Mergers: a method to the madness

Modern Brewery Age, July 21, 2003 by Karl Edmunds, Tim Coughlin

Describing the combined entity and identifying owner constraints

Identifying each party's contributions and establishing preliminary ownership interests

Satisfying suppliers

Planning, optimization, and final adjustments

Formalizing the agreement

Describing the Combined Entity and Identifying Owner Constraints

Sketching out a basic vision of the merged entity is an essential first step for potential merger partners. A preliminary plan for combined operations helps quantify the financial benefits of the merger, sets the foundation for joint decision making, and provides a framework for identifying deal constraints.

Getting a grip on the financial benefits of a merger is difficult, particularly at the outset of merger discussions. For many owners, engaging a professional with consolidation experience ultimately is a must for proceeding down the merger path. At the outset, however, most owners probably can answer for themselves the question of what types of benefits are available, even if they can't put a firm dollar figure on the financial benefits.

Once potential merger partners start talking about combined operations, some owner "must haves" undoubtedly will arise. This is a good thing because getting deal constraints on the table early is essential. At a minimum, the parties should touch on the issues of operational authority and control of the corporation. Failing to identify deal constraints up front can waste significant amounts of time and money, can lead to mistrust, and even can derail what could have been a highly lucrative combination.

The list of owner "must haves" DMG Financial has encountered ranges from the perfectly reasonable, to the questionable, and even to the ridiculous. This is why it is important the parties have some grasp of the contemplated merger's financial benefits. A lot of "must haves" quickly become "it would be nice ifs" once potential partners see the financial benefits. Some partners start out saying they're only interested in a 50/50 merger, but when they see that they can be making significantly more money, improve their professional life and eliminate long-term survival problems, 40/60 doesn't seem so bad.

Identifying Each Party's Contributions and Establishing Preliminary Ownership Interests

What are the various parties bringing to the table? This seems a simple enough question on the surface--it's just a couple of beer distributorships after all. Both sell an equal number of cases, each has a warehouse, some trucks, some forklifts, inventory, furniture, and office equipment. If only it were that straightforward.

When owners sit down and try determine what each is contributing, they quickly run .. into difficulties. Disagreements over utilization and value of the warehouses and rolling stock are common and can become surprisingly heated. It gets worse when owners must put a value on their distribution rights.

Not all cases are created equal. An operation's market share, product mix, margins, geography, account base, and multitude of other factors impact profitably and value. Two distributorships of equal volume in adjacent markets, or even the same market, can have substantially different values. Wholesalers know this and, if differences exist, then when it comes down to carving up the merged pie, at least one of the parties probably will want to discuss it.