Ingredients for successful mergers and acquisitions

A startling Jerusalem Post headline, “Exit Nation? 95% of Israel start-ups sold abroad” (June 4), is a clarion call for the Israel Securities Authority (ISA).

June 16, 2013 21:41
4 minute read.
Waze traffic software

Waze 521. (photo credit: Marc Israel Sellem)

A startling Jerusalem Post headline, “Exit Nation? 95% of Israel start-ups sold abroad” (June 4), is a clarion call for the Israel Securities Authority (ISA).

“In 2012, Israeli hi-tech companies raised only 27% of their funds from local venture-capital funds, while the rest came from abroad or other sources,” according to the new report.

Just when infant Israeli companies take their first steps, they hold the hand for stability and reassurance of towering, sometimes fatherly looking, foreign corporate executives with bulging wallets, not Israel venture-capital funds or banks.

Eight days after this ominous report, the paper confirms, “It’s official: Google gets its Waze” for $1.1 billion. A month earlier, Berkshire Hathaway paid more than $2b. for remaining shares in Iscar after spending $5b. for 80 percent of the company in 2006. Other M&A snippets can be found in the Post’s June 12 edition.

Buyers have created a culture of aleatory sugarplum dreams in Israel. Start-up company founders and investors hope to sell their companies, making them wealthier beyond their wildest imaginations. One company CEO and founder of a new software company interviewed me to be his general business manager. He repeatedly whispered to me throughout the meeting, “This company is going to be worth billions of dollars,” and it wasn’t four years old. It has no sales and is running down first-round money raised from family, friends and personal savings. The pervading culture in Israel’s start-up community is one of here and now, grab market share, hold it for as long as you need to and sell for as much as you can.

Cash is the sweet ingredient of M&A. The worldwide economic struggles appear to be under control and economies are stabilizing. Stock markets are zooming, corporations sit on mountains of cash and survivors trimmed the fat, leaving glowing bottom lines and balance sheets. A keystone of buyout corporate culture is it is easier and cheaper to buy assets than build them. In times like these, of cheap money, some business leaders pay premium prices for building corporate assets through acquisitions. The low value of the dollar, low interest rates and bonds yields, and low inflation, make corporate assets very attractive even at these prices. Some are borrowing heavily to buy, but acquisitions will fail if they do not make business sense.

This confluence of factors makes foreign buyers and Israeli sellers happy to swim in the same pool. We have yet to hear about a hostile takeover in this environment.

Peter Drucker identified five simple rules for successful acquisitions decades ago (The Wall Street Journal, 1981):

• First, know what the buyer can do for the acquired company, not visa versa. Money is not enough. Management expertise, market savvy and technology are all more critical.

• Second, there must be a common core of unity between the two companies. Drucker suggests these include shared markets, technology or production process. They must share a common culture through experiences, expertise and common language.

• Third, an acquisition can only be successful if the buyers respect the product, markets and customers of the new company, and there is a “temperamental fit.” Pharmaceutical researchers and biochemists are concerned with health and disease. Pharmaceutical companies acquiring cosmetic firms made the serious staffs of the former sour on the frivolous products, markets, customers and researchers of the latter.

The M&A is not all about the deal to impress board members and media.

• Fourth, the acquiring company must provide top management within a year of purchase because they are not buying management. Integrating the two companies might work, but not always. Warren Buffett, an investor (not a titan of industry), leaves the management in place of companies he acquires; he rarely intercedes in the operations and lets them run practically as stand-alones.

• Fifth, management people in both companies receive substantial promotions from one company to the other. This creates the vision that their personal opportunities are enhanced.

Carly Fiorina, former CEO at Hewlett-Packard, warns that “fear is a principle motivator in business. People fear change.”

They must be made to feel secure in the new company, and positive reinforcements must come throughout the first year of acquisition.

The report to ISA warns of the loss of jobs and economic vitality in the exit nation. Mellanox plans to delist from the Tel Aviv Stock Exchange and trade on the NASDAQ Stock Market.

No target is too small for takeover. Tiny Beeologics, begun in Israel, was acquired by agriculture behemoth Monsanto.

Acquisitions are bleeding the economy white. Politicians are not rushing to slow the drain because the windfalls to the Treasury from sales of companies can be staggering. Globes reported that Prime Minister Binyamin Netanyahu telephoned Waze CEO Noam Bardin to congratulate him for putting “Israeli technology on the global map.” In a gleeful sounding follow-up, he said, “You are also contributing to state coffers, which is welcome at this time.”

In the end, it is all up to the sellers. Stay for the long haul or haul the money away. Dr. Seuss wrote just the right scenario: “You have brains in your head. You have feet in your shoes.

You can steer yourself in any direction you choose. You’re on your own, and you know what you know. And you are the guy who’ll decide where to go.”

While buyers will woo and cajole, “You’re off to Great Places! Today is your day! Your mountain is waiting, So... get on your way! Oh, the Places You’ll Go!” Dr. Harold Goldmeier is the managing partner of Goldmeier Investments LLC and an instructor of business and social policy at the American Jewish University in Tel Aviv.

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