Linowes, David F.

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eGrove (Univ. of Mississippi)

Management Services: A Magazine of Planning, Systems, and Controls Volume 8 Number 1 Article 2 1-1971 New Decade, New Look in Corporate Mergers David F. Linowes Follow this and additional works at: https://egrove.olemiss.edu/mgmtservices  Part of the Accounting Commons Recommended Citation Linowes, David F. (1971) "New Decade, New Look in Corporate Mergers," Management Services: A Magazine of Planning, Systems, and Controls: Vol. 8: No. 1, Article 2. Available at: https://egrove.olemiss.edu/mgmtservices/vol8/iss1/2 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Management Services: A Magazine of Planning, Systems, and Controls by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. The recession, the change in the national administration, the effect of Opinions 16 and 17 of the APB—all these have changed the merger climate drastically. This article explores the implications of those changes—and what they can mean to CPA MAS departments—NEW DECADE, NEW LOOK INCORPORATE MERGERSby David F. LinowesLaventhol Krekstein Horwath & HorwathIn keeping with the general cool­ing down of the economy, the advance of the conglomerates that seemed so invincible in the Sixties appears to have halted. The daring corporate raids that threatened so many companies in the recent past —including such giants as Sinclair Oil, Goodrich Rubber, Grumman Aircraft, and Armour Meat Packers —are no longer so bold, so success­ful, or so frequent.There is more behind this than the business downturn, however. There has been a change in the na­tional administration. Whereas the Johnson Administration looked with a rather condoning eye on the merger movement, the Nixon Ad­ministration has taken a very dif­ferent attitude. The Justice Depart­ment through Assistant Attorney General Richard McLaren seemed at one time to have opened a broad­scale attack on acquisitions. Under President Johnson, a task force organized to study the entire merg­er question reported in June, 1968, that it did not feel the heavy merger activity of that time tended to create unreasonable concentra­tions of wealth or economic pow­er and that, in its opinion, no new laws were required to deal with this trend toward acquisitions.On the other hand, the Depart­ment of Justice, under the Nixon Administration, seems to have de­cided to interpret an existing law to hamper merger attempts; Mr. McLaren has chosen to interpret the Clayton Act by basing his ac­tions on a corporation’s intention to commit an act contrary to the public good. The act states that an acquisition is illegal if “the ef­fect of such acquisition may be substantially to lessen competition or to tend to create a monopoly.”This is vague wording, and its very vagueness has made it possibleJanuary-February, 1971 171Linowes: New Decade, New Look in Corporate MergersPublished by eGrove, 1971Recent antimerger steps were sometimes taken at the request of businessmen . . .for Mr. McLaren to use consider­able latitude in bringing antitrust actions.Interestingly enough, the anti­merger action taken recently by the Government does not mean that the Nixon Administration is anti­business. On the contrary, the anti­merger steps were sometimes initiated at the request of business­men who resented the then merger entrepreneurs—such as Ling of Ling-Temco-Vought and Bluhdorn of Gulf & Western. The business­men who resisted these aggres­sive overtures wanted to continue to run their businesses along tradi­tional lines without disturbance to the status quo, and they put pres­sure on the Government’s adminis­trative agencies to help thwart some of the attacks.So, both the business and Govern­mental climate have changed radi­cally since the late Sixties. Yet many companies still are vitally interested in acquisitions. What do they do?The trend that seems to be emerging is of vital interest to CPA firms and particularly to the MAS departments of those firms.If anything in the present merger trend can be discerned, it is that much more thought and planning are being applied to acquisition programs. Acquisition executives have become far more respectfulDAVID F. LINOWES, CPA, is a national partner of  Laventhol Krekstein Hor­wath & Horwath. He is  vice chairman of the A1CPA Trial Board. Mr. Linowes is also chairman of the U.S. Peoples Fund for the U.N. He is an ad ­junct professor of man­agement at New York University and chair­man of the professional advisory board of the University of Illinois' department of ac­counting. Mr. Linowes headed U.S. Depart­ment of State missions to assist in economic development programs in Turkey in 1967 and in India in 1970. The American Jewish Com ­mittee awarded him its Human Relations Award in 1970.of the adage, “The buyer needs a hundred eyes, the seller not one.” They are now more carefully than ever analyzing their own attributes and qualifications for acquisition and are exercising more prudence in readying their organizations be­fore plunging ahead.The major effort is being placed on evaluating management capa­bility, rather than on financial statements, which in the past were the key factor in acquisition moves. No one familiar with business has to be told how the finding of hid­den values in financial statements and the application of unique tech­niques of corporate finance led to many of the major success stories in the Sixties. It was often a matter of bookkeeping legerdemain—and, in some cases, even outright chi­canery.But now a combination of cir­cumstances—not least the accept­ance by the accounting profession of Opinions 16 and 17 of the Ac­counting Principles Board, which deal with mergers and business combinations—has placed the busi­ness of mergers in a state of re­examination. Because the general effect of the APB Opinions may reduce the reported earnings of some acquired companies, they will become less attractive as opportu­nities for acquisition gimmickry and  financial entrepreneurship.So the emphasis in future ac­quisitions will be on management capabilities, not financial state­ments. Sound management is the currently accepted catalyst for turn ­ing copper into gold, not financial machinations.This sound management ap­proach begins with self-analysis.In self-analysis, companies are looking for the pluses within their own shop which give them a par­ticular advantage in certain types of acquisitions.These pluses are the unique at­tributes of an organization with special talents, rare experience, or superior people.Here are some of them:1. Ability to make fast decisions2. Effective labor relations tech ­niques3. Know-how in setting up and  supervising franchise or establish­ing chain store operations4. Knowledge of transportation  and public warehousing facilities5. Familiarity with business cus ­toms in foreign countries6. Experience in turning dor ­mant real estate into profit oppor­tunities7. Resourcefulness to convert  idle capacity into new profit centers8. Capacity to operate in mar ­kets having severe price fluctua­tions9. Capacity for quick responses  to consumer wants10. Familiarity with financing  techniques and institutions.There are many ways to ap­proach a business organization’s self-analysis. Outsiders can be helpful in giving an organization insights into its own strengths and weaknesses. Customer reactions, suppliers’ opinions, bankers’ evalu­ations may be helpful. Consultants that a business uses, such as lawyers, CPAs, engineers, are in a position to identify a company’s strengths and weaknesses from their particular discipline’s vantage point. Regardless of the approach or the mechanics, the self-analysis exercise has now become essential for laying a sound foundation for the steps in preparing an acquisi­tion program.The acquisition executive today is anticipating problems that may arise and is thinking through ten­tative solutions which he may ap­ply on short notice. Here are some 18 Management Services2Management Services: A Magazine of Planning, Systems, and Controls, Vol. 8 [1971], No. 1, Art. 2https://egrove.olemiss.edu/mgmtservices/vol8/iss1/2management actions which are now being thought through and worked on at the same time an acquisition program is getting under way:1. Preparations are being made  for increased demand on executive time and talent.2. Controls that are comprehen ­sive yet flexible are being readied.3. Personnel who are to review  the various functions of the ac­quired company are being selected and prepared.4. The need for objectivity, in ­tellectual independence, and integ­rity during each step of the ac­quisition is being emphasized.The nature of the organization charged with the responsibility of an acquisition program is largely determined by the nature of the management hierarchy of the ac­quiring company.All structures, however, are rec­ognizing these three essential points:1. An acquisition program is not  a part-time job for an executive. A capable creative executive is be­ing assigned to this function and is applying all his efforts to this work. If the man charged with the ac­quisition program is not the chief executive officer, he is an executive with authority to make decisions, and he has ready access to the chief executive officer at all times.2. The procedures for processing  acquisition candidates are being made flexible, fluid, and informal. The fact that time required to process papers through rigid pro­cedures and long lines of authority may try the patience of an anxious seller and drive him into the arms of a competitor is now recognized.3. The facility for strategic plan ­ning is being built into an acquisi­tion structure.There are so many facets to ex­amine and weigh in a merger ne­gotiation and so few people avail­able to do this work that in the great majority of cases practically all planning had been on the tac­tical level. The immensely impor­tant strategical planning efforts got postponed to a later date. The later date came after the merger had been consummated, and then it was often too late.The tactical aspects of a merger transaction include the price nego­tiations, products analysis, deter­mination of asset values and liabil­ities to be assumed, terms of pay­ment. These tactical facets all in­volve questions whose answers are signed, sealed, and delivered on the merger date or within a few months thereafter. Too frequently all attention during merger nego­tiations was directed to these tac­tical matters at the expense of strategical matters.The strategical aspects of a mer­ger involve the long-term relation­ships between the acquired com­pany and the acquiring company— the management aspects, if you please. They include plans for re­aligning executive personnel and for consolidating production facil­ities, cutting back some of the divi­sions, entering new market areas, and consolidating the research and development laboratories of both companies, as well as plans for con­solidating the sales and distribution organizations and instituting cen­tralized or decentralized controls, all designed to carry the merged complex at least three years beyond the merger date.The coming decadeIn conclusion, I have presented in an abbreviated way what ap­pears to be the new approach to mergers in the 1970’s—this changed approach being brought on by rather adverse economic conditions and actions by Government regula­tory bodies and even actions by the accounting profession.The approach of the Seventies places its major thrust on manage­ment capability, not financial entre­preneurship. The management cap­ability approach first identifies the acquiring company’s own unique attributes; then organizes itself to handle problems that may arise later; and finally sets up a struc­ture which provides for a full-time executive, flexible procedures, and strategic planning.All structures now are recognizing three essential points:1. An acquisition program is  not a part-time job.2. Procedures for processing  acquisition candidates are being made flexible, fluid, and informal.3. The facility for strategic  planning is being built into an acquisition structure.January-February, 1971 193Linowes: New Decade, New Look in Corporate MergersPublished by eGrove, 1971

New Decade, New Look in Corporate Mergers

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New Decade, New Look in Corporate Mergers

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