Spotting the Toxic Takeover

By |2020-09-09T11:27:39-04:00August 10th, 2020|Company Culture, Engineering|

With ongoing, significant economic challenges facing the US economy, the pace of normal economic sector maturity and consolidation is likely to increase. One contributing factor is some organizations with relatively healthy business models and balance sheets may be acquirable at a discount. In the coming fiscal quarters, as visibility slowly increases and the longer term and perhaps lasting effects of the COVID-19 event become more evident, the cadence of Merger and Acquisition activity may find its way to the business journal headlines. An example of the COVID effect on a significant part of the US infrastructure related economy is evident in Deloitte’s Midyear 2020 Outlook for the Engineering and Construction (E&C) sector. Deloitte cites a thoroughly mixed bag of news with the first quarter dealing with the staffing and cost challenges of a hot economy only to experience sudden reversal in April with industry employment dipping 13% in year over year comparisons. That employment dip arose in part from delayed projects, projects placed on hold and outright project cancellations. The E&C sector is not the only one facing real challenges. Traditional brick and mortar retail, airlines, hospitality, large venue operations, restaurants, theaters, performance arts, sporting businesses (both professional and amateur), advertising all are seeking stability as COVID-19 has opened massive revenue holes in their business models.  Prolonged economic impact for businesses in these markets will create buying opportunities as companies look for synergies, booking backlogs, customer bases and intellectual property  that can be gained in a potential merger or acquisition.

For many organizations, survival has already meant significant downsizing coupled with private and public cash infusions in efforts to rationalize new revenue levels with operating costs and overhead. As these actions have already been taken, further action like an M&A becomes more likely if the health event persists.  

For some companies, an M&A event can be just the shot in the arm the company needed to take things to the next level. The inherent value in the product and/or services the acquired company offers can be released by cash infusions, synergies and new leadership.

The Amazon purchase of Philadelphia based Ring and electronics firm with a novel door-bell video/communication system is an example. Amazon provided Ring with the resources, financial, sales and marketing clout they needed to take a great product to its potential in the market.  

However, that is not always the case. Sometimes, the honeymoon period immediately following an M&A event is followed by a noticeable increase in the toxicity of the working environment. It may start relatively innocuously with a change in benefit plan at the next renewal period. Generally, this is a give and take event with some gains and some losses of benefits and or costs. However, that is not always the case. Sometimes benefits can be eroded significantly with no accompanying compensation offset.  This is a yellow flag, signally the possibility of rough waters ahead.

Additional signals things may be different is the exit of key executives from the acquired company.  Often, the acquiring entity brings in their own team with new agendas. Those agendas can include aggressive financial and operations machinations designed to truncate the ROI period. This is typically a signal that the acquired has become a balance sheet exercise valued for its ability to generate free cash flow today and not necessarily as a group of talented people that create unique and valuable products or services. Another is delayed or cancelled initiatives to replace departing or retiring workforce personnel, resulting in consolidation and increase of responsibility as their duties are spread around the remaining team members.

The reality is the merger may actually be going quite well for the acquiring company, as they accelerate their ROI through reduction of costs, people and benefits. However, recognition of change of status for the merged company’s employees from valued members of ‘our company’ to balance sheet entries on the acquiring company’s financial statements is important as you evaluate your situation.

As you manage your career, taking stock of post-merger trends in reinvestment and new initiatives along with any cost cutting measures can be leading indicators of the new owner’s longer term intentions for your organization.

Certainly, if the senior management team remains, benefits remain on par, new energy, excitement and investment arrive, you may be in the early stages of something beautiful taking place. 

On the other hand, if indications are less positive, it may be appropriate to test the waters, especially in this COVID time. It could take longer to find that special opportunity.

 

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