MERGERS AND ACQUISITIONS IN THE N.E.W.--NEW ECONOMIC WORLD

by Herb Rubenstein and Robert McNeice

Conventional mergers and acquisitions more often destroy shareholder value than expand it. Every major consulting firm that has studied this area including Price Waterhouse Coopers, Bain & Company, McKinsey, Deloitte, Accenture and Ernst and Young, all report that somewhere in the vicinity of two thirds of all mergers are failures. The write-offs of the 2001 in the field of acquisitions by companies are creating losses of historic proportions taking down acquirers like PSINet and plunging JDS Uniphase into a staggering 50 billion dollar loss for the past twelve months. Harvard Business Review articles and books like Mergers and Acquisitions by our colleague Jeff Hooke lay the foundational principles for how to evaluate a merger or acquisition opportunity, how to plan for the absorption, how to execute the integration of the entities and how to evaluate the results.

Although the conventional M&A thinking is based on sound economic principles, supported by high priced consultants, banks, underwriters and other very savvy economic players, there is a growing sense that something is terribly wrong with the M & A process as it is practiced in the U.S. today. Recently, when AOL announced its merger with Time Warner, AOL’s stock lost 39 billion in value. Daimler-Benz’s “merger” with Chrysler has been such a disaster that the very future of Chrysler is now in doubt.

Mergers and Acquisitions have cost the world economy hundreds of thousands of jobs over the past decade. While shareholders have repeatedly lost money on these ventures, employees have lost their livelihoods, companies have lost their identity and core competencies and most importantly, talent and innovation in the company acquired has been smashed to death.

These failures in the conventional economy come at a time when “new economic world” and “new age” companies are just beginning to pass the million dollar marks in sales and profits. Companies and non-profits whose organizations are related to healing, meditation, preventive health care, yoga, “consciousness raising,” mediation of disputes, mentoring, ending illiteracy, promoting diversity, ethics, spirituality, environmental awareness and other “new age” topics are finding that as they grow they need a system to work with other organizations to promote their complimentary goods and services. They need more efficient manufacturing; they need access to larger markets; they need larger amounts of capital than their own balance sheets and management teams can command and, most importantly, they need to diversify and become more complex, rebutt economic entities in order to survive the next economic downtown or unpredicted changes in consumer preferences and in their competition.

Unfortunately, it appears the lessons to be learned from the traditional economy’s merger and acquisition approaches are few and far between. In fact, the old economy and the high tech “new economy’s” M&A track record has been so abysmal that companies in the new economic world - - a world that promotes uniqueness, values talent and innovation, seeks to create new markets rather than dominate old markets and seeks to harmonize business with an improving and sustainable world - - must look to a completely new paradigm to guide how mergers and acquisitions take shape and are implemented.

This article begins to lay out some of the fundamental principles of mergers and acquisitions in this new economic world being created today by thousands of entrepreneurs in small businesses and non-profits whose twin goals are economic success for the organization and undertaking activities that make the world a better place.

The old M&A paradigm was based on a notion of power that allowed only one company, one executive, one culture, one regime to rule the newly merged or combined enterprise. Occasionally mergers like Citicorp Travelers would keep two stop executives after the merger in an “office of the Chief Executive.” Rarely would this “dual control” or “dual leadership” work for long.

New age companies and non-profits can fall into the same power games and the same “one culture fits all” mentality that zaps the strength, vitality and ability to perform economically that we see over and over in the traditional economy. There is a way out, a new paradigm that can be used to link up, promote mergers, facilitate acquisitions and generate symbiotic, economically powerful relationships among new economic world companies and non-profits. This new paradigm is calling “bonding.”

Bonding is the forming of one entity where the two original parts do not lose their character, their basic elements or their identity. More importantly when two materials bond together they each still represent and continue to manifest the basic energy forces and molecular structures that made them unique structures in the first place. When two companies or non-profits form a new bonded structure they can gain economically, empower the workers and leaders of each group so linked and most importantly, like in chemistry, they can form complex bonds that create super strong, super effective entities without destroying the fabric of what made each element a perfect bonding partner in the first place.

A bonded group of companies (two or more) or non-profits is stronger than companies or non-profits that form strategic alliances. They can enhance shareholder value and customer well-being by allowing those whose creative energies got the individual companies or non-profits off to a successful start to maintain a strong role in the newly bonded enterprise. The bonded enterprise can promote a single branded marketing strategy or “sub-branded” strategies where the goodwill of the companies that have just bonded is maintained and strengthened rather than destroyed under the “one label fits all” strategy.
Bonding will require careful screening in the partnering process, sound economic analysis, promotion of efficiencies in production and distribution and require that the newly bonded organization be fully committed to creatively and profitably deploying the creative elements and workforce of each entity forming the bonded entity rather than destroying these elements as so often occurs in old economy mergers and acquisitions.

The newly bonded organization will have to create its “rules of engagement,” its new operating and decision making structures, its rules for becoming bonded with other entities and its rules for disengaging the bond should that become necessary. The form and structure of the bond will require lawyers, strategic planners, investment bankers, venture capitalists and CEO’s and managers to begin to look for new ways to join forces, new ways to unleash the talent in their respective organizations and new forms of distributing power and decision making authority among the newly joined elements.

The key to making these newly bonded entities successful will be to create a sustainable distributed power system that promotes decision making at the lowest possible level in pursuit of achieving a set of goals for the new entity that is widely accepted by shareholding workers, customers, vendors and all other key stakeholders of this new entity. Distributed power and the political science work necessary to make these bonded entities’ value far greater than the sum of its parts are essential for new age companies to form unions without sacrificing their core values in order to compete successfully in the marketplace as we transition to a new economic order.

The costs of bonding the right way initially may be greater in terms of research, costs, creation of distributed power systems, protections for each element of the bonded enterprise and careful planning than the hard money costs associated with traditional mergers and acquisitions. The benefits can be enormous not only in increasing economic value from combining entities but also in creating stronger economic entities that can serve as the protective shell that allows creativity, personal development, widespread employee training and education, new product development, new standards for customer service, and the unleashing of talent that is prevented daily due to the fear and uncertainty created in the traditional merger and acquisition route to growth practiced today.

New age companies and non-profits have a particular duty to “walk the walk” and by bonding with other organizations to form “a more perfect economic entity” they can lead the way to showing entrepreneurs all over the world that James Moore’s “The Death of Competition” was the start of a new way not only of doing business but a whole new way to look at business.

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