Truth or consequences
Howard Baldwin - January 1, 2004
The acquisition took place so long ago that time has eroded almost everything about it except the bitterness of the CEO whose EDA company was acquired. "We were told we were going to be an independent subsidiary," the erstwhile CEO says today. "But it soon became clear that their current product line wasn't growing and they needed new products—such as ours." Before long, the executives of the acquiring company got rid of everyone except the original engineering group.
If they'd just been honest from the start, the story would have been different, says the ex-CEO. "I ended up having constant battles with them, and it didn't help that I viewed them as incompetent and dishonest."
In talking to CEOs who have been on both sides of acquisitions, the theme of honesty—manifested in the simple idea of managing expectations—comes through again and again. "Sometimes an acquisition is done with less than full candor in order to get it done," says David Stanley, director of corporate development and strategy at Magma Design Automation, who was hired last August specifically to shepherd acquisitions. "So many companies just assume the best because they want to make the deal," says Irving Grousbeck, who teaches entrepreneurship at the Stanford University Graduate School of Business. "In deal mode, you don't always stand apart and look dispassionately at the answers. There's a momentum that can create false expectations."
Executives frequently compare the process to courtship and marriage. "As with any marriage, there are always going to be bumps in the road," says Roy Vallee, CEO of Avnet, a distributor that's acquired 45 companies since 1991. "Only with trust can you work through them."
In the ideal acquisition, the new owners value the contributions of the various teams—management, engineering, sales—because they're what made the company a worthwhile deal. In reality, however, that is rarely the case. Grousbeck estimates that half of all CEOs whose companies are bought are gone within two years. "Being in the acquiring company takes quite a different mind-set than the one that got you to being an attractive acquisition candidate. But now you're no longer responsible for setting the culture. You no longer have decision-making authority," says Grousbeck. That's a tough situation for many entrepreneurs—hence the importance of trust and honesty.
But honesty is like a diamond: It is extremely valuable, and it has many facets. For acquiring executives, honesty is certainly the best policy. But for CEOs who are giving up their title along with their company to become a vice president or general manager at the company that's buying them, there's honesty about the acquisition, about yourself and your needs, and about your employees and their needs.
The acquisition. All this makes it doubly important that CEOs understand what's being promised, on both sides. Start with honesty about the acquisition itself—just like marriages and snowflakes, no two are exactly alike. "Are you buying a technology, a market niche, management leadership or a going concern?" asks Grousbeck. The answer to that question has deep ramifications for the people whose skills aren't necessarily being acquired. If the suitor covets your engineering team but not your management team, it needs to be straightforward about that, so that you can understand your future in the new organization—or lack of same. "You have to be candid," says Vallee. "These CEOs know they're selling the company. They know there can only be one surviving culture. Dancing around the subject is disingenuous."
"In deal mode, there's a momentum that can create false expectations." —Irving Grousbeck, Stanford Graduate School of Business
"You have to understand exactly what the business is going to look like once the acquisition is completed," says Vess Johnson, formerly CEO of Silicon Metrics, which was recently bought by Magma Design Automation. "Talk about the details of the operation." Most important, he suggests, learn the corporate culture: "You have to understand how the game's played."
It helped considerably, Johnson added, to have someone in David Stanley's position at Magma, whose responsibility it was to ensure that postacquisition operations went smoothly. "It was his job to make sure that the parameters we'd agreed upon stayed in place. If something is going awry, I have somebody who's not my boss that I can talk to."
Yourself. When your company's acquired, you also have to be honest with yourself. "You have to do some soul-searching and understand your real goals," recommends Chris Mack, former CEO of Finle Technologies and now vice president of lithography technology at process control vendor KLA-Tencor. "People don't do that enough. They set up a strategy for an acquisition that sounds right on paper but doesn't satisfy their needs or wants." The problem, he says, is that too many people accept conventional wisdom about success. "A certain level of expectation of what it means to be successful is put on entrepreneurs. You build, you sell out, you make beaucoup bucks—what could be more fun? But that model doesn't fit everyone." The problem, acknowledges Mack, is that most people aren't that self-aware. "I realized that I enjoyed starting up a company—but not enough to want to do it again, what with the long hours and family sacrifices. The key was thinking about it up front and sharing our aspirations."
But it's not always that easy. John Sanguinetti, CTO of Forte Design Systems, a developer of software for semiconductor synthesis and verification, has been involved in multiple acquisitions, on both sides. He remembers an acquisition in which his company wanted solely the technical team but, as frequently happens in small electronics firms, the CEO was part of that team. Sanguinetti's company wanted to retain the CEO, and he wanted to stay. "Being CEO of a startup changes your life," Sanguinetti notes. "You go from being an individual contributor to being a generalist. You've moved on to a different stage, and it's hard to go back." The CEO eventually left.
The employees. "It's not just about yourself," maintains Aki Fujimura, who was president and COO of Simplex when it was acquired by Cadence Design Systems, where he's now CTO. "In a startup, you get close to your team. You care what happens to every member." Here again, trust and straightforwardness are important—if your employees trust you, they'll accept your reasoning about the acquisition. That's why it's important to ensure that the acquiring company is being candid, something Avnet's Vallee insists is counterintuitive.
"I used to think that if I told the employees we were going to close a warehouse, they'd quit," he explains. "But if you don't tell them, they get afraid and act irrationally. You get far better results when people deal with facts than the unknown." To this end, he adds, there's no such thing as overcommunication, whether it's in the form of face-to-face Q&A sessions, FAQ lists on Web sites, or e-mail addresses for questions. "It's the only way to stay ahead of the rumor mill," he says.
And what about the employees when you know you're strictly a transitional executive? The same rules hold. "Carefully explain to your new boss what the expectations and reasonable needs of your key employee base are," advises Stanford's Grousbeck. "Do they expect to be left alone, or do they anticipate having a strict budget to operate against? Translate their needs so that your eventual successor understands better how to manage them after you're gone."
Consolidation will always be a part of the electronics industry, and therefore these personal and professional integration issues will always be with us. If there's a ray of hope, it's that there's more humility among executives and less breathlessness about deals. With the constriction in the industry, entrepreneurs have "learned a bit of humility," says John O'Neil, president of the Center for Leadership Renewal. "There was a time when there were way too many deals, and they were hastily put together. There are fewer deals now, so people can be more deliberative."