M&A Is On The Rise – Are You Prepared?

Many communities have plans in place to help address natural disasters like tornados, hurricanes, or floods. These plans are dusted off periodically and updated so they can be used when the need arises. These plans are important because lives are at stake and everybody appreciates that being prepared is the best chance of minimizing property damage and human suffering.

Most communities do not have a disaster plan in place to help mitigate the impact associated with the loss of a major employer. And yet both the human suffering and economic impact associated with unanticipated layoffs can often be dramatic. Different cause, but for many people a similar effect on a personal level. In addition there is often a resultant impact on required community services and/or on the housing market (depending on the community size).

A recent CNBC.com article suggests more Mayors may be saying – “My major employer is leaving town, what are we going to do now?”.

The article reports that in today’s economy, mergers and acquisitions (M&A) has become an important business growth strategy for companies. Organic growth is not delivering the numbers CEOs need to satisfy shareholders, and bigger companies are flush in cash. Growing through acquisition and integration aimed at lowering operating costs is seen as an increasingly smart approach.

The Bloomberg 2011 M&A Outlook Report indicates consolidations in the Energy and Finance industries set the pace, and that cross-border M&A represented nearly 50% of the M&A activity in 2010. And the general consensus it that percentage is likely to grow in 2011.

Intralinks reports there was a +30% increase in global deal activity in 2010 when compared to 2009. The quarterly M&A data they presented would suggest the trend is accelerating.

Quantitative studies suggest if a company undergoes a merger or is part of an acquisition, it is not a given that there will be massive layoffs to generate operational efficiencies. But, downsizing is generally the outcome in many sectors. And more importantly, plant consolidations that result in a community losing a facility and having the employees transferred can have a devastating effect on the local economy even though the net employment for the company remains unchanged.

I am going to hypothesize that for most communities in the U.S., the odds of a major employer undergoing an operational rationalization, merger or being part of an acquisition are at least as high as experiencing a major natural disaster. I think it is a reasonable hypothesis given the lifetime odds of a person being killed from a natural disaster are estimated to be 1 in 3,357.  I know a lot more communities that have lost major employers than I know have had to deal with the impact of a natural disaster.

Why then do so few communities have a preparedness plan in place to help prevent and/or deal with the potential loss of a major employer?

It would seem like this is a probable event and every community should minimally have a plan in place to get an early warning (if at all possible) and to proactively manage any fallout so the risk of negative impact on the community is somewhat mitigated.

What Can You Do?

This is certainly not a comprehensive or exhaustive list. Consider it food for thought.

Be a good partner and help your local Companies succeed. When it comes time for operational consolidation, typically the lower performing plants/offices are on the list for “rationalization”. To avoid having the facility located in your community be at risk of “rationalization”, do everything you can to help ensure local Management has the best chance of creating a top performing operation. Far better to have the Company move other operations to your community for consolidation than to move your facility to another location.

Create a list of your top 10 employers and continuously assess the risk. This certainly involves talking and listening to the local company CEOs. But, often, they may not be aware or are obligated to keep the information highly confidential. Periodically review the financial health of the top 10, proactively scan the news for clues, meet with corporate management and build a rapport, contract with a professional resource to assess the probability. Bankers that specialize in M&A are a good source of intelligence.

Contingency Plan. Create “what if” scenarios and work through the implications. There won’t be a perfect solution, but at least you will have a good handle on the magnitude of the challenge. You can make it a generic exercise – What if a major employer in the community was to relocate and 2,000 people were laid off? That way you can invite company HR managers to help you develop a feasible response plan.

Benchmark communities that have had the experience. Don’t reinvent the wheel. There is a lot to learn from others that have had to deal with the loss of a major employer. Gain an understanding of what they had to deal with and what worked or didn’t work. Create a set of key learnings you can refer to when needed. Update the key learnings often since times change.

What Are Your Thoughts?

What would you add to the Action list to be prepared for the potential downside of M&A? If you have the experience of living through a challenge like this, share what you learned.

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5 Comments so far

  1. Charley Bowman

    July 27, 2011

    This topic gives me shivers. I was a first time city manager in a town in southern Ohio that had changed from a mayor form to a statutory city manager form. The year end general fund balance prior to my arrival was $12K (if my memory is correct). At the end of my first year, we projected it up to $85k. At the end of December Honda announced a serious reduction in production. This particular town had 5 industries – 4 were suppliers to Honda. One factory closed its doors in May and the second moved its operations to Canada in July (and would not talk to the locals or the State about its move or consider any efforts to keep it in Ohio). It took 50% of our general fund budget.
    I was forced to recommend laying off the 8 full-time firefighters, 2.5 full-time dispatchers, 2 people in the Service Department and one .75 person in Finance. It was nothing short of ugly. We did contract with the county to provide dispatching – a good consolidation of services. We provided fire services to 4 townships. After some discussions with the townships and a local not-for-profit, work started on a fire-ems district – another good consolidation of services. I left shortly thereafter, and they have done a pretty decent job to rebuild that community’s job base.
    When I see these towns ravaged by tornados and floods, my heart goes out to the communities and their leaders. I was in one tornado prone community where we had a very complete disaster plan – prepared long before I was employed there. We also had a direct connection on the US Weather Service that provided realtime weather reports. It was very unnerving one morning at about 3 am to watch a tornado go through a southwestern Ohio city. This particular city has the model that most cities in Ohio have modeled. The city staff in this community really had their act together in dealing with such emergencies.

  2. Sean Grace

    July 27, 2011

    This is a difficult topic for a lot of people to deal with. But, I agree that it pays to think out some kind of a plan ahead of time.

    I am in Cincinnati, OH where we have several very large multi-national corporations. So, one company relocating is probably not going to destroy us. But, there are several small cities in the greater Cincinnati area that may suffer greatly with workforce reductions and employment shifts elsewhere. Additionally, once one major employer leaves, some others may follow suit.

    I think it’s important to be prepared for these kinds of shifts by being flexible as a community and continually working to attract new corporate investment. It’s been pretty obvious that communities with all of their eggs in one basket are economically devastated should a major M&A occur.

    Lastly, to kind of piggyback on one of the points made in the blog post, cities should be in constant contact with their employers. The city leaders need to continually show the benefits of bringing more jobs in from elsewhere rather than moving the existing ones.

  3. Emery Graham

    July 27, 2011

    Geographic locations have become commodities in the corporate production function. Like labor or capital, geographic location is valued by corporations based on available competitive advantage. The competition between suppliers of location force the same “race to the bottom” as suppliers of any other commodity. Location has become an economic good. Unless cities form some type of restrictive alliance, corporations will force the costs of location down and avoid any locations that impose increased costs for corporate M&A activity. With the increase in the attractiveness of foreign locations, e.g., educated workforce, lower costs of living, lower government regulation, and a decrease in the cost of communication and technology integration, American cities have become uncompetitive in the location market place. Maybe it’s time to look toward a relocation insurance pool for small municipalities who are dependent on one or two major employers. It would be an interesting exercise to see how the insurance actuaries would evaluate and price such a product.

  4. Eric Canada

    August 10, 2011

    It is absolutely essential to be prepared. However, there is also a role for active intervention. We have been following the M&A issue for years through executive interview and our national Synchronist data. We have seen the concern among executives rise about the threat of M&A. Nationally, 68% of company executives are concerned about their facility being impacted by M&A activity. In some states this shoots up to over 90%. Imagine a state where they have mostly branch facilities that serve at the whim of corporate. So, the problem is that this elevated perception of increasing M&A activity among executives creates an unstable environment for all business planning. When combined with a mature product companies, it becomes a greater concern for economic development professionals as these executives feel a lack of control and progress so firm drift, available resources like MEP services go unused. Addressing this requires a broader existing business strategy which includes calling on the corporate offices of strategic owners. Classic business retention program is wholly ineffective in dealing with 3/4 of the issues that drive business risk because we look at the wrong issues. This is a great example of one of those issues we should be paying attention to. You only see what you are looking for.

  5. Al Jones

    August 13, 2011

    It’s something I think we’re too often passive about, like a hurricane or flood, instead of a series of very human decisions that can be changed and that’s aren’t necessarily “a done deal” as often presented. More mergers and acquisitions unravel during the due diligence and dealmaking phase than actually occur, some say 3x as many fall apart. So being a wrench in the monkeyworks happens but could happen far more with a better understanding of tools (like telling the truth, not rolling over on extending the same sweetheart financial deals and tax breaks to a new owner, detaching the CEO from the rest of the company instead of letting him steer it into the rocks for his own enrichment, calling their loans, etc.) as communities get hardball played On them far more than they actually manage to do it themselves. Realizing M&A is far more about a very few people’s momentary financial interest rather than the grand sweep of strategy and high finance that it’s presented as though it’s hyperrational instead of emotional egotism more often than not. Fortune referenced a study awhile back that the single most reliable predictor of whether an M&A will go through is how many business magazines the CEO has appeared on the cover of recently (!!!)…in other words it’s more important not to look like a weakling who can’t get a deal done than to walk away from what’s revealed to be a terrible deal.

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