Archive for the ‘Cultural Mergers’ Category

Financial Due Diligence – Beyond the Dream to Reality

Saturday, June 12th, 2010

 By Mary Whetstine

In our previous financial analysis article, Due Diligence/The Tool for Transparency, we discussed the necessity for due diligence for an investment or acquisition.  We are now going to examine the critical part of the process:


Financial Due Diligence

You now have made the decision to move forward with the strategic acquisition or selling of the company, the patent, the license, or the design that will take your current company to the next level.  This is where you go beyond the dream and the great idea. This is where we detach from the emotion and the energy and we ask” is there enough substance to last?”  Be prepared to do your research and know your company’s past, present and future,  because if you are to be successful with your capital requests, your private, closely held group will be turned inside out and inspected.

Financing needs and terms—why is the capital needed?  Will it be used for products or personnel?  A timeline needs to be established.  How does the funding need to flow, exactly how and when it will be consumed?  Is the company public or private?

Business Model and budgets—this may seem really basic, but know your cash flows.  What are your expenses and revenues and how they are affected by the capital? Prepare a balance sheet and detail liabilities.   Do you plan to hire people or buy equipment?  What is the burn rate?  Have your goals and objectives mapped out, short and long term?  How will the capital be used upon receipt and what is a one year milestone?  What will the company look like a year from now?  Prepare projections detailing scenarios for best, worst and most likely, include the dates and when you estimate you will break even.  Finally, what are your future funding needs and who do you see as a possible source for that capital?  What are the milestones that will have been achieved that will enhance your receiving that next round of funding?  Do not fall into the trap that by acquiring the funding you have just hit the lottery.  Demonstrate that the money will be used for solid enhancement of the business and not perks.

            Compensation—if stock options are used, know the vesting schedule as to how the plan dilutes stock.  If there are restricted shares, what are the details of the restrictions?  Determine how the founders, board and key employees are compensated and if there is a vesting schedule.

Without being able to answers these questions, there is no going forward because you don’t even know what you have, nor a justifiable value of what you are seeking to acquire or sell.  Without that full understanding of value, it will likely be a futile attempt to convince an investor that your company, the patent, the license, the design is a great investment.

Dear Reader: Can you share a financial due diligence experience that had either positive or negative results in the acquisition or selling of a company or intellectual property?


Next time we’ll finish financial due diligence by exploring some of the legal elements to review.  Then move on to the competition and marketing components.


Friday, May 21st, 2010

There are areas of mediation and conflict resolution that are all too often ignored by even the largest of companies. If I had to characterize the omission, it would be close to not having automobile insurance, not taking fire precautions, not locking your car door in a city or not taking preventive medication.

A positive case in point that may illustrate the type of problem that arises is a story of a large fortune 100 company, whose financial division included a marketing department and the CIO’s (Chief Investment Officer) department.

These two groupings employed well over 1,400 people. The “powers that be” decided that it would be worthwhile, due to the departure of the executive in charge of marketing, for the CIO to take over and combine the functions of both of these departments. The problems that arose from this combination were many and yet, when we investigated, it was in large measure due to the perceptions that each department held of the other.

According to Marketing: “The CIO department sits in an ivory tower and makes (word altered here) “stuff” up that has no application in the real world and expects us to make it palatable”.

According to the CIO group: “Marketing doesn’t really do anything anyway. They throw parties and put names on hats and golf balls”.

The challenge here was not the mechanical or functional merge between these diverse portions of the same organization, but rather the cultural merger. Could the perceptions that each held of the other be changed? What were the factors and blocks that stood in the way? Would the organization take an active structural role through a shift in the way it rewarded the employees so that cross group and team function was a portion of the bonus structure? Was it possible for the individuals at the top of this grouping to genuinely attribute value to their interaction with the other department and model that for the whole group?

In this case, perceptions were changed and structures were shifted through the application of mediation and conflict resolution approaches. After a year of our input we found that a natural synergy had been developed, that project managers for the CIO service would always request participation by the Marketing department in the earliest stages of development and the reverse was also true. These departments became intertwined, and the group leaders requested that the leadership structure be moved into the same suite of offices so that they could cooperate more easily. Through the wisdom and sensitivity of leadership, mediation help was asked for at the right time and the results were excellent.

By contrast if we look at the rise and fall of the Daimler-Chrysler merger, we can see that they believed a tremendous amount was to be gained by the merger of technical expertise and manufacturing capability. Indeed, the technical levels of both organizations were raised considerably. The final results only a few years later were characterized as deception and betrayal. The short lifespan of this merger was due to the lack of will to invest in making a conscious cultural merger. This might have been be carried out by consultants who had a wide range of communications, mediation and conflict resolution skills being brought in during the initial merger talks and not left as an afterthought to the financial or just to chance.

Sometimes it seems that even large companies with billions at stake don’t want to take their medicine. The use of the professional services of cultural mediators early on can be the “Spoonful of sugar that makes the medicine go down”.

Richard Dash