In his terrific article for Harvard Business Review, 3 Common M&A Pitfalls, and How to Avoid Them, entrepreneur Craig Walker, a former M&A attorney and Google executive, outlines three ways in which a merger or acquisition can make or break a company (or several companies).
By and large, Walker cites examples of M&A disasters. In each of the three cases, what looked great on paper did not translate to reality. In the first case—eBay’s initial purchase of Skype in 2005—he noted that eBay didn’t own the underlying technology in their deal. In the second example—the stalled negotiation of his own startup, Dialpad Communications, as it was being sold to Yahoo in 2005, there was an issue due to a disgruntled former minority shareholder. In that circumstance, Walker raised the importance of bringing in all sides, no matter how minor their stake, when negotiating a deal.
And finally, Walker highlights the issue of clashing culture. No matter how well-intentioned a deal is, it could always fall down when the people on both sides are a bad fit. In this case, he cites a deal between Sprint and Nextel. Walker writes, “A Nextel managers’ meeting illustrated the dynamic perfectly: The Nextel CEO wore khakis and shouted “Stick it to Verizon!,” while his Sprint counterpart, wearing a suit, gave a PowerPoint presentation. Lack of chemistry affected the ability to effectively integrate in other ways and ultimately forced the Sprint CEO to resign.”
There is one example that I’d like to add to this mix. It tends to crop up before anyone has time to notice it: It’s the concept of acquiring a company that has international employees in areas where the acquiring company does not have its own established business entity, in which case, all the above factors are affected by which outside partner the sales side company chose—in other words, who is their Global Employer of Record?
This issue may be overlooked until diligence starts, because it is looked at as minor when positioned in the context with the greater deal, despite its actual, reality-based importance. The acquiring company wants to retain the employees who helped build a successful venture, and being able to get those employees smoothly over to NewCo is often a challenge that is important for all parties. The buyer also wants to ensure IP created by those employees is on lockdown and protected. As such, “cheap and cheerful” things you (or your global service providers) have done in employing people globally will definitely cost you at the exit, which is when it most matters.
I cannot stress enough how important it is that the work of engaging your global workforce be outsourced to a highly competent team and an expertly designed platform. Not only will a lack of proper HR or legal compliance for these employees dramatically delay a deal, it could cost the buying entity the ability to retain the personnel—which often affects value paid to the buyer. If the TSA expires and the situation is not resolved, the buyer might be on the hook for all of the issues related to compliance. Since the sellers know this, they are often careful to navigate or negotiate around this prior to finalizing an agreement, and it will be a major challenge when trying to close a deal.
On the flip side, imagine the ease with which these deals can be completed for companies that chose a best-in-class global service provider. In that case, the sell-side company simply transfers the MSA with the Global Employer of Record to the NewCo upon close of the deal—with all the employees’ benefits, payroll, and employment arrangements perfectly intact. If your service provider was diligent in protecting your IP, that has been protected and easily transfers as well.
When one of Globalization Partners’ client companies was recently acquired in a $1.8 Billion deal, we took it as a huge pat on the back that the lawyers doing diligence confirmed that the seller company’s IP had been properly protected in employment agreements, because the IP protection language on our contracts was above reproach—in more than 20 countries. This is because we take the careful approach of having our U.S. legal team and global lawyers carefully build out a platform that meets the needs of our high-growth and Fortune 1000 clients. It’s not the cheapest way to run our business, but we know it’s the right one—for our clients, and the type of global platform we want to put our brand behind.
Moral of the story: The value brought to the table by the vendors you choose will matter when it’s important; when you exit.