News Scrapbook 1985

San Diego, CA (San Diego Co.) Dally Tran er pl (Cir. D. 7,415) L

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Kratz: The two companies that c~e together had two completely different motivations although we shared lots of similar motivations. Jeff Smith, who was the principal a nd roughly 50 percent owmer of Southwest Energy, was, like all of us in small business, wearing 20 hats and developing his company for about 10 years. At the same time he just had his second child, has a new home that he just built and realized that he wanted to change his working sit- uation. co~pany has been very umdimensronal in the sort of pro- duct and marketing that we've t>een pushing. Our indlll'try, the solar industry' is going through the possible l"ss of solar tax credits on the feder, l level at the end of this year wh11,h , culd be a gigantic upheaval in our marketplaco. Solarsmith is unusually :lepen- dent upon those tax credits and we could see that we needed to d" . 1ver- s1fy our business to protect ourselves against the possible loss of those to the political process that would throw us into immediate chaos. Q Who are the players in a merger and what are the steps? . Bahr: !'here are a lot of profes- s10nal players who just have to have roles. The field of accountan- cy and the legal field are obviously the two technical areas of exper- tise. Very often two other groups play roles too but aren't often not- iced by the public. One is the in- vestment banking houses who have often played intermediate roles. And secondly the commercial banks. Very often if they see a company in trouble - trouble often because they have been too successful - will, rather than to lose the foot- ings, that is the deposit base of that firm or finding that firm getting

SAN n1EGO FOCUS: q?~ The Delicate Balance ofMergers S11n Di o Focus is a monthly feature of the Transcript which explores issues in business, fi. nance, law, ~al est_ate, ai:ch1tecture, construction and a wealth of areas in between. During round table d111Cuss1ons with editors of the Transcript, San Diegans discuss issues and trends that affect our community.

Q What makes a merger work? Bahr: There's been a terribly overworked word that surfaced as a re ult of th8t kind of philosophy. Th word synergism. I hate to use it because it has been overused but it really has a very germane ap- plication to this kind of process where things fit together and lit- erally create a more profitable mass than they do as independent entities. Kratz: With small companies hke ours it's probably easier to see that happening if it's well done be- cause there is not a lot of overlapp- ing taking place. There is just a good mesh right from the start. Bahr: If there were one other ill8ue that could be the predictor of success or failure in a merger it is the accommodation that must be reached between Vie two very head strong and self willed executives that bring about successful com- panies and also bring them to the merger. If there's one thing that I deal with more than anything else it's trying to get two people who have never perceived that the one thing they have to give up is complete power. In most cases one of them loses. Kratz: We have at least tem- porarily solved that problem in that there's been an agreement that one not only is going to but wants to, to some degree, give up the power and the control. But we can already see a list of difference of opinion areas developing that we need to, on an ongoing basis, sit down and discuss and deal with. Q Why do ome mergers fail? Kratz: The number one reason would be mismanagement of the ambiguities and uncertainties and conflicts that develop in bringing two groups of people together. That is by far the larg'!st risk that com- panies our size run. No matter how carefully we have planned all of that people react in their own individual ways and it's very difficult to know beforehand precisely how they are going to react to these changing cir- cumstances. Mismanagement or no management of those people and the way that they react are instan- taneous problems that then have all kinds of ripple effects through- out the entire business.

FredBahr Fn,d Bahr i• a prof-,r of bumneaa adminiJJtratioir-.t..the Um- ven,iiy of San Die6Q with • IIP""iality in mergera. He's been there Birice 1976. PhD in businesa from George Washington Umversity plua three master's degreet1. A gradw,te ofthe Command and Gen- eral StaffCollege and the Industrial College ofthe Armed FortYJB. PreVJoUBly taught at USC and George Washington. Love8 to prden, ,mow di and ocuba "] like physical thinp to counter the mental ,tuff," Myl Bahr. He and his wife, Betty, have four children and five grandchildren. ----

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Bahr: The

nction of clash of

primarily a corporate cultures.

mto liquidity tests m· help them seek out t" · So you have marria~ the technical expe sent the periphery tha\ .r:,

Kratz: We're undergoing that right now. In our business trucks roll out every day to accomplish various task . One of our com panies has historically been very proud of the appearance of the trucks and maintaining them. The other company has been more, let's jump in the truck and go get the job done sort ofoperatjon. We now have two groups of peo- ple with two sets of trucks which are very diverse in their physical appearance and approach to that aspect of our business. Right in the parking lot this morning we had a major discussion about these two different corporate cultures. There ~e a myriad of issues that are go- mg to come up every single day for months. Bahr: The same issues (with a larger merger). Who's got the key to the executive john? Whose sec- retary does personal work? Who has parking places? I bet you the parking places is probably the single toughest question you're go- ing to do in an integration. But it's symbolic of the kinds of problems that you deal with when you're dealing with this sort ofthing. Let me tack on three that are associated with an incident. The three issue involved were the kind of car t hat comparable people would drive. One company drove very large and luxurious automo- biles and other!! felt t hey should be much more temperate in their val- ues. So we had the clash of the Buicks versus the Cadillacs. Parking. The third one was the amount of acceptable charges on business credit ·ards during the month. All of them. had to pass the test of the IRS b\ we're still talk- ing about Jr 1 s o. expectation.

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wh re xc d111advantage or mebody. A

these types of arrangements together. I might add one more group con- sulting expertise. '

cond major cause is tax con- iderations We've had individuals who h ve had block equity holdmg11 that finally have to pay the pip<•r for their succeSR in the growth of their company. And dur- ing the In. t few years usmg avail- bl •tax credit.a. Kratz: Part of our fe ling th t th •r ar perhaps mor mergers now is that' there's greater awaren of bu.sine s activity in g n ral. There's greater public int r st nd there's just much mor pr about business matters th n ther u d to be. We f. I that there are more merger as well as oth r kinds of bu n activity bee u. e people a re r 11ding about it more nd th ' mor attention p td to t~ 'l'here·s more attention being paid to bu iness matters in part becau. of the Yuppie phenome- non. People in general have re- turned to an interest in business nd making money and some of tho kinds of values that for a while in the 60's and 70's - par- ticularly the younger population - had t d out the window. Bahr: When you look at this against an economic backdrop - we're looking at a GNP in 1960 of about hlllf a trillion dollars. We're lookmg at six times the activity in the country and therefore the sense of awareness of the process has grown proportionately, maybe even a little more than that. Not only are the sheer numbers there to support more merger ac- tivity but the considerations I mentioned earlier have been pow- erful driving forces. So many com- panies find themselves at some point saying, let's get a partner who is ca h rich or product rich or resource ri(h m the nse of pro- duction facili i or has excess m nagem nt, r,r whate r and capit lize on our o portunities ow

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Q

Is this the way it works at Gulfand Signal?

Bahr: Signal's "n anomaly. For- rest (S~umay, chairman and chief executive officer of The s· l c .) 1gna ompames has probably had bet- ter luck overall t han anybody 1 know m terms of sustained batting average. It's almost been improba- ?le, the luck and success he's h d in putting diverse activiti:s together. The s_ame kinds of considerations that drive one kind of merger drive another. It's one .,:- ,hose se 1 1 dry . vera aun hats of considerations Th sheer size of the ope t · . . e ra 10n in- troduces a different level f plexity. 0 com-

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