Story by Tom Zind
Photo courtesy of The city of overland park
With a slow and uncertain economic recovery underway, merger and acquisition activity, which grounded to a near halt four years ago and lay mostly dormant for two years thereafter, is starting to heat up again.
But a couple of local high-profile mergers that predated the 2008 economic downturn continue to cast a long shadow over the Kansas City-area M&A scene. Sprint Nextel’s purchase of Nextel Partners in 2005 and YRC Worldwide’s acquisition of rivals Roadway Corp., in 2003 and USF Corp., in 2005, stand out as a few textbook cautionary tales of what can happen when a merger goes haywire.
Both companies, deeply rooted in Kansas City, might have moved too hastily either to consolidate power in their industries or keep predators at bay. Today, they are still struggling to digest purchases that proved too big and too costly, and the process of righting the ship and finding a profitable way forward continues.
Although M&A missteps are far from the only reason the two Overland Park-based companies stumbled in recent years, it’s fairly easy to connect the dots. Culture clashes, ill-fitting business models, assumption of crippling debt and failure to anticipate worst-case scenarios doomed the deals.
In 2011, scores of growth-hungry companies with a Kansas City connection did manage to look beyond examples of failed M&A. Country Club Capital Advisors tallied 150 key deals involving a Kansas City-area company last year, a notable decline from 2010 but further evidence that the market for deals has firmed since the onset of the 2008 recession.
With the climate for deals starting to improve, more area businesses are sure to attempt the tricky M&A dance. Though each will be different, the parties will have playbooks with dog-eared pages on the importance of due diligence, trusted sounding boards, realistic expectations, a good sense of the deal’s essence and a plan for integration.
M&A candidates looking to take a lesson from Sprint and YRC likely are paying close attention to the importance of culture. In both of those examples, planning for the mechanics of joining two surprisingly different companies might have been overlooked.
The problems each experienced might be classic examples of focusing too much on sealing the deal. Tom Knauff, an acquisitions specialist who worked in the Kansas City propane industry before he co-founded investment banking firm Jordan, Knauff & Company in Chicago, says that acquiring companies must carry the ball across the finish line and beyond.
“Integration is where many of the problems with acquisitions come from,” says Knauff, who shepherded numerous deals as an executive with the Overland Park-based Ferrellgas Partners and as co-founder of Propane Continental (PCI), also in Overland Park, in the early 1990s.
Knauff adds: “When you buy something for some multiple of EBITDA (earnings before interest, taxes, depreciation and amortization), you have to know exactly what you’re acquiring, determine what umbilical cord is connected to it and preserve it. One big mistake many acquisition-oriented companies make is to put their most talented people on the acquisition part of the deal, and then after one is done they move on to the next, leaving the newly acquired company flopping around like a fish pulled out of the sea.”
Sometimes, that can be fatal. The eventual buyer of PCI, Knauff says, allowed the company’s wholesale propane unit to flounder. Inattention led to the loss of key personnel and customers, dooming a core element of the acquired business.
“If that unit had been making something like a $2 million profit, $16 to $20 million in enterprise value ended up being squandered because it was inappropriately integrated,” he says.
Because of its importance, the time to begin the integration phase is well before the deal closes, says Jene´ Popper Hong, principal and practice leader of CFO Services for Business Transition Specialists, an Overland Park-based M&A consultancy. Many an M&A failure is rooted in the acquiring company assuming integration will take care of itself.
“In the Sprint [Nextel] deal, the systems didn’t work together, the new people weren’t trained properly, and there was a lack of integration planning,” Hong says. “Ideally, instead of staging an integration plan after you buy the company, the best ones are [integrated] simultaneous with the acquisition process. The meshing of cultures and people issues play a big part in a merger’s success or failure.”
Those challenges often are understated and misunderstood, says Knauff. Suitors who might prize a company for its culture often don’t realize that it’s not static.
“If you’re buying a culture, you have to be aware of the fact that buying it changes that culture,” he says. “You’ve put ink in the well, and it will be changed. Don’t always just assume you’re going to be getting all of that good cultural stuff.”
No matter how well-planned the acquisition, Knauff says, the people who come with the new company likely will be a little on edge, and a lack of information and clarity could breed anxiety and rumors. For that reason, it’s vital to station senior and capable employees on the ground, people who can be empowered to make critical decisions swiftly and confidently.
Ample due diligence in all its forms, from the hard numbers to the softer people side, is as important as ever, and even at risk of being more rushed as deal-making heats up.
Hong, whose firm has closed more deals so far this year than in both of the past two years combined, says both buyers and sellers need to turn over as many rocks as possible to mitigate risk.
“Sometimes people just go at it too quickly and they don’t invest the time to find all of the ‘dead bodies,’” Hong says. “You don’t want the process to drag out forever, but it is important to take the time needed and, if possible, work with a professional adviser.”
Because many acquisitions now demand more up-front equity, buyers should feel more pressure to be very thorough in scouring all of the angles of a potential purchase, Knauff says. Even companies that are well-versed in M&A could risk falling into the trap of going through the motions.
“Experience in doing a lot of [acquisitions] can work against you,” Knauff says. “When you have it, sometimes you’re not scared enough. It’s often good to have someone on the acquisitions team asking the naive questions and demanding that the team goes through the motions. ‘Be very afraid’ may be the best piece of advice.”
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