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The secret of a successful merger

Barbara Murray is Editor of Families in Business magazine.

Antonio Gallardo, Vice President of pharmaceutical group Almirall Prodesfarma, draws on his family's experiences and identifies the keys to a successful merger of two family businesses

Almirall Prodesfarma, Spain's first pharmaceutical multinational, was born in 1997 as the result of a merger between two family companies. A shared vision of mutual benefit – for both the company and the families – made for a smooth, successful transition. Today, the company holds a leading position in Spain with a market share of more than 6%. It employs 3,600 people and its products are present in over 80 countries.

Barbara Murray (BM): I understand you have some strong views about what it takes to achieve a successful merger of two family businesses.

Antonio Gallardo (AG): Yes. I'm convinced that the usual routes that businesses use to raise funds – for example, talking to venture capitalists (VCs) – is not the best approach for family-owned and family-controlled businesses.

BM: What if the family is looking for a quick injection of cash that also offers the chance to regain ownership relatively quickly?

AG: Well, that comes at a price. Many family businesses need to grow and to finance this, they either go to the bank or, if they are big enough, they may consider an IPO (Initial Public Offering). I would definitely advise thinking twice before going public. And VCs want to make a quick return on their investment and make their exit; they are usually looking for a quicker and bigger than average return on their investment. That strategy is, generally speaking, the complete opposite to the strategies that family-controlled businesses tend to use. Oil and water don't mix.

BM: They can create an interesting emulsion – a different product. Can it ever work?

AG: Rather than trying to force the mixing of two fundamentally different structures, we need to rethink the old, unfounded assumption that "public" is "good" and "private" (especially "family") is "bad".  Family businesses are good at coming up with interesting and original solutions – solutions that play to their strengths.

The ideal solution is one that plays to the strengths of both parties. VCs may agree to enter a company with a minority holding, say 20%, but once they see the long-term strategies, they force change, and there are things you can't do without their say-so. Okay, you can get money from them, but my warning is to be careful about what you are signing. Their interest is short term – maybe three to five years – then they walk away and have no interest in what happens after they go.

You ask can it ever work? I think that we need to reframe the question and be open to other alternatives. I began to wonder why we don't see more mergers of family businesses with other family businesses.

BM: Why do you think we don't see more?

AG: The first difficulty to be overcome, if family businesses want to go down this route, is a personality problem. In my view, if you are a family business the best company you can do a merger with is the company you have been competing with very closely for years. In 80% of the cases, the experience is positive. When you compete, you fight and relations between the two firms are bad.

Therefore, the main people involved have to get themselves into a positive frame of mind about it. If you can't let go of past events and let go of the sort of thinking like, "I'd never go into business with him, he head-hunted our Finance Director!" – then it will never work. You have to let go of grudges. Once you do, there are many, many advantages.
BM: What are these advantages?

AG: First of all, if you think about it, your closest competitor is someone you have invested an awful lot of resources getting to know over a long time. You know them and they know you. You've been watching and observing each other for years – at trade associations, conferences and so on. You've also been gathering a lot of published information and objective data on each other.

The other problem to be overcome is the cultural question. In non-family business mergers, the cultures are normally very different and people simply don't know each other, so you start with a culture of suspicion.

BM: How can you get over this?

AG: A merger in the same country is a big advantage. When this is the case, you certainly know the other side personally. So if you can overcome the personality issue, it's a question of making an approach and starting discussions.

BM: What else is involved?

AG: There is the issue in all mergers – exaggerated in family business mergers – to do with the majority/minority percentage split and who is perceived to be in power after the merger.

BM: That's a crucial issue, I would have thought. What does it take to overcome this sense of losing control of what the family has worked to create, often over many generations?

AG: It needs both sides to enter into the talks with the mindset that what you are doing is good for your business and is good for your family, whether you are going to be in the majority or in the minority. You have to look forward to the future and be sure that it is the right thing to do, and you have to be generous.

BM: In what way?

AG: Well, if you were working with a VC who wanted to enter into a minority role, you would end up thrashing out an agreement about protecting minority rights, conditions and so on, making sure the majority can't make strategic decisions alone. In a family business merger, you have to be generous when working towards the solution about the final proportion of ownership and other issues.

For example, it may seem sentimental, but one side may want to keep their office in the headquarters. So the key is to be flexible where necessary.

BM: Surely it is very difficult for people to come to terms with the loss of power and control?

AG: I believe that it is one of the hardest things to overcome between two family businesses hoping to merge: the perception that someone is going to lose power. But everyone loses power when you merge. And if the merger is good for your business and good for your family, it's your obligation to lose power. You should expect this and you should do it.

BM: I know your family business, Almirall, merged with Prodesfarma in 1997. How long did the process take?

AG: The books say it should all be over in three to four months, but that means merging becomes an aggressive form of imposing change on people, rather than a gradual process of change management with the emphasis on human relations.

Our philosophy was totally the contrary. We announced that no one would be fired and it took two to three years to convert to a new company. Some decided to leave, but no one was looking over their shoulder in fear. That's the best way to do this, in my view. It's a soft approach and it's best in the long run.

BM: What happens in family business mergers to members of the families who have careers in their family businesses?

AG: This can be a real complication, especially if there are too many executives. It means sitting down and talking through who is going to do what and what changes people have to accept in their careers.

BM: You have made some important points about culture, power, careers, and strategies in family business mergers. Could you explain how these were managed in your case?

AG: Ours was a merger with another pharmaceutical company based nearby in Barcelona. In our case, property was not a big issue as Almirall was owned by my brother and myself. In the other company, Prodesfarma, there were three different families involved in the ownership. 

BM: I imagine that both being Catalan firms helped regarding the blending of the two company cultures. What if a proposed merger involved firms from other countries, or different regions in the same country?

AG: Well, I know of a Swedish-Italian merger that was a disaster. Equally, I know of another Catalan merger of two construction companies that has been very successful – it took place decades ago between two families. One thing I am sure of: we have the know-how and we should approach the possibility of a merger in a positive way. But most firms don't see it as a positive thing.

BM: Nevertheless, each family, as a family, has its own culture and its own values and ways of doing things. Surely you must have had to deal with the merging of two different family cultures?

AG: Yes, naturally, and we had a plan for this, which was not to impose a culture. Since we operated different commercial lines, we switched the heads of certain lines to different lines in the other company. We switched managers. We did this to show we were all the same, and that there were no winners and losers. Each was genuinely interested in the other and a culture of mutual benefit emerged.

BM: Referring back to the mind-set needed to overcome the fear of losing power and control, what other factors could motivate two families to join forces and resources? Does it have anything to do with timing? For example, is merging also potentially a succession solution, or an estate plan solution, or a continuity solution?

AG:  In our merger it was a succession solution, a continuity solution and a growth funding solution. The three families of Prodesfarma had no obvious successor in mind and they had begun to question their future as a family business. Their choices were to sell, to try to keep managing things for as long as possible, or to explore other continuity options.

Prodesfarma was established circa 1950 and was a classic case of a post-WWII business where the founders needed a succession solution. For our part, we were at the stage where succession was not an issue, but funding the growth we aspired to certainly was. Our goals were to spend more on R&D and to internationalise. Almirall was founded by my father in 1942; by 1997, when the merger took place, it was under the control of my brother and myself.

BM: How was the process of change managed in reality? Did you manage it yourself and what help did you need from outside?

AG: The key person was my brother Jorge, who was able to convince the CEO of Prodesfarma of the advantages of a merger. After the initial approach, we set up a committee with two people from each company to discuss the way forward. We spent nine to 12 months on this.

We agreed that an external company should do the valuations of each company. Of course, given the nature of our business and our industry, there were actual valuations as well as theoretical valuations based on potential earnings in five to 10 years and on the innovations we each had in the pipeline. At this stage, confidentiality was important to prevent the employees getting nervous at a time when we hadn't ourselves found the answers to the main questions. Based on these valuations, we agreed a share ownership formula that gave Almirall the majority.

BM: Was this based simply on the valuations?

AG: No – and this is such an important point – you have to look beyond haggling over two or three percentage points. What difference will a few points make? People will never agree a value anyway, so it always comes back to principles.

And the guiding principle for us was that it was worth going forward with the merger as long as it was good for the business and good for the family.

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