Acquisition and Merger Negotiating Strategy

Edited by Mark Strage

Preface

Most of the material in this book, revised and updated, was

originally presented at a series of informal two-day discussion
and workshop sessions sponsored by Corporate Seminars, Inc.,
during the past two years.
Corporate Seminars, Inc., is a management education and
information gathering organization which for the past five years
has served the executive community by providing opportunities
for corporate policy makers and outside specialists to exchange
their expert knowledge of vital problems in modern business
practice.
The sessions in question were held in New York and
Chicago, and brought together unusually qualified groups of
professional experts in the field of acquisition and merger-
corporate chief executives and staff officers, investment
bankers, legal, accounting and financial relations specialists.
Most of them came with predominant experience as buyers
rather than sellers, for the simple statistical reason that a man
usually sells a company only once. However, their observations
have equal pertinence to both parties in negotiations. In fact, as
will be explained in detail, a potential seller can profit
substantially by placing himself, for purposes of establishing
strategy, in the seat of the buyer.
I wish to thank the editors of the HARVARD BUSINESS
REVIEW for permission to reprint Master plan for merger
negotiations by Gary E. MacDougal and Fred V. Malek, and
Contingent payouts cut acquisition risks by Robert Reum and
Thomas A. Steele III, which originally appeared in the January-
February 1970 and March-April 1970 issues of that magazine;
and also thank Robert E. Jones, executive editor of Presidents
Publishing House, Inc., who with gentle firmness guided this
book to completion.
New York
March 1971
Mark Strage

Acquisition
and Merger
Negotiating
Strategy

1
BY
WAY
OF
INTRODUCTION...

by Mark Strage

In providing the introduction to a complicated subject,

perhaps the most useful service an editor can perform for the
reader is to isolate one workable generalization.
The subject of this book is complicated indeed. Acquisitions
and mergers are among the most powerful instruments of
business policy ever devised. Used well, they can telescope time
and vault distance, multiply physical resources and permit the
spectacular leverage of human energy.
 Understandably, they are likely to engage the full interplay of
points of view, business philosophy and value systems of both
participants. For one of them at least, the negotiating process
will lead to the single most important decision of his
professional career.
Because they do involve human elements, no two
acquisitions are alike; there is no such thing as one right way to
proceed. If there were, books such as this one would be
unnecessary; a simple set of forms would do.
The twenty-one authors in this book are all skilled,
experienced specialists. Together, they have been personally
involved in perhaps one thousand successful acquisitions,
representing tens of billions of dollars worth of enterprise. From
everything they have to say, and much that they have simply
assumed and left unsaid, one main generalization can be drawn.
Stated simply, it is that the essence of successful economic
activity is satisfaction on both sides. For an acquisition to
succeed, both the buyer and the seller must be better off after the
transaction than before.
This appears to be so simple as to be virtually self-evident, a
business corollary to the golden rule. Yet some negotiations
succeed while others, the far greater majority, fail. Some- body-
many people-must be doing something wrong.
In scope, this book will attempt to focus on the generalization
and follow it through the entire negotiating process, from
beginning to end. The end, of course, comes with public
announcement of the completed transaction. The beginning
starts some time before the prospective buyer even begins to
approach his first prospective seller.
Strategy by definition involves the deployment of known and
available resources to achieve predetermined goals. So our
discussion begins with the identification and disposition of these
resources.
 "Probably the most crucial part of doing acquisition work
must be done, and done well, before you ever start talking to
anyone," one of our authors points out. Specifically, he adds,
"Anyone who is to get involved in the acquisition process must
first address himself to the question of whether the decision-
making mechanism of his own company is in fact positively
oriented with respect to making acquisitions."
Next, we see what can be learned from other people's
mistakes. "Rarely do we find," says one author, "a corporate
president of a desirable company who does not receive at least
one offer a month to buy his company." Yet, he notes, most of
these companies are still independent. And he suggests one very
cogent reason why this may be so.
Having done the necessary homework and prepared a basic
strategy, the next logical question is: who should set it into
motion? Since the human element is so important in carrying on
negotiations, three chapters are devoted to aspects of what
makes a good negotiator, what he should do-and avoid doing.
There is also consideration of the advantages and possible
disadvantages of using third parties. A highly knowledgeable
and experienced investment banker explains in some detail what
is actually meant by the phrase, celebrated in "tombstone" ads,
"So-and-So assisted in the transaction."
Then we come-as all negotiations inevitably do-to the
delicate subject of price. How do you bring it up? How do you
handle it? Who should broach it first?
Actually, if the problem is approached correctly, it need never
come up in this possibly embarrassing form. One chap ter
demonstrates, with examples, how price determination can be
handled as a perfectly straightforward and simple exercise in
executive decision-making. Another chapter de- scribes, again in
detail and with specific examples, various techniques of price
determination to meet specific needs of both sellers and buyers.
Since we are now within the core of the negotiating process,
and alternative possibilities are numerous and potentially
confusing, the next three chapters provide opportunities to stop,
step back, and review the situation from three different and
often-overlooked points of view. In turn, we consider the
strategic implications of timing, of risk-taking, and of value. At
each step of the way, we weigh alternatives against the basic
principle: that a successful deal benefits both sides. Our purpose
is not to see how we can gain an advantage but how, through
innovative consideration of existing fac- tors, mutual advantage
can be achieved.
So far we have been talking in general about buying
companies, and the resources and skills needed to achieve this
goal. There are also skills involved in selling companies. In fact,
our next chapter suggests that, in the current marketplace, sellers
may be doing better as a group than buyers. The author
discusses the results of a private survey of 65 recent important
mergers, and suggests specific tactics that should be considered
by both successful sellers and successful buyers.
There is a technical side to all acquisitions. However firm the
understanding between principals, the arrangements must still be
put clearly on paper. This is a job for specialists, including
accountants and lawyers. In the next two chapters, two
specialists-one an accountant, the other a lawyer-have their say.
Their subject: how can they be of maximum use to you in
helping to achieve your goal. You may not wholly agree with
what they have to say, but it is well worth the time to listen to
them.
One of the crucial stages of the negotiating process is the
closing, and we have therefore devoted one chapter to this
subject alone. Closing is crucial because it is, in its own way, the
"moment of truth"-the point at which misunderstandings or
breakdowns in communication suddenly emerge, usually with
disastrous results. The purpose of the chapter, written by an
expert in corporate law, is to show how these misunderstandings
can be avoided.
Now, having taken up each of the separate parts of our
strategic review, we put them all together into a unified plan. It
is not intended to be a master key to all successful mergers,
because we know that no such thing exists. Rather, it is a guide
and check-list that should, if properly used, make any mergers
easier to achieve.
And finally, having brought the deal home, all that remains is
to tell the world about it. The final two chapters take up the
subject of disclosure. There are certain rules-unfortunately not
all of them fully explicit about disclosure requirements, and the
first chapter tackles the problem head-on, and proposes a
commonsense approach. But disclosure can be an opportunity as
well as an obligation, and the last chapter suggests ways in
which a company can use financial communication as an
effective tool in its long-term relations with the investment
community.
Empathy the imaginative projection of one's own
consciousness into another being is the soundest platform from
which to launch any program of acquisitions. The author, a
leading exponent of growth through acquisition and merger, has
been the chief architect of his own company's corporate
development.

THE ART
OF MAKING
A SELLER HAPPY

by Nicholas M. Salgo,
Chairman, Bangor Punta Corporation

There is a natural tendency, in approaching any kind of

negotiation, to bring oneself "up" psychologically and men.
tally. The nearest analogy that comes to mind is of an athlete
who has been in training preparing finally to compete, or of a
performer about to step out in front of an audience.
The tendency is natural, I believe, because there is an
inevitable sense of competition in any negotiating situation -
your brains and skill against those of the other fellow; the
desirability of taking the offensive and controlling events.
In dealing with acquisitions, I think it is the better part of
wisdom first to recognize this tendency, and second to hold it in
check.
Let us assume that you are at the critical point in an
acquisition situation. You have gathered all the necessary
information and, from your point of view, the proposition is
desirable.
In my opinion, there should be no proposal made until you
have arrived at as clear an idea as is possible of the seller's
desires, scope and expectations.
After you have brought yourself "up" psychologically, you
should devote a serious amount of time and thinking to appraise
the whole question from the other man's point of view.

GAUGING A SELLER'S INTENTIONS

You should, for instance, determine whether he is really

ready to sell, or merely entertaining a semi-serious notion. It is
difficult to answer such a question on the basis of words alone.
You must try to understand the other man's situation-not just
listen to him, but to understand. If he is in his late fifties, and
there is no obvious line of succession, he may indeed want to
wind things up and move to Florida. Usually, however, it is not
so clear-cut as this, and before you can start using your skills as
a negotiator, you must use your skills at understanding human
behavior and motivation.
 In most cases, the man himself will give you all the
necessary hints and indications, if you are alert. The exceptions
are people who are either unusually unscrupulous or unusually
shrewd, and these will be the exceptions rather than the rule. In
the vast majority of cases, your success will depend on your
ability to evaluate and empathize.
I have been thinking until now of privately-owned or family-
held companies, since they make up such a large share of
potential sellers. But even in dealing with a publicly-held
company, the premise is valid. Here, you must get an accurate
reading of the thinking of one or a few key men-the board
chairman, the chief executive officer, a principal share- holder.
If anything, it is even more important to get a clear reading in
this instance, because the likelihood of continued relations with
the selling management is greater, and an evaluation of how
those relations may develop is often important in assessing the
desirability of the entire deal. It is easy to imagine conditions
under which you may decide you absolutely want to retain a key
manager. There are also, unfortunately, circumstances where
your hope will be that he leaves as fast as possible. In either
case, it is better all around if these circumstances are recognized
and dealt with very early in the process.

TAILORING A PROPOSAL TO FIT THE SELLER

Once you have determined that you truly mean to under-

stand the other fellow's position, the knowledge that you gain
will help you in shaping the outline of your strategy. It will help
you put together a more attractive offer, but it will also tend to
dictate how you handle the negotiating process itself.
I recall an acquisition which we made some time ago in the
boat business. The gentleman with whom we were dealing is
still with us, but now as the chairman of a group. He was one of
the finest human beings I'd ever met, and one of the plainest in
his personal tastes. In the course of our discussions, I invited
him to dinner and he accepted. After some hesitation, I took him
to Nedick's.
He felt comfortable there; he ordered coffee and a sandwich,
and we continued our discussion. He was and is an extremely
frugal person, though no less excellent a business- man. To this
day, I have the strong feeling that if I had taken him to one of
the kinds of restaurants usually chosen to dis- cuss major deals,
he would have been scared off.
There was also the case of a man and his family in New
York. After some digging into the situation, we found that this
man was not really prepared to sell out. He had not the faintest
desire. He had been told that it would be good for him.
He had been told how much he should ask for the company-a
nice round figure, but with absolutely no relation to his
company or its value. It was just a nice round figure: 750
thousand dollars after taxes. But when we really got to it, we
found out that this was the sort of man who, regardless of his net
worth, gets up at the same 6:00 in the morning, puts on the same
work clothes, and works the same whole day. He would do it
even if they would take him off the payroll -just as long as they
let him do it, because he doesn't know how to live otherwise. To
take a man like that and give him a million dollars cash for his
business would be actually doing him a disservice. You would
make out of him, in a few weeks, the most unhappy person on
earth.
So, instead of trying to buy him out, we made an offer which
hinged on his remaining with the company. This not only gave
him something to do, but it was absolute psychological
knowledge and assurance that for the next five years he had to
work to earn his money.
The next day after the closing was just another working day,
with perhaps a little more motivation because even though it
was no longer his own earnings alone that were on the line,
there was the matter of pride.
 This case was relatively simple, because it involved only one
man. When the decision to sell is going to be made by a group,
the matter is inevitably more difficult. Not only are you dealing
with genuinely different desires and systems of values, but there
is the likelihood that the interplay of factions will generate
friction. People are likely to say and do things more for the
effect they will have on other interested parties than on the deal
itself.
I know of many negotiations that were carried on under these
conditions. One in particular sticks in my mind. We were
dealing with a group of three partners, but were con- ducting our
discussions through one of them, who acted as spokesman. The
talk dragged on for six months. There seemed to be something
wrong with everything we offered, and we did our level best to
be creative and accomodating. Finally, as a last resort, we made
contact individually with each of the three partners, and
reviewed with each one all of the offers that had been made.
In quick order, we discovered that there was something in
each of the offers that pleased one of the partners, but left the
other two dissatisfied.
So we made what in effect were three separate offers. One of
the partners accepted common stock for his share, another took
a mixture of common and preferred at a fixed redemption rate,
the third took only preferred stock.
Now, everybody was happy. It happened that the three men
were entirely different in personality and outlook. One was
essentially conservative he wanted to know exactly what he
would get, right to the penny, and when it would be paid to him.
Another was more concerned about maximum achievement for
maximum dollar. He was much more of the promoter-activist,
and indeed had successfully played that role in the management
of the company. The third one was much happier straddling the
middle of the road. It was a position he had become accustomed
to in his dealings with his two partners. In considering our many
offers, each had weighed the terms on his own scales, and found
them less than satisfactory. Finally, it was when we were able to
put ourselves in the position of all three sellers, that we
succeeded in closing the deal.

LOOKING BEYOND THE CLOSING

This was perhaps a complicated way of doing business, but it

did carry with it the advantage of allowing us to become closely
acquainted with the company involved, not only its balance
sheet, products and markets, but with the people who were
really its heart.
This knowledge in the strategy of negotiations can represent
an enormous dividend. It can grant you insight into what you
can expect from these people in the future, because if you
understand what they want and why, you automatically get the
benefit of being able to predict how they will function as a
human part of your future organization, and you can also judge
then whether you want them in this future organization.
In many negotiating situations, the test of whether empathy
has been achieved between buyer and seller comes up very
quickly and over a specific issue: price.
It is not appropriate here to discuss price strategy-several
chapters are devoted to the subject elsewhere in this book-but
discussing an over-all approach to the question of price is
relevant.
First of all, in many instances, the object on which you are
planning a valuation is the result of most of a man's life-work. If
the value to you is much less than what you know -or should
know the value is in bis own mind, then don't even bring up a
specific figure. You will only alienate or offend him.
Try rather to find out what he has on his mind-whether he
actually is interested in the money as a quantity or money for
himself or his family, or whether it is a way of achieving an aim
and merely a numerical expression of that aim. Per- haps ways
can be found to achieve this otherwise.
 If you can see that you are going to be very far apart, I think
you are doing yourself a disservice by even entering serious
negotiations. If I were in such a situation I would point out very
plainly why we are miles apart, and I would close the
discussions in a most friendly manner, saying that if and when I
can see that you are worth more to me, I will come back. If you
can see that your own aims change, you come back.
Don't tell him that he is way out of line; because, first of all,
he will never believe you. He realizes that you have ad- verse
interests: you want to get it for the least amount. You just have
to explain to him that although you believe there is tremendous
value in putting the two together, and that you can see
tremendous additional values created, still, adding all this up,
you are not there. Let him then think it over, whether he is
realistic or has exaggerated or not. But, in my opinion, you
should not start telling him that his company is worth just
exactly half of what he is asking for it.
Should you find that you are in the same ball park-which is
to say that you can negotiate without risking or hurting the ego
of the person with whom you would have to work and live,
because I assume that in most cases you would want the people
who run the business to continue-should you be in this position,
by all means start to negotiate. But if your judgement or instinct
tell you that the gap is still too wide, then leave matters alone. I
do not believe that much is accomplished with a formal, written
proposal, either. It certainly does nothing to narrow the gulf or
encourage closer mutual understanding.
What will tend to narrow it, and most certainly will
encourage the kind of understanding that makes for good
acquisitions and good long-term relations, is the applied
exercise of empathy.
The ultimate price has to be one which is good both ways.
The correct deal is one where both parties sit down to sign a
paper with pleasure, and a sense of constructive
accomplishment.
 To want to make acquisitions, and to be ready to make
acquisitions, are two entirely different things. Failure to make
this distinction has prob- ably caused more negotiations to fall
through than any other single factor. The author was principally
responsible for leading his own company to more than a dozen
technically-related acquisitions.

THE POWER
OF POSITIVE
ORIENTATION

by Warren B. Hayes,
Chairman of the Board, Fansteel, Inc.

Somewhere in the files of practically every company active

in acquisition work there sits a document which, what. ever its
actual title, functions as a master check-list.
Typically, it will contain financial criteria, operational
guidelines, legal caveats. Depending on its thoroughness, it may
even include such details as executive perquisites, and what is to
be done about hunting lodges carried on the books of the
acquired company.
These lists are enormously useful and I have no quarrel with
them, not even with the details. Anyone with even limited
experience in acquisitions quickly learns that it is the details not
covered before the final signing which end up causing the most
trouble afterwards.
My criticism of check-lists is that too many of them fail to
include one certain question-in fact the question which should
be at the very head of the list. Stated simply, it is this: "Do we
have a decision-making mechanism which is positively oriented
toward making acquisitions?"
This is not the same as asking "Do we want to buy
companies?" The difference lies in the phrase "positively
oriented," and the purpose of this chapter is to investigate that
difference and explore some of its implications.
THE OBJECTIVE OF BUYING

It may well happen, for instance, that a company's decision-

makers in this context the term could include a formal
committee, a small ad hoc group, or even a single person-are
really interested in acquisitions as an end in itself, rather than as
one of several possible means to an end. I have in mind the
example of one specific company which had a history of
spectacular technical growth. As often happens, its growth rate
began in time to moderate. Both its technology and marketing
capability approached maturity, but it nonetheless remained an
attractive and successful company.
Some time just after the growth curve began to flatten,
control of the company passed into the hands of new
management which was more financially than technologically
oriented. The new management-in this case it happened to be an
individual-had originally been attracted to the company because
of its growth rate, and could see no reason why it should be
allowed to slow down. He proceeded to steer the company into a
series of acquisitions.
They were "good" acquisitions in terms of the balance sheet,
but made very little operational sense. Gradually, the company
began slipping in the estimation of the investment public. People
simply couldn't understand and the new management couldn't
convincingly explain-what the company was trying to achieve.
As a result, earnings continued to rise while the multiple
dropped. This "successful" acquisition program did not solve
problems, it created new and thorny ones.
 THE EVALUATION OF RISK

Positive orientation requires the willingness to make a

commitment. Even the stodgiest company likes to think of itself
as "acquisition-minded"-it just isn't modern to be anything else.
Yet when the chips are called for, something happens. Often, it
is a simple case of cold feet.
It is easier and more comfortable for a decision-maker who,
after years of service, has risen to a position of great
responsibility, to vote "no." He risks little that way. The loss to
his company may never be accurately assessed; even if it is, no
criticism can be levelled directly at him. Fear may come from
another quarter: the possible dilution of control through the
introduction, by way of acquisition, of new managers, or
directors. Here again, a negative vote may be justified on
objective grounds. The decision-maker may quite sincerely
believe that he is acting prudently and in the best interests of his
company. No one-not even his psychiatrist -will know for sure.
My point is not to quarrel with motivations-the subject is
complex enough without that-but only to suggest that it is
extremely difficult to press decision-makers into making
acquisitions if they themselves are not committed to the concept.
All of the positive acquisition programs which I am
personally acquainted with involve decision-makers who believe
that acquisition can be a viable and constructive business
technique, who are willing to take the risks associated with
acquisition, who understand the value of intangibles that are
usually found in good acquisitions, who are ambitious for their
company, who want to make their company grow, and who are,
above all else, secure in their positions and are willing, because
of their sense of security and confidence in themselves, to
assume the risks that acquisition implies.
 THE CHOICE OF TECHNIQUE

Having made the commitment, decision-makers must still

determine how they are going to use various basic techniques.
There is a choice: go out after acquisitions or wait for someone
to bring them around for your appraisal. Neither approach is
necessarily right or wrong-it depends on a number of factors.
But one fact-in my experience, at least is clear: if someone
comes around and wants to sell you a com- pany, you had better
start with the premise that he knows why he wants to do it. He
knows the situation a lot better than you do, and you are going
to have to work hard just to catch up with him.
There is nothing sinister about this; it is just a fact of life.
Under the circumstances I have described, the seller is more
likely to be "right" than the buyer. It therefore follows that, other
things being equal, it is better to be an active buyer of
companies on the basis of organized strategy and reasoning,
than to assume the passive role of potential purchaser of
companies which someone proposes selling to you.
All the acquisition work that I have been involved with has
been based on some kind of a specific business strategy. That is,
it was possible within the framework of an industry or a market
or a technology, to identify what could be de- scribed as
business opportunity, a sense of how the technology was going
to evolve, a sense of the deficiencies of the industry structure as
it existed, a sense of the opportunities that were going to unfold,
and what their technical impact would be on the structure of the
industry. From this would come a strategy.

THE DEVELOPMENT OF STRATEGY

In Fansteel, for instance, we found ourselves, more or less as

a function of history, rather deeply involved in the aero- space
business. Different aspects of it were potentially promising on
the one hand and unattractive on the other. A number of years
ago, we sat down and decided that we were irrevocably
committed to the aerospace business by virtue of the materials in
which we were involved, and that as long as this was going to be
true we ought to try to optimize our tactical processes with
respect to that industry. We concluded that what we really
wanted to do was to get into the jet engine business.
This particular product area was attractive to us because it
has a relatively long production life. Jet engine models have
lifetimes of something on the order of ten years. In the space
business in which we were heavily involved, if we ever made
more than ten of anything we were lucky, and usually became
involved in very difficult and critical commitments with
technical problems. By the time we achieved mastery of these
problems the program was over, and we were starting from
scratch on something else. Continuity was one of the major
factors that attracted us to the jet engine. We
Having made the decision, we acquired a producer of
investment castings, because we knew that investment castings
were part of jet engines. We worked in the field of powder
metallurgy, which we considered to be promising. We found
ourselves with an opportunity to acquire a vapor deposition
company. This is a technique by which one can deposit metallic
layers by growing metal out of vapor, a very interesting and very
promising process. We went after one of the most important
high temperature sheet metal fabricators in the country. Sheet
metal fabrication doesn't sound like a very exotic kind of
activity, until you consider the sort of metals that we were
working with. We were making rocket nozzles out of
columbium, doing extensive titanium fabrication, using super
alloys. The particular company that we went after was the most
competent operation of its kind in the country. We also acquired
a division of duPont which had as its basis a materials
technology-the only material that looked as if it would be
serviceable between about 1700 F and 2100 F. Almost all the
advancements in jet engine technology have to do with being
able to operate at a higher temperature.
 Some of these companies were already involved with the jet
engine business but all were in technologies related to the jet
engine market. Then, as the engine companies went into the new
generation of engine designs, into the JT-9 which powers the
Boeing 747, into the TF-39 which powers the C-5, and the
commercial versions of it which power the DC-10, we were in
an excellent position to respond to the need of this market.
Our strategy was to get deeply involved with the new
technologies, to go after and establish a relationship with the
principal producers of jet engines, to work our way in because
we were able to do jobs that nobody else could do as a function
of our technical competence. I think we've got a foothold in
what ought to become one of the most important businesses of
Fansteel over the years ahead. This is a direct product of
strategy. In almost every acquisition we made, we specifically
pursued a company. We knew what we wanted, the capability
we wanted, we identified it, we went after it. We knew, for
instance, we wanted a vapor deposition capability. There was a
rather small laboratory in California that was reputed to have the
best capability in the United States. We went after them. And we
did the same thing in almost every case.
I believe very strongly in business strategy, and I believe
very strongly in relating acquisitions to strategy. I believe that it
makes a lot more sense to identify companies that fit within the
structure of the strategy and pursue them, rather than be in the
receiving line hoping that somebody will bring an attractive
acquisition along. I do not think I can make a more important
comment about the whole process of acquisition than that.

PERSPECTIVE ON RISK-TAKING

Even in the context of a reasoned strategy, there are several

risks in analyzing potential acquisitions. One of them -a basic
one-hinges on whether there is, within the buyer, a capacity for
capable judgment with respect to the acquisition to be made. It
is very possible, especially when dealing with companies
engaged in dynamic technology, to run into two kinds of
problems. One is that you may find yourself deciding on the
basis of historical evidence-especially on the typical kind of
information that is easily available-that you have a very
attractive operation on your hands, only to discover that you
have bought a company with a technology that is absolutely
going to die in the next three years. If you do not have the
capacity to penetrate the unfolding technology in the market
which the company serves, you certainly can get into a bundle
of trouble by buying something that is going to go downhill.
The other kind of risk is on the opposite end of the scale. You
can get involved with a new technology that is demonstrable on
a laboratory basis and is sincerely represented by the developer
as being on the threshold of sweeping the industry and
revolutionizing the market. This can seem very, very attractive
and you can become committed and discover that it is absolutely
not true. If you have sufficient insight into the problem, you are
going to be able to identify this, but if it is, relatively speaking, a
new and different sort of field and you are not expert in it, you
face difficulty with respect to your capacity for judgment.
In my own experience, the most important area of technical
evolution in electronics in the last two or three years has been
the development of circuit technology, and in particular the
impact of integrated circuits, thin film and thick film circuitry.
When I came to Fansteel I had a feeling that we could profitably
expand in the direction of electronics by way of acquisition. I
was somewhat overwhelmed at that particular time, however, by
uncertainty as to what the pattern of circuitry was really going to
be over a four or five year period, and passed by an acquisition
or two which I thought might be undermined by the impact of
integrated circuits. One of the companies that I passed by almost
went into bankruptcy because of the competitive impact of
transistor circuitry on computers. Thereupon I became very
much impressed with the importance, in an acquisition situation
in which technology was dynamic, and where there was a
significant possibility that the unfolding technology could
undermine the logic of the acquisition, of the need to assure that
the buyer does indeed possess capacity for judgment.
If such capacity does not exist, or is questionable, it is
necessary when one makes acquisitions to put some analysts to
work on the problem. Ideally, the buyer should try to find some
bright people who have technical knowledge, who have
analytical orientations and who are very good at exploring the
facts with respect to the market. One caution: the analyst's
whole orientation predisposes him toward making the
acquisition. His job is to make acquisitions; it is not to turn them
down.
In this context, I can recall one company which we looked at.
Everything was right about it, the technology was right; we
knew it was moving into a dynamic market. The company had
had a history of sales and earnings growth followed by a year of
trouble, but the president of the com- pany, who was interested
in selling it to our analyst, very conveniently, logically and
efficiently rationalized the inadequate performance and very
carefully presented a program for the succeeding year which
made it perfectly clear that this company was going to bounce
back and do very well. In the course of time the report came to
me, and as I read and thought about it for a while, I came to the
conclusion that at the given time the company wasn't going to
do this. We decided not to go ahead, and as things turned out the
com- pany did just as badly the next year as it had done the year
before. This was just a marvelous illustration of a perfectly
sincere, dedicated analyst who was influenced to try to construct
a believable case because he wanted it to be believable.
Another kind of a risk arises in dealing with internal
company experts and I would say that the technical breed is
particularly guilty of this. Through loyalty and esprit de corps,
they can easily become convinced that nobody can do things as
well as "we" can, and anything that anybody else does on the
outside is "dumb" and not going to go anywhere. and we can do
it better than they can do it, and they're lacking in capability, and
so forth. One of the worst mistakes I have made in the last five
years happened when I looked at an operation that was in the
casting business. I was reasonably new to casting technology,
and I had a very bright technical young man who was working
on a new casting technique and it was suggested that it might be
useful to bring him in to take a look at the potential acquisition,
which I did.
I have never heard anything put down as hard as this
technical man put that casting operation down! In retrospect, I
never should have listened to him, because we turned the deal
down, and the company did nothing but make money and grow
and do all the other things you would expect it to do. The fault,
of course, was mine.

THE ELEMENT OF PERSONAL CONTACT

However useful experts are, there is still almost no substitute

for direct contact between the decision-makers in the acquisition
situation. Acquisition is not a remote project. If you are, let us
say, significantly responsible for the acquisition decision, and
ultimately for the acquisition negotiations, you cannot send a
group of people out and tell them to analyze the acquisition
situation and come back and decide whether or not it makes
sense based on what they tell you. You can do a lot of
spadework in terms of generating information and data, but in
my experience there is practically no substitute for direct
contact. There are also other reasons for direct contact, but I
have found that you yourself must go see, look and feel and
sense and talk with companies in order to make really good
acquisition decisions. All the analysts notwith