The dog days of summer are an odd time to hold an annual meeting, but Ainsworth Lumber will have one this month nonetheless. It has to. When the company learned in May that its marriage with Lousiana-Pacific Corp. wouldn’t proceed as planned, the TSX listing requirements demanded an AGM.
That’s likely not the only bit of scrambling management is doing. Last September the Vancouver wood composite maker agreed to be taken over by Nashvillebased Louisiana-Pacific for US$1.1 billion, a 30% premium over its share price. LP saw the deal as a way to better position itself for the U.S. housing recovery. Ainsworth shareholders would get immediate value and liquidity. It was certainly a win for majority owner Brookfield Asset Management, which had restructured Ainsworth after the latter’s brush with bankruptcy in 2008. The shareholders and the courts endorsed the union.
But that wasn’t enough. The demands of the U.S. Department of Justice and Canada’s Competition Bureau for asset divestments proved more than LP could stomach. Now, after spending most of the past year working under the expectation of the merger, Ainsworth has to come up with a Plan B.
How does a company move on when a major transaction gets stymied by forces beyond its control? If you’re not prepared for the worst, a failed deal can prove to be a deadly disruption. Then again, as demonstrated by Macdonald, Dettwiler and Associates (MDA), which saw a high-profile sale scuppered in 2008, it can also be a golden opportunity.
Don’t act until you’re sure
One rule of thumb is not to make any operational changes—reassigning employees or integrating teams, for example—until the money is in the bank. Instead, leaders should continue executing the existing business strategy. “You can’t substitute [the deal] for the strategy,” says Rajinder Raina, a lecturer at UBC’s Sauder School of Business and director of California-based ThirdEye Strategy Consulting. Statistically, mergers and acquisitions have a spotty record of actually growing earnings. If the strategy is a good one, it should stay in place whether or not the deal closes.
Prepare and protect
Before entering into a major transaction, put some deal-protection tools in place. These include transaction terms and schedules, confidentiality agreements and break fees. (You’ll need to procure legal advice.)
“Discipline [in following processes] is important,” says Ivor Luk, a partner in the financial advisory practice of Deloitte Canada. Make sure the other party sticks to the agreed procedures, and be prepared to walk if it doesn’t. You will have to share data; try to skew it toward information that will grow stale quickly, because if things don’t work out, your suitor may go back to being a competitor. And set up a dedicated deal team so management can get on with running the company.
Learn from setbacks
If things don’t pan out, do a formal post-mortem. Too few companies analyze what they did right and wrong when a deal unravels. The Ainsworth sale was deemed harmful to competition by regulators; its managers should consider what could achieve the same business goal—say, sustained earnings growth—without further consolidating the industry, Raina says. Explore other ways of obtaining the objective, such as finding cost efficiencies or introducing new products. If selling the company to a larger rival is still the best option, explore how the hurdles you faced this time can be overcome. Luk recalls a client who applied the lessons of one failed deal to structure a successful sale five years later.
Get back to business
Every large corporation has a well-defined Plan B—”and C and D,” Luk says—in case a deal goes south. Small businesses should too. Provided creditors aren’t at the door, the best option may be simply to keep on keeping on. “Fundamentally, mergers and acquisitions are a means to execute your corporate strategy,” Luk says. “You build or you buy as a way to create value.” Focus on building instead of rushing into the arms of another suitor.
Often, a transaction’s failure reflects a flaw in the business strategy that led to it, Raina says. He recommends taking a fresh look at the context in which the business operates. How might the organization build on its existing competencies and position itself to exploit new opportunities?
Another Canadian company’s recovery in the face of rejection is worthy of note here: After Ottawa blocked MDA’s sale of its space division to a U.S.-based firm in 2008 because the feds deemed the business a strategic national asset, MDA did an about-face. Two years later, it instead sold its real estate information arm to a Texas-based private equity firm and doubled down on space. The timing was fortuitous, as the U.S. and U.K. housing crashes had capped the growth of the property data business. Since the 2008 setback, MDA has grown revenues by 56% and more than tripled its share price—all on the strength of a business it previously planned to jettison.