Michael Weider (Darren Brown, OBJ).

When a company needs to fill a gap, fight off a competitor, or simply expand faster than anticipated, many will look to a merger or acquisition for a ready-made solution.

Although the reasons for an acquisition can be as diverse as the companies making the purchases, one thing remains perfectly clear: It is a huge undertaking and not without risk.

So, when a smaller company such as Web-based risk management software and services provider Watchfire acquires five companies in the three years, people notice.

Its activity began with the acquisition of Bobby, the market-leading Online Accessibility testing solution from the Center for Applied Special Technology. Buystream's web analytics technology was next in January 2004, followed two months later by a benchmarking and Web site assessment services business unit of Gómez Inc.

About one year ago, it pulled the trigger on a deal to buy Sanctum to acquire its application security testing. Coast Software was its latest target, with that deal closing last month.

Hot on the heels of its latest acquisition, Watchfire founder and chief technology Michael Weider gave the Ottawa Business Journal his view of mergers and acquisitions.

OBJ: Why a merger or acquisition? Why not just expand?

WEIDER: Consolidation continues to be a software industry trend and customers often find it more cost effective and convenient to work with fewer vendors. Watchfire has made five technology and company acquisitions in three years through a deliberate strategy to build and expand its online risk platform WebXM. Essential to the success of any successful M&A is that the acquiring company has a clear understanding of their goals and business objectives.

A well thought out M&A is a good way to expand market share and increase sales, while at the same time allowing the company to defend its market share and eliminate competition.

M&A are also excellent ways for a company to obtaining new technology and new customers immediately as well as enabling a company to acquire a stronger market share in key geographic regions.

If the technology and company synergy is there, it makes much more business sense to acquire or merge with another market leader. Well-planned M&As will help a company gain expertise and accelerate time to market while also saving considerable research and development and recruitment resources that would have been needed to build the technology and market penetration from scratch.

OBJ: How much due diligence needs to go into planning a merger or acquisition? What do you need to examine?

WEIDER: Proper due diligence is essential to any well-executed acquisition and needs to be a priority. First, the acquirer needs to determine which characteristics are required to meet its corporate goals. Early planning allows management to quickly eliminate companies that don't fit the acquirer's goals.

For Watchfire, we looked at several factors. Potential targets need to not only have a strong technology synergy and be a market leader, but also have a good fit with our corporate strategy. Its technology or services must have significant cross-sell potential, have similar target customers and must provide the ability to sell through similar channels. The ability to integrate employees where the company is based is also an important consideration when doing your due diligence.

Revenue growth potential and profitability is a critical due diligence factor and getting a clear understanding early on of the cost of the deal in terms of cash and or stock.

Lastly it is important to understand how much of a distraction the deal will be to your core business and whether you're in a position to take this on. This is one factor that is often underestimated. The acquisition may go well but your core business may suffer because your team is working on closing the deal and integrating the new company.

OBJ: Is there a limit to the size of a company that can be acquired by another company? Can a smaller company acquire a larger one? How does a merger work when the two companies are not equal?

WEIDER: There are no specific rules regarding the size of a company that can be acquired by another company but the larger the acquired company is as the percent of your company size, the more difficult it will be to make it work. Sanctum, which we acquired in July 2004, was equal size to Watchfire. It was challenging because of Sanctum's many locations and time zones but ultimately the integration was extremely successful. Acquiring an even larger company would have been even more challenging.

OBJ: How long does it take for a merger/acquisition to be completed on a corporate level?

WEIDER: Acquisitions completion times can vary. It depends on many factors, including the size of the company, geographical locations, whether the company is public or private, the board of directors involved and the synergies between the two organizations. For Watchfire our agreements have all been between three to nine months from the first discussions to signing the deal.

OBJ: How much do the companies' cultures fit into the equation? Can you merge with/acquire a company if the cultures don't mesh?

WEIDER: Increased sales or improved profitability are only part of the picture. A good cultural fit cannot be overstated. Effective due-diligence will illustrate early on in the process where two companies converge or diverge on such aspects as leadership and core values.

Ultimately the cultures need to mesh but that doesn't mean there can't be differences. When Watchfire acquired Sanctum, there was already a large established security development office in Herzelia, Israel. Culturally, there are differences between the Ottawa office and the Israeli office; however, the integration was successful because we share common ground on core values and the vision for where we want to go.

OBJ: How important is it for the employees to feel that they are a part of the larger entity? Are there programs to help this happen?

WEIDER: It is no secret that employees are a company's most important asset and are often a big reason for merging or acquiring but there can be employee resistance on both sides to the newly formed company. This can be when many of the most talented employees - a key driver for many deals - voluntarily leave the merging organizations. To counteract this, it's critical for management to identify key employees and offer retention plans and incentives for them to stay. It's also important to ensure that employees feel they are a part of the larger entity and understand and support the corporate mission.

Generally, there is a transition period where people need time to get comfortable. You can't rush this as people need time to digest the change but you also can't leave it too long or serious problems will arise. Programs will vary by acquisition but management needs to make it a priority right from the beginning. Organizations need to communicate to employees early, and often, using every vehicle available.

Companies must also define and communicate clear plans for their employees. Get a cross-department team together early to make everyone feel at home and communicate new responsibilities and organizational structure. It's also important to get the new teams working together as soon as possible to foster a sense of community.

A good book on the subject is Managing Transitions: Making the Most of Change, by William Bridges.

OBJ: Once the merger/acquisition is complete, how do you integrate the new people into the company? How do you reduce fears of job losses?

WEIDER: Inevitably there will be some overlap as a result of a merger and acquisition, and certain positions and redundant roles will be eliminated. The ultimate success of an acquisition depends upon frequent and honest communication. Generally, people would rather hear bad news than no news. If there are cuts to be made then they need to be communicated quickly and professionally. The same goes for any management or organizational changes.

For the sake of the newly formed company and employee morale going forward, it is also important to quickly determine which individuals are not supporting the new entity and make quick decisions regarding employees who may defocus and un-motivate other employees.

Getting any cuts over quickly reduces the fear, uncertainty, and doubt (FUD) factor.

As previously mentioned, it's also essential to get the teams mixing and working together quickly. Moving some people from one location to another if only temporarily promotes cross-pollination and encourages team building. For example when we acquired Sanctum we moved some developers from Israel to Ottawa. Some stayed for a period of six months. Others may stay here permanently.

By Jeff Pappone

Special to the Ottawa Business Journal