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How to avoid a bad merger.

* HOW TO AVOID A BAD MERGER

Ten months ago, ZSoft founder Mark Zachmann finally bought his way out of a painful two-year merger with Mediagenic, a publicly traded consumer software conglomerate. Zachmann--who became Mediagenic's second-largest stockholder--got his company back in the nick of time: Last month, Mediagenic filed for bankruptcy, giving creditors 80% of its stock. Zachmann says the Mediagenic deal taught him some hard lessons, especially about how to spot the warning signs of a deal that is likely to turn out badly. "There were a lot of red flags I ignored," he admits. "I got emotionally involved in the process and didn't think enough about what would happen two years later." In retrospect, says Zachmahn, he should have paid attention to several critical signs that Mediagenic's acquisition of his company was probably a bad idea: * The buyer took the initiative: Mediagenic was one of several

corporate suitors that began courting ZSoft in 1988, says

Zachmann. "There are only two reasons a company initiates an

acquisition--great synergy between the two companies or a

skeleton that's about to pop out." In Mediagenic's case, says

Zachmann, the company was living off old products" and needed

ZSoft to bolster sagging revenues. If their whole pitch is how

much they'll be able to help you, that's a bad sign. The other

guy isn't in business to help you." * The buyer kept secrets: Almost immediately after the deal closed

in September 1988, Zachmann started hearing for the first time

about declining sales, layoffs, legal liabilities, and

uncollectable accounts. He says Mediagenic president Bruce Davis

discouraged him from investigating the company's health before

the sale by insisting Zachmann could only inspect financial data

that was available to the general public. Any company that

won't let you get down and dirty with their financials probably

has something to hide," says Zachmann. * Customers, suppliers, and employees were unhappy: Zachmann

admits he should have been more aggressive about checking out

Mediagenic's reputation. "My sales manager--who admittedly had a

vested interest in not doing the deal--said he heard that

Mediagenic's distributors weren't happy campers," says Zachmann.

And if I'd taken a few employees out for a beer they probably

would have told me the business was a shambles." * The buyer's management had little stake in its company: Although

Mediagenic's executives claimed to be parsimonious," Zachmann

noticed they routinely booked expensive hotel suites and seemed

"more interested in creature comforts than in the health of the

business." Especially when a deal involves payment in stock (as

the ZSoft merger did), Zachmann says it's risky to give up

control to a chief executive who doesn't have a significant

ownership position in the business he manages. "His eye just

isn't on the right ball." * Company philosophies didn't mash: Bruce's strategy and my

strategy were very different," says Zachmann. He thought

Mediagenic should be a software publisher and just acquire

products, and we thought it was important to keep our own R&D

effort alive." Once ZSoft became part of Mediagenic, he adds,

Bruce made us conform to his overall design. For two years I

was a pretty unhappy person." * The buyer's CEO wasn't actively involved in the deal: "I met

with Bruce only twice during the negotiations," says Zachmann.

The rest of the time, Zachmann says he negotiated with lower-level

Mediagenic representatives (who sometimes acted

"irrationally"), even though the deal was supposed to be urgent

and important. "If the CEO isn't intensely involved at this

stage, there probably won't be any pressure later to make the

deal work out well." Mark Zachmann, chief technical officer, ZSoft Corp., 450 Franklin Rd., Marietta, Georgia 30067; 404/428-0008.
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:ZSoft Corp.'s painful merger with Mediagenic Inc.
Publication:Soft-Letter
Date:Nov 8, 1991
Words:603
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