Let’s
make a deal
Rochester
Business Journal
October 8,
1999
Special Report Small Business
by:
Lynette Haaland
Business Methods Inc. wants to double its annual
revenues of $23 million over the next five years. In order to do that, the
company must make more acquisitions.
The Brighton company
already has acquired one company and is in the process of buying three
others.
The first acquisition was
the Computer System Group, a company with $2 million in revenues. This
year, BMI is looking at acquiring two local companies and one company from
Buffalo that do similar work, says Steven Sauer, executive vice president
and chief operating officer.
Sauer believes the key to a
deal is assembling the right team of experts, including a lawyer,
accountant and consultant. “Confidence allows you to take the next
step,” he says. “lf you don't have it, you won't pull the trigger to
do the deal.”
While there are different
ways to negotiate deals, there are some universal steps all companies must
go through to reach a successful partnership, says Diane Harris, president
of Hypotenuse Enterprises, Inc., which advises and trains other companies
on the “art” of deal making. BMI's Computer System Group acquisition
took approximately two months from start to finish, Sauer says.
"It went very well,”
he says, referring to everything from working out the terms of the deal to
the timetable and the business details.
One of the first things a
company needs to figure out is what kind of deal structure is right,
Harris says. She helped put together more than 230 deals, totaling more
than $1 billion when she was vice president of corporate development for
Bausch & Lomb Inc.
Deal structures include
supply agreements, licensing, strategic alliances, joint ventures and
mergers.
BMI chose an acquisition
deal with Computer System Group, buying controlling interest of the
smaller company.
In a merger, it is usually
the marriage of two equal companies, Harris says. In licensing, one
company may let another company use its brand name on a product.
And in strategic alliances
and joint ventures, two companies come together. One usually brings the
products, the other the distribution network, and they join to
commercialize the products.
Dennis DeLeo, a Trillium
Group LLC principal who consults with start-up and early stage companies
on their business strategies, says when evaluating an opportunity, a
company must assess impact on revenues, cost savings, what its competitive
position will be after the deal, and the ability to control or manage the
company.
Smaller companies, with up
to $5 million in revenues, are not initially looking at the competition,
but rather they are trying to establish their business and secure
revenues, DeLeo says. Many times, smaller companies are more comfortable
in strategic alliances than mergers or acquisitions because they can share
technologies with a larger company without giving up ownership.
Midsize companies—those
with more than $25 million in revenues--are more concerned about the
established or emerging competition, he says. The idea of partnering
protects them from some of the competition and is a way to build a
stronger company.
William Conklin, lecturer
with SUNY College at Brockport's Business and Education Department, says
the main reason a company makes a deal is to get capabilities another
company has, such as a specialized work force or certain technology. If a
company does not seek the latest technology, then it could lose its
competitive advantage.
The motivation to do a deal
is that the whole is greater that the sum of its parts, meaning that the
newly created entity should be more profitable than the two companies
taken individually, Conklin says. This can be through a combined customer
base that can offer greater potential for more sales.
"Only 20 percent of
the deals made end up being a total success," Harris says, adding
that taking the proper steps can ensure greater success. Here is an
outline of Harris' six steps toward a successful deal:
Harris notes that it is
extremely important to make sure those going into a deal-making situation
have formal training. If the company is not equipped for deal making, it
is at a disadvantage, which may affect the relationship with company
dealmakers in the future.
Harris says the key to a
successful deal is personal credibility. If someone does not deliver on
promises as small as delivering papers on a certain day, it can affect
trust in the deal.
At Harris' latest
deal-making seminar, Ashland Inc.'s Distribution & Specialty Chemical
Group sent employees from Columbus, Ohio, to Rochester to learn how to be
better at the bargaining table. Kevin Johnson, who works on an average of
seven deals a year at Ashland, fine-tuned his negotiating skills.
"There are techniques
out there we are not aware of," Johnson says. "We are looking to
see if there are new and better methods."
For example, Johnson and
his team brought back tips on how to change the language in the company's
confidentiality agreement to be more specific and spell out more
protections.
Sauer says BMI is looking
at more than numbers in its acquisition strategy. He believes aligning the
"people side" determines an acquisition's success or failure.
Once the acquisition is
completed comes the job of merging operations. If culture and human
capital are not considered, this process could be brutal and expensive.
Sauer says it is important
that the consolidation team have people from both sides of the
acquisition. His other advice to make the acquisition work: "Be
up-front and frank, and make people feel comfortable."
With the Computer System
Group acquisition, being a small company helped. Sauer could spend time
with everyone and explain to them "what we're doing and where we're
going."
The Computer System employees were nervous at
first that BMI did not have the background to make a successful expansion
into digital products, but Sauer and his team were able to convince them
they were ready.
