Snaring A Suitor.

Want your company to be acquired? Learn to think like a buyer.

Dennis Kozlowski, chairman and CEO of Tyco International, is one of the nation's most experienced executives when it comes to mergers and acquisitions. Over the last few years under his leadership, Tyco has acquired more than 100 companies. By any measure, he's in an elite group of "serial acquirers."

In an interview, he once was asked how he and his key strategists decide which companies to pursue. He revealed that, at any given time, Tyco keeps a fluctuating list of some 30 companies that are possible targets. The implication of Tyco's list is that acquisition is rarely a product of circumstance and fortune. Rather, it's a carefully conceived element of corporate strategy, designed to achieve specific goals the company has in mind.

With the exception of hostile mergers, every acquisition requires a willing seller. Yet remarkably, most sellers don't approach the sale of their business with anywhere near the sense of strategy that buyers do. Smaller companies in particular tend to look at a sale only as an option to unload a family business, take advantage of temporarily high valuations in a given industry - or simply as a way to cash out of an enterprise they no longer have the resources and energy to run themselves. In some cases, a sale is the only option when a company has no succession plan and needs new leadership. Sometimes a sale is an unpredictable but fortuitous event -- a sudden windfall that benefits lucky and unsuspecting owners.

In fact, selling a company is no less a strategic action than purchasing one, regardless of the size of the business or the details of the transaction. The most successful sellers are those who learn to think like buyers: developing a strategy, carefully considering the comparative advantages of possible partners, building a long-term relationship and using the steps leading to a sale to enhance the value of their franchise.

Last year, Kozlowski, Jan Leschly, CEO of SmithKlineBeecham, and I founded the M&A Group (www.themagroup.com), an organization of CEOs who have established themselves as leaders in M&A transactions.

At a recent meeting, I was struck by how often these executives concede that many of their acquisitions lead to surprises and disappointment. According to David Komansky, CEO and chairman of Merrill Lynch, you never know why a company wants to sell itself until you purchase it.

Komansky's words remind us that, at bottom, what every acquirer is looking for in a potential target company is reassurance. Buyers hate surprises, and to the extent a seller can put a buyer's mind at ease up front, the more attractive the company will become.

Reassuring a buyer typically requires a number of obvious steps: candor about the operation of the company; full disclosure of little-known problems; solid, well-documented financial information; and a willingness to provide an honest assessment of the strengths and weakness of the top management team.

These are fundamental steps that will always make a good company still more attractive. But in addition, there are tactical steps a company contemplating a sale can pursue that will make it both more attractive to buyers and help smooth the post-sale transition. Every company thinking through how to position itself for a sale can employ these three, closely related tactics: forging alliances, seeking long-term relationships and keeping an eye on corporate culture.

BUILDING BRIDGES

Too often, small companies assume a sale is a single event -- a short-term transaction, driven exclusively by the interests of the buyer. But for most companies, the challenge is to position themselves for a sale that allows them to accrue the greatest ben-efits and enjoy the smoothest integration process. Rather than waiting for the phone to ring, a small, growing company might want to begin nurturing a long-term relationship with a potential buyer or buyers. Creating an alliance between your company and a larger company with the resources to make acquisitions lays the groundwork for a possible sale without compromising your independence or closing off other options. Rather than a marriage, a strategic alliance prior to a sale is like an extended romance that leaves open the possibility of greater things to come.

For a number of years, I've been involved in a small medical company that developed a path-breaking technology for treating flesh wounds. The company went public in 1996, even before the product had FDA approval. Many would have viewed this as the opportune moment to seek a buyer and cash out. But rather than try to move immediately to a sale when the company was still in its infancy, the company's board and its executives saw the advantage of growing the business through a strategic alliance. In trying to forge that alliance, the company deliberately looked at large companies that could bring strong national distribution links and proven brand-name power. Of course, the company also looked for partners with the resources to acquire us when the time was right. But an immediate sale wasn't the objective. Soon after the company went public, we reached a distribution agreement with Johnson & Johnson, helping to boost the stock and grow the company.

Today, the company is far better poised for a sale than it was four years ago. Back then, it was merely one of a number of emerging health care firms struggling for recognition. Its advantages - a patented technology and a clear demand for the product - made us confident that we could one day sell the company. But rather than shopping around for a buyer, we believed an alliance would give us an infusion of cash, new legitimacy on Wall Street and the ability to have our management still run the company, making it more valuable in the long run.

Opportunities for these types of alliances are growing. Under pressure to innovate, many large companies, heavily dependent on R&D, often find it just as easy to go out and buy innovation as to develop it internally. The question the buyer must ask, though, is when is the right time to purchase a fledgling but promising company. Sellers can help make that decision by offering the possibility of a strategic alliance: an arrangement that lets a buyer test the waters.

This arrangement is also advantageous to the seller. After all, the very act of putting a company on the block raises questions in the mind of a potential buyer. In many cases, it creates the impression that you no longer believe in the company, or simply want to get cash out while you can. The strategic alliance puts that concern to rest.

LONG-TERM RELATIONSHIPS

When a larger company takes a stake in your company, you also achieve something intangible that can lead to a future sale: a strong business relationship. Relationships are a part of every element of business, but they're particularly helpful in positioning a company for a sale. Even if the relationship is purely personal, one CEO to another, it can establish a level of trust that makes a purchase more attractive to a buyer. David Bohnett, founder of the Internet site GeoCities, had known Jerry Yang and David Filo, the founders of Yahoo!, for some time before Yahoo! bought Bohnett's company for $4 billion. In their discussions, the three executives learned they had similar visions of the Internet, advertising and e-commerce. Not surprisingly, Yahoo! had taken a stake in GeoCities almost a year before the sale, so the relationship between the two strengthened.

Never underestimate personal relationships. At the highest level of cor-porate mergers, a working relationship between senior executives is often the best way to spark negotiations for a sale. When he announced his merger with Time Warner, AOL CEO Steve Case mentioned his friendship and past work with Gerald Levin as helping to spark his thinking about a union between the two companies.

For more modest-sized organizations, developing business relationships with executives in companies known for acquisitions is the best advertising you can develop. Within their own industry space, far-sighted executives are con-stantly on the lookout for well-managed companies that can expand their plat-form. Mackey Macdonald, CEO of the apparel company VF Corp., for example, encourages his managers to look beyond their current business to discover "what product consumers are going to wear tomorrow that is going to replace the product we're selling today." But short of having a financial advisor beat the bushes for a potential buyer through a series of road shows, executives of small-and mid-sized firms have few ways to promote the virtues of their companies. Using a network of professional relationships to showcase your company is therefore not only a way of winning the trust of other executives, but also of educating them.

Some relationships will naturally terminate once the sale has been consum-mated. But that's not always the case, especially when a seller's management team is vital to continuing growth of the company. Indeed, while purchasers are always under pressure to cut costs after an acquisition, they're likely to find a company more attractive if some of its senior management shows a willingness to stay around during an extended transition, Executives who make it clear that they're looking for a cash-only deal that lets them walk away from a company they've helped to grow invariably send a negative signal to the market. By contrast, companies willing to accept a stock deal implicitly indicate their faith in the merger, especially if they're willing to accept a post following the acquisition.

SEEK THE RIGHT CULTURE

The meshing of corporate cultures is increasingly seen as the litmus test for a successful merger. It's now widely recognized that traditional financial due diligence conducted by an acquirer tells relatively little about whether the two companies will "fit." Indeed, many mergers, announced with great fanfare, soon find themselves victims of a culture clash once the integration process begins. This hurts not only the acquirer, but the seller, too.

John McCartney was CEO at U.S. Robotics, the company that launched the Palm Pilot. In 1997, the company merged with 3Comm, at the time the second largest technology merger in history. He continued to work as a president of a 3Comm business unit through the following year. He says that although he believes the underlying rationale of the merger was sound, his company, U.S. Robotics, struggled through the integration process, discovering the two companies had very different cultures and management styles. Nearly all the senior U.S. Robotics team left 3Comm within a year. "I now realize that in any merger, focusing on the common culture is as important as focusing on product integration, strategy or technology," McCartney explains.

McCartney's experience is instructive to any corporate acquirer. But there's also a lesson here for companies looking to be sold. As stories like McCartney's become more common, there will be greater pressure on any acquisition team to avoid a company with a clearly incompatible and inflexible culture. Companies that have a good understanding of their own culture -- and can point a potential buyer to where two companies need work on the integration process -- will be seen as a more attractive target. In other words, a seller that anticipates the challenges of cultural integration saves the buyer a lot of headaches down the road. If a seller is willing to think through integration problems early in the negotiation process, before a deal is even signed, it's more likely that the final agreement will come more quickly and prove less burdensome for both sides.

BE POSITIONED BEFORE NEGOTIATION

No one trying to sell a company can ever presume to know the strategy of a buyer. Nor is it possible to anticipate exactly who the buyer will be and what conditions would be placed on a sale. But a far-sighted company can do many things to put itself in a position where its strengths are recognized and its value is understood. The most successful mergers arise from circumstances where two companies have truly had a chance to get to know one another. By forging alliances and partnerships, leveraging long-term relationships and thinking strategically about corporate culture, a company makes it much easier for a strategic buyer to get to know it and move toward a sale.

Dennis C. Carey is vice chairman of Spencer Stuart U.S. and co-head of the recruiting firm's board services practice. He also is founder and co-chairman of The M&A Group, a consortium of CEOs focused on the best practices in merger and acquisition transactions.