Doing the Deal Part 1: The High Stakes in Business Transactions

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Courtesy of Richard MacLean & Associates, LLC

Providing support for major business transactions is arguably the most important strategic responsibility of an EH&S manager. The potential cost savings (if done correctly) or liabilities (if done poorly) can be enormous. A company may bet its future success on a single business acquisition or merger. Even purchases or divestments of plant and equipment can have a profound effect on a company. With so much at stake, one would expect that EH&S support for business transactions is a finely tuned and closely managed operation. Wrong. It is often ad hoc, with the EH&S manager brought in at the eleventh hour to rubber stamp a deal steamrolling along. In this, the first of a three-part series on business transactions, we explore the internal politics of “doing the deal” based on a survey of best management practices of leading companies conducted by Competitive Environment. Next month, we will examine specific approaches to property risk assessments, and in the third and final part, we will analyze the value of environmental management system assessments in merger and acquisition activities.

There is something inherently “sexy” about major business deals. Business executives are drawn toward them like a bear to honey, and recently, mergers and acquisitions (M&A) have been occurring at fever pitch (see “Recent
Major Mergers and Acquisitions”). The “urge to merge” is truly amazing, similar to the need for politicians to vie for a new sports stadium or major league team. Civic leaders may express unflinching enthusiasm for new sports arenas, but the public has begun to balk at the building of taxpayer-subsidized stadiums that appear to enrich a few, but fail to benefit the overall community. Much in the same way stadiums are receiving closer scrutiny by voters, M&A are now receiving careful examination by stockholders and analysts. The results are surprising. Only 17% of the major deals made during 1996–1998 increased shareholder value. In fact, a study by KPMG International showed that 53% of 700 deals actually reduced shareholder value.1

EGOS, POLITICS, AND POWER PLAYS

If major business transactions are more often than not “bad” deals, why do executives pursue them? The simple answer is that so much is at stake politics and power plays drive the deal and determine the outcomes, not facts and reason. Executive management dynamics before, during, and after deals can be turbulent. As a result, specialized management consulting services have emerged to deal with such issues. David Greenspan, executive vice president of management advisors Clemente, Greenspan & Co., explains, “There continues to be an increase in the number of M&A failures. Recent studies reveal that between 35 and 50% of all deals fail to even return cost of capital. But the most chilling statistic is that three out of every four deals fail to achieve either their strategic, financial, or operational objectives. So in essence, before you even begin, the odds are stacked against you.” In some cases, the initial strategy is flawed, yet ego and corporate hubris force the deal to proceed. In other cases, traditional due diligence—which focuses on legal, finance, tax, and accounting issues—is employed and not “marketing due iligence.”2 Marketing due diligence assesses a target company’s growth-related strengths and weaknesses to ensure the success of a merger or acquisition. It transcends traditional due diligence by its dual nature, focusing on both “defensive” (risk avoidance) and “offensive” (growth) aspects. While there may be an integration strategy, its execution is often flawed. Integration is a management process unto itself. Many senior managers are under the false impression that because they can manage, they can also integrate. Clemente, Greenspan reports that the firm is sometimes brought in several weeks after closing, once management realizes that the advice and execution of someone with specialized integration experience is critical to ensuring success. The clock is ticking. The eyes of Wall Street analysts are looking for results. And the company is now faced with two diverse groups of people, products, and processes, with management trying to figure out what to do. Lack of foresight, in this case, is a recipe for disaster.

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