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« Political Soapbox - 2 (digging the hole deeper) | Main | The Fight Begins »

Merger Mania

Well the merger bug seems to have bitten quite a few recently.  And it’s not just those few remaining unconsolidated Miller Coors houses… lots of talk between adjacent and overlapping wholesalers of all shapes and sizes… A-B and Miller/Coors.  So what is driving this sudden interest in mergers?  I’d like to hope it is just old fashioned common sense and the realization that sometimes 80% of something is better than 100% of nothing.

Of course the push for consolidation has been occurring for some time now, and the same problem remains… most don’t want to leave the industry.  This is completely understandable.  These are great businesses in a great industry.  This reluctance to sell has had a distinct impact on prices, driving the value of the franchise rights higher and higher.  Economics 101, more demand for a very limited supply drives up prices.

In addition, often these family businesses go back to prohibition so these businesses are a lot more than “just” a business.  This is true of almost all private businesses; they mean a heck of a lot more than just some shares of common stock.  It is easy to have no emotional attachment to your shares of IBM or Cisco stock, not so easy when it’s the family business.  And as is the case in almost all privately-held businesses, they are an important – perhaps profound – piece of your life.  Most owners spend much more time with their businesses than with their wives or children.  The business is the largest, and most important (at least from a time viewpoint) aspect of an owner’s life.  To sell a family business is emotionally much like selling a child… a dang tough thing to do regardless of the price or the circumstances.

And of course no one likes to feel that they are being forced to do anything.  This will almost always to significant push-back, regardless of whether the proposed move is a good one or not.  Have you ever tried to lead a green horse or cow?  Throw a rope over their neck and regardless of which direction you try to make them go, they don’t want to go in that direction.  Just the act of trying to make them go in a direction forces them to fight against it.  People are much the same (and for those parents out there, you see it all the time with your kids).  It’s just the way it is.

In addition, many of these established wholesalers are relatively debt free, and the beer distribution industry is a great cash flow business, so many of these wholesalers can financially weather a heck of a lot before being financially forced to sell. 

So a lot of these wholesalers are examining the business horizon and coming to a number of conclusions:

·                    The status quo is unacceptable… and projecting it out into the future doesn’t change the picture.  Therefore something must be done.  But what?

o       Consolidate by purchasing adjacent wholesalers.  That would work but the dirty rotten SOB won’t sell – I liken it to a fish tank where every single fish wants to eat all the other fish… it adds a certain tension to the tank.  But if they won’t sell (and remember, YOU are their “they”), what to do?

o       Of course try to find additional brands, etc.  Everyone and his dog is doing that.  And for the major secondary (and even tertiary) brands, it seems the brewers might be cutting in line in front of the distribution tier and making these decisions for you.

o       Not to beat a dead horse but… form a state-wide association to act as a funnel to bring you quality brands, be it beer, wine, spirits, NAs or whatever.  This option still has the greatest potential to drive significant financial rewards to all members.

·                    Or accept the fact that in many situations no one is going to leave so instead of fighting and hoping for the other guy to tire first, investigate a merger.  When you can’t fight them, join them.  These can be between similar sized wholesalers or wholesalers of different sizes.

I’m working on a number of proposed mergers right now – in many cases my role is one where I work for the proposed merged company, protecting the interests of both parties to see if a merger is possible.  If a number of hurdles can be met, they almost always make sense. 

1.                  A fairly high level of trust is required.  A wise attorney once told me to choose my business partners with more care than I’d chose my wife… I’ll be spending more time with them and they may ultimately be more important to my life.  We can create legal documents which will “protect” you regardless of the circumstances… yeah right.  All it will take is years in the courts and hundreds of thousands of dollars in legal fees to enforce this “protection”, and you can always lose.  As I recently sadly learned in dealing with venture capitalists, it is impossible to successfully do business with people whose word and signature have little to no meaning.  Most of you already know your potential merger partner pretty well, if you don’t feel you can trust them… my advice is to walk away and save yourself a lot of pain and headaches.  Remember, if this merger fails down the road, getting divorced will be MUCH MORE difficult and painful than getting married.

2.                  You can’t always get what you want.  In every re-organization I direct, I always emphasize a reality of building a new organization – no one is going to get 100% of what they want.  Organizations are a complete and integrated system, and we design them so the system is optimized, not any single part.  Delivery routing is a perfect example.  If you operate 20 routes, you could possible built 10 or 15 “perfect” delivery routes, but only by leaving the remaining routes complete, unworkable disasters.  This doesn’t work.  Instead each route is less than perfect so the total delivery routing is as close to perfect as is possible.  Keep the same in mind as you consider a merger… compromise from all parties will be required.  You can’t take every single decision to the mat and fight to “win’ every single one.  If you don’t plan to compromise, then don’t waste everyone’s time… walk away.

3.                  Change requires just that, change.  Please repeat this 3 times.  It seems rather self-explanatory but if you really want to complete a merger, everyone must be open to change.  The organization will be different.  The power structure will be different.  The roles each party plays will be different.  You can’t complete a merger without change.  If you are unwilling to change, then walk away.

4.                  Which part is more important?  Also in each re-organization I do, a standard issue is raised – which is more important?  Since we are often creating entirely new positions, this question is often on employee’s minds.  I often respond with an example from the space shuttle Challenger explosion.  If you recall, the Challenger exploded soon after lift-off, completely destroying the space shuttle and killing the entire crew.  The cause of the explosion?  A rubber O-ring with a cost of about $5.  Tell me, which part of the Challenger was the most important?! I think those dead astronauts would tell you that $5 O-ring was pretty darn important. The question, which part is more important, actually doesn’t make sense since the premise of the question is invalid.  In a system, no part is “more important” than any other part.  In a system, all parts are equally valuable since the system will not work if each part does not perform its specific duties.  Think of your car.  Which part is more important, the spark plugs?  The spark plug wires?  The transmission?  Take any of them away and see how your car runs.  Or look at a business.  Often I hear how a position like the receptionist isn’t important.  If you have ever dealt with a great receptionist versus a terrible one (as either an employee or customer) you know what I mean.  A receptionist is a very important position which can have a profound affect on the daily operations of your business.  The same is true for these potential mergers.  All parts are important.  Let’s not get too hung up on the imaginary stroking of egos, with two willing partners we can design a superior merged organization which meets everyone’s goals and desires. 

5.                  When building something new, start broad and work your way down.  You won’t know a lot of the answers at the beginning.  That’s just the way it is.  Building a new system is a process; at the end you’ll have the answers, not the beginning.  Far too often potential change is shot down right at the start because the answer to some specific question is not known.  When these issues arise, write them down as something which must be addressed at some point in time, just not right now.  There is a sequential nature of building things and you have to get “A” done before you can define what “E” will be.  Don’t let this fuzzy nature of new organizations stop you.  In addition, always attempt to focus your initial discussions on issues, not necessarily your solution to the issue.  There might be many solutions, let’s not argue about them until we have agreement on the basic issue(s).  Often at the end of this process, an issues-based analysis, the process itself clearly identifies a superior solution… and saves us a lot of useless bickering.  And remember, no one knows what the weather will be two weeks from today, so let’s not waste a lot of time arguing about things over which we have no control and have no way of truly knowing.

6.                  Much like a handshake, someone has to stick their hand out first.  This is not a sign of weakness; it’s a sign of an open mind.  Perhaps the merger can be designed to meet everyone’s approval, perhaps it can’t… but it will never happen if someone doesn’t at least start the investigative process.

7.                  All successful long-term relationships are win – win.  This is true whether it’s your merger partner, an employee, your wife, or even a friend.  If you think about it, this truism must be true.  If both parties have freedom, they won’t stay in the relationship if they are constantly “losing”.  If you are trying to “win”, to beat your merger partner in this process, I recommend you also walk away.  The odds of “winning” are incredibly small, while the odds of wasting a lot of time and money AND creating bad blood are very high… all while causing real harm to your business in the process.  If you can’t see this process as win – win, look elsewhere.

8.                  Put in the effort upfront.  If you are truly going to investigate the viability of a merger, do it right.  Of course the financial aspects of the merger are of utmost importance to everyone, but things like the value of both entities post-merger, should be determined towards the end of the initial process not the beginning.  Instead bring me in right at the start to focus on three primary issues – generally we can get these done in a week or two:

a.       Ownership and power – Here I conduct private and confidential interviews with all relevant parties to ascertain everyone’s desires and goals.  Generally at the end of these meetings I will have a very good feel on whether the proposed merger has a chance of success.   I won’t lie to any of you, mergers of this nature are extremely difficult to complete.  Not from an operational perspective, the operational side is relatively easy, but from the ownership/management perspective.  Putting the effort in up front by focusing on these issues helps increase the odds of success throughout the entire design and implementation process.  This is by far the most important factor in success.

b.      Organizational design and changes/modifications each party will need to make to ensure the merged organization operates as one. 

c.       Mutually agreed upon costs/savings this new design will generate.  These are then fed to your person doing the financial valuations.  Spend the money on the financial valuation AFTER these three steps, not before.  In fact at the end of these first three steps, you will know whether it is even necessary to spend the money on the valuation… it might be clear that the present odds of completing the merger are far too low to waste money on an expensive formal valuation.

d.      If the merger still looks probable, the financial valuations are completed and the merger either moves forward, is re-negotiated, or we all walk away.

Mergers can and do make sense in many situations.  They are not easy to complete and the odds of failure are relatively high… but for those who are willing to take the chance they can be well worth the effort.

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