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by Arik Johnson

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Mating Habits of Corporate Fauna -- The Role of Competitive Intelligence in Helping to Ensure Success in Mergers, Acquisitions, Alliances and Other Inter-Enterprise Relationships

Poise and execution: despite all his flash and showmanship, that's exactly what "Broadway" Joe Namath embodied in his personal motto - and, a true statement, if we can judge by his MVP status in one of football's most exciting upsets as he led the New York Jets to a 16-7 victory over the Baltimore Colts in Super Bowl III. And, by putting the AFL on equal footing with the NFL, the victory laid the groundwork for one of the most significant mergers in late twentieth century American competition - the one that brought together the AFL and the NFL. But for business leaders today, perhaps that should be paraphrased instead as "planning and execution". In contemporary business competition, nothing matters more than making plans you can stick to and then delivering on those promises. One of the most important, and high-stakes, games is in the particularly strategic undertaking of mergers and acquisitions (M&A), defined even more broadly by all inter-enterprise relationships, including strategic alliances, joint ventures, consortia involvement and technology transfers.

By many accounts, M&A activity is one of the riskiest in the toolkit of business growth. Most have been found to fail enhancing shareholder value, usually because of poor performance in one or both areas -- to the statistically disappointing tune of some 83 percent of such initiatives, according to KPMG. So, why is it so tough to pull off a success in one of the most active areas of business strategy (more than two trillion dollars worth of deals around the world and $500 billion in the U.S. alone in 1998)? I would argue, this is often because of a lack of focus in one critical knowledge management arena: companies fail to rely on real market and competitive intelligence to fill the gap in pre-acquisition due diligence as well as post-acquisition execution that could help avoid bad "fits" and help ensure good M&A decisions. It is also no coincidence that most of these activities are undertaken with traditional competitors in a given market, and relatively rarely as a means of expansion into new or faster-growing unrelated markets (although notable exceptions, such as Cisco and Microsoft, apply!).

It's important to understand the traditional steps in the acquisition process. First, targets are identified based on pre-established relationship criteria that will explain why a particular firm is seeking a particular target as a candidate; and then scan for, seek out and identify specific targets that have qualities that the acquirer needs or wants. Next, evaluation and analysis is performed on those targets to arrive at a short-list of potentials and from there, due diligence is conducted on-site in order to validate externally collected assumptions about the target. Finally, a recommendation is made and, if that recommendation is positive, negotiation of terms, consummation of the deal and integration of the enterprises ultimately ensues.

But, where in this cycle does the CI function fit? At all levels, from pre-acquisition candidate screening to integration of the two enterprises, intelligence is necessary to support the decisions that are usually very non-analytical decision-making process in most acquiring (and acquired) firms. Intelligence is used at the front-end for more than just early due diligence -- it can also uncover assumptive starts (as well as surprising revelations) and provide a guide for deeper research later on. This includes financial, marketing, technical, product and production or manufacturing information as well as evaluation of strategic fit and venture benefits (advantages and disadvantages), product/service line, review of product life cycles (PLC) and market share/position as well as other market forces. Finally, good M&A specialists try to build an understanding of technical capabilities and opportunities, industry trends if they are unfamiliar, customer and supply chains, potential risks on the downside and summary estimates of the costs and benefits of the deal.

It goes without saying that, this information comes from all kinds of sources -- from salesforce and sales support (one highly-underutilized intelligence goldmine), top management executives, suppliers, customers, existing surveillance of that company or market, as well as trade publications, specialty or association newsletters and venture capital activity. Traditional M&A activity is focused on two areas of responsibility in most firms: legal and finance to evaluate, negotiate, consummate and integrate such deals. But a new model is called for -- to include not just the intelligence team along with legal and finance, but also market research, marketing, R&D, MIS/Operations, HR, Engineering and business development. It is largely a question of functional involvement in the relationship with the M&A team and the acquisition process -- and, it's true that, the intelligence team undergoes a decreasing level of involvement during the transition from the recommendations phase to the negotiation phase as the deal unfolds. However, many M&A teams have an intelligence liaison sitting at the negotiating table whispering about how a particular point has changed over time on the part of the target.

But analysis is where intelligence really hits the ground running. One technique often used as a starting point for analysis and recommendations planning in candidate selection begins with a brainstorming session where initial acquisition criteria are identified and this criteria is then sorted and ranked according to importance to executives. These are usually five to seven criterion points for acquisition decisions -- two strategic and five financial. These often boil down to subjects such as: Return-on-Investment (ROI); Break-Even (B/E); Compounded Annual Growth Rate (CAGR); Gross Profit Margin (GPM); Production Capacity to Fill; Products/Services Mix; Intellectual Property; People/Knowledge Acquisition; and Investment Scale and Scope (do we want to make 5 acquisitions for $20 Million or one for $100 Million?).

These criteria for acquisition candidacy is then evaluated with definition parameters (circumstances) aligned for each of these criterion, metrics for how candidates will fit this criteria and acceptable exceptions to this criteria are established. During this candidate-identification phase, it's important for intelligence to play a role in summarizing the basics. One such tool will include the candidate list detailing companies, their contacts, history, products/markets, differentia versus competitors, funding and financials (including revenues and profits, if known), employees, sales structure and any notes or source-citation, plus details on the current relationship with the firm. The other main output product is a company overview of each target candidate that matches this criteria -- describing each company in greater detail including all of the above, plus its founders/investors, a summary of its acquisitions-criteria fit and an explanation of why this company is appealing under the current circumstances, plus a SWOT analysis.

Now, it is not appropriate to consider all inter-enterprise relationships as strictly M&A in nature. There are many types of relationships that do not involve the wholesale swallowing up of the target by the acquirer. Somewhat less risky, less intimate options should also be presented -- joint ventures, strategic alliances (including cross-investments), consortia organizations and technology-transfer activities are all appropriate alternatives - sometimes these are far better suited than all-out acquisition. Lately, there has been a steady up-tick in consortia as the number of partners in these relationships tends to increase -- with three or more partners, in fact, this is almost always the preferred option. Thinking beyond M&A, there are important factors to be considered differently among each of these types of relationships: with strategic alliances, strategic intent and fit are most important; with joint ventures, an understanding of which will be the contribution of each partner, with one usually taking the role of the teaching or the "stretch" partner; while consortia require a very tight definition of what roles each actor will play.

Two tools used widely by many intelligence analysts include the "Extended SWOT Analysis" and the "Strategic Gap Analysis". Extended SWOT is focused on understanding the strengths and weaknesses (usually internal to a company), opportunities and threats (usually external to the company) faced by a particular firm in a few core areas, with others added as needed. These areas map nicely to the acquisition criteria described earlier -- market share gain, market entry, intellectual property, financial metrics, management team, owners/founders, products/services, manufacturing/production capabilities and strategic fit. A comparison chart is built for each one of these areas that considers each alongside the others in terms of the internal strengths and weaknesses and external opportunities and threats presented by that target.

Strategic Gap Analysis looks at many of these same areas (plus business models, customer satisfaction/loyalty, competitive differentia, corporate culture, talent, and cost structure), but is focused on the relationship between these criteria to the acquiring firm in terms of four analytical realms (often represented by side-by-side columns in the output of the intelligence product) -- Current State, Desired State, the Strategic Gap between these and the Costs & Benefits of closing this gap.

But one of the most important priorities for intelligence to be involved are in the evaluation of risks and potential mistakes in executing the deal - and a forecast of the likely situation as it might exist in the future. These include an understanding of real and IP asset valuations, employee retention, financial liabilities, deal complexity, ownership structure, as well as providing sanity checks to test assumptions, review project objectives and avoid the inevitable "group-think" that often accompanies such undertakings. Potential pitfalls such as non-strategic motives, myopic opinions of real value, poorly defined resource requirements or changes in strategic fit criteria can be avoided by intelligence providing a reality check before the deal devolves into just another statistic.

Finally, during negotiation, consummation and integration, intelligence is there to assist as the project is passed to M&A specialists by helping with negotiation strategy and support, testing of assumptions and monitoring of directional changes. From the perspective of the intelligence team at this point, the acquisition is considered "complete", and the analyst group can move on to the next project.

While this argument has largely been presented from the point of view of the acquirer, all of these principles translate to the situation of the acquired with equal importance. Taken together, the benefits to involving the intelligence team in M&A activities extend to both the firm as well as the intelligence team itself -- from reducing costs to the firm and providing for a front-end process and continuous scanning resource, to helping extend the visibility and importance of intelligence services into high-impact activities with a tangible, value-added means of realizing return-on-investment.