediately after the close.

2. Resolve uncertainty and conflicts. Mergers generate tremendous excitement and stress within an organization. Many employees fear they will lose jobs and will have little say about how the operation will be run. Not much can be done to dispel this anxiety, because the fact is that some people usually will lose their jobs. Moreover, for the deal to be a success, something must change and change can be scary.

Usually the passage of time will lead to a calmer state of affairs, but there are some actions management can take to minimize disruption. Setting the top-level organization quickly is important, so that factions do not develop and people down the line do not have the experience of ''watching their parents fight." Senior management also needs to identify and handhold top performers throughout the organization. They are usually well known to competitors and recruiters and vulnerable to being lured away. Do not underestimate the depth of anxiety even star producers may feel in the midst of a merger. Once convinced of the benefits of a deal, however, they can be very helpful advocates throughout the organization. Finally, communicate as candidly and often as possible with the employee base at large. They may not like everything that happens, but it will go a long way toward reducing the fear and resentment that a feeling of secrecy can engender. Remember, too, that employees are a key source of information for customers and suppliers—poor morale internally can end up creating problems externally.

3. Respond to external pressures. Regulators, shareholders, and creditors will need to be kept informed as a merger proceeds. Indeed, they will likely demand it. If you've done your homework you know about all the regulatory requirements and legal notices required.

If your company is publicly traded you will want to make a presentation to securities analysts on the day of the announcement about the deal, if it is a significant one for the company. You may also be required by securities laws to file disclosure statements. Keep in mind that these materials will have a wider audience, including your own employees and customers.

The CEO and others down the line should contact important customers early in the process— perhaps right after the deal is announced on the news wires—to explain the benefits of the combination and how they will be affected. Competitors will miss few chances to do so on your behalf, so you want to get your story out first. Few things can be more demoralizing than the loss of an important customer shortly after a deal is completed. Conversely, early wins with existing or new customers can be a tremendous source of energy.

Overall, speed of action in merger integration is crucial. Moving quickly dispels uncertainty. And, of course, the sooner cash flow improvements can be realized the better from a value perspective.

Joint Ventures

Joint ventures differ from acquisitions in several ways. First, they are effectively partnerships and their creation does not usually involve a takeover premium to either party. Second, to be successful they must be structured to allow effective control. As a form of alliance, joint ventures are particularly important. Many alliance options are available, as can be seen in Exhibit 7.4. Mergers and acquisitions tend to deal with the entire business system of a company and are more permanent in nature. Joint ventures can be focused on pieces of the business system (a sales joint venture or a production or development joint venture) and can be dissolved after a period of time.

Exhibit 7.4 Alliance Options

In their study of joint ventures, Bleeke and Ernst examined the partnerships of 150 companies ranked by market value—the 50 largest in the United States, Europe, and Japan.5 Their findings were:

• Both cross-border acquisitions and cross-border alliances have roughly the same success rate (about 50 percent).

• Acquisitions work well for core businesses and existing geographical areas. Alliances are more effective for edging into related businesses or new geographic areas.

• Alliances between strong and weak rarely work.

• Successful alliances must be able to evolve beyond their initial objectives. This requires autonomy and flexibility.

• More than 75 percent of the alliances that are terminated end with an acquisition by one of the parents.

To be considered a success in the study, an alliance had to pass two tests. First, both partners had to achieve their on-going strategic objectives. Second, they both had to recover their financial cost of capital. For acquisitions exceeding 20 percent of the acquirer's market value, the deal was judged to be a financial success if the acquirer was able to maintain or improve its return on equity and return on assets. For smaller acquisition programs, interviews were conducted to assess financial success. A comparison of cross-border mergers and acquisitions with cross-border alliances shows the same success rate—about 50 percent.

The motivation for cross-border mergers and acquisitions, however, seems to be different than for joint ventures. Mergers and acquisitions seem to benefit from geographical overlap, perhaps because synergies such as consolidation of production facilities, integration of distribution networks, and reorganization of sales forces are more easily achieved by high geographical proximity. Alliances, on the other hand, are usually intended to expand the geographical reach of the partners. There are fewer alliances with high geographical overlap and they have a much lower success rate for both partners.

Ownership structure is also important for the success of joint ventures. When the ownership of the joint venture was evenly split, the probability of success for both was 60 percent compared with only 31 percent when the ownership split was uneven. Alliances work best when both parents are strong. When one partner or the other is weak, the ''weak link" becomes a drag on the venture's competitiveness and hinders successful management. When one parent has a majority stake, it tends to dominate decision-making and puts its own interests above those of the partner, or the joint venture itself.

5 J. Bleeke and D. Ernst, eds., Collaborating to Compete (New York: Wiley, 1993).

Joint ventures work best when they have autonomy and flexibility. Flexibility is important because the relative power of the parents will inevitably change, because markets and customer needs will shift, and new technologies arise. During interviews with the top companies that have alliances, Bleeke and Ernst found that of those alliances that evolved, 79 percent were successful and 89 percent were still surviving at the end of the sample period. Of those alliances whose scope had remained unchanged, only 33 percent were successful and more than half had ended.

Flexibility and autonomy can be built by giving the joint venture a strong, independent president and a full business system of its own (R&D, sales, manufacturing, marketing, and distribution) and providing it with an independent, powerful board of directors.

Joint ventures have a limited life span. More than 75 percent of the terminated partnerships were acquired by one of the partners. This does not necessarily imply that the joint venture failed. Alliances often end after meeting the partner's goals. It does mean that it is useful to prepare for the break-up of the alliance. If the eventual seller does not anticipate such an outcome the sale can compromise its long-term strategic interests. Often the natural buyer is the company that is the most willing to invest to build the joint venture.

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