mergers and acquisitions (2)

The long-discussed and reviewed merger of American Airlines and USAir has finally gone through. It is the latest in a series of bankruptcies and mergers that have turned twelve airlines into four .

Mergers have a very bad record in general because more often than not, they fail to deliver achieve expected benefits. Airline mergers have an even tougher time because the industry struggles to make a profit. So there should be interest in using information that would improve the chance of the success of mergers and acquisitions. But there’s enormous momentum in our financial and accounting systems even though they miss a lot of the story in today’s businesses.

The Accounting for the American transaction hasn’t been disclosed yet (although here’s a long but interesting discussion of how the accounting might look) but there eventually will be a consolidated balance sheet of the combined entities.

Of course, the GAAP balance sheet won’t include many of the most important assets of the two organizations. Things like:

  • Human Capital – Unionized workers, unionized pilots, training systems, core competencies
  • Structural Capital – Systems to support reservations, route management, maintenance. Rights for routes and landing slots in airports.
  • Relationship Capital – Customer relationships. Relationships with suppliers and regulators. Brands and reputations.
  • Strategic Capital – Business models, culture and external market opportunities.

What if there were a consolidating and consolidated inventory of these “intangible” aspects of the two organizations? It would tell us a lot more about the prospects for success of the transaction than any of the raw numbers would.
Even better, what if there were an objective evaluation of the relative strength of each of these assets in the two organizations as a guide to how the consolidation should be handled? It would provide greater transparency among management, employees, customers, partners and regulators. And, based on our experience, lead to better decisions and, who knows, maybe even a profit for the combined airlines!

If you look at the reporting about this deal, most of it is about the intangible capital of the two airlines. However, since there is no ICounting available, the best we get is isolated pieces of a jigsaw puzzle. Here’s hoping that businesses catch on and start pulling the full puzzle together before the deal closes…

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Straight from the Source: Intangibles in M&A

10468395683?profile=originalWe had a great half-day session called Making the Intangibles Count earlier this week at the AM&AA Summer Conference

Over the course of the afternoon, we led some 100 M&A professionals on a discovery process to learn how to identify, measure and optimize the intangibles portion of M&A transactions. The agenda included live exercises using our open source ICounts Index and ICounts Canvas tools (more on our full ICounts toolset).

We were also lucky to have what one panelist called the best panel on intangibles he had ever been on including:

  • Mike St. Martin of Navigant
  • Michael Friedman of Ocean Tomo
  • Gabe Fried of Hilco Streambank
  • Ken Sanginario of Corporate Value Metrics
  • ...And a great forward-looking talk by Jay Deragon of Smarter-Companies.

At the end of the afternoon, we crowd-sourced the best ideas that the participants learned/developed during the session to help on the buy and/or sell side. Here they are as promised:

Buy and Sell Smarter

  • Teach everyone involved to think about the intangibles
  • Look at the full range of intangibles: people, IP, supply chains, brands, processes, culture and more
  • Be able to look not just at innovations achieved but at the ability to innovate
  • Try to understand the key intangible elements that distinguish companies that have generated different market multiples

Sell Smarter:

  • Identify and measure key intangibles before starting the sales process
  • Find ways to quantify, use metrics to make intangibles tangible
  • Make the org chart real by including key metrics about the management (such as years of experience)
  • Tell the story of where there are upside opportunities in the intangibles
  • Don’t put lipstick on a bulldog—it has to be real to be valuable
  • Run through a trial due diligence to be ready for the process

Buy Smarter:

  • Make sure the buyers understand their own intangibles as a starting point to mapping the fit with a target

Thanks to Kathy Richardson Mauro, Mike Nall and the team at AM&AA for making this possible. Thanks to the speakers and the wonderful participants who took our material and ran with it. We look forward to continuing the conversation on line and in future get-togethers!

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