BIZ SAVVY: Behind the Deal – Time and tide didn’t dampen this deal

By KRYSTLE CHOW
Published in the Ottawa Business Journal newspaper and website.
Jan. 28, 2008 (Jan. 30 on OttawaBusinessJournal.com)

When wireless, satellite and defence solutions maker EMS Technologies Inc. said it was going to buy satellite communications company DSpace and merge it with its Ottawa-based SATCOM operations, it seemed like the perfect fit.

Both make satellite technology to provide mobile broadband Internet to people on the move in remote areas, both used U.K.-based Inmarsat’s satellites, and the acquisition wouldn’t require SATCOM to shed any product lines or lay off staff.

But DSpace is based in Adelaide, Australia, which is more than a day away by plane and 12-and-a-half hours ahead of Ottawa. So, how did SATCOM deal with the distance and the differences, both temporal and cultural?

The OBJ spoke with SATCOM general manager Gary Hebb about some of the ways the companies managed to bridge this divide.

OBJ: Why did you pick DSpace to acquire?

HEBB: Our satellite communications technology, which are particular terminals that give you high-speed data communications while you’re moving in a vehicle anyplace around the world, is pretty complicated tech, with only about five companies in the world that provide that kind of technology. DSpace was one of them and EMS was one of them.

With DSpace in Australia, they have customers like the Australian defence forces and they have access to markets in that side of the world that we normally wouldn’t even think of. It gives us access to those customers, those markets and more of an understanding of what’s going on in different areas of the world.

It also gives us access to Australian government funding. Satellite communications is a very high-tech kind of business and it’s the sort of thing that qualifies for research and development initiatives that different governments have, and we can access those now in Australia, as well as Canada, and also the United Kingdom, where we made an acquisition a few years ago.

As well, it was probably a better fit between us and DSpace – DSpace had the technology but not the products; with the other companies we would have had to acquire their whole product lineup and it would overlap with our product line so we would have to eliminate one of them and all the investment that went into making that product line.

OBJ: What were some of the challenges you faced in this deal?

HEBB: The biggest challenge was that DSpace was so far away – first you have to fly to Sydney, Australia … and then you fly another two and a half hours to get to Adelaide where they’re located. In learning about their business and deciding that it was a good fit we had to travel a lot, send a lot of people to check the company out, so that was probably the biggest challenge.

Time zones, of course, are a challenge; it’s a very complicated thing to figure out what time of the day you can actually have a phone call with the people in Australia, and then everything’s backwards in Australia too – summer’s winter and it’s the other side of the clock: it’s 12 hours away, but when daylight savings comes it moves in the other direction, so that was a big surprise … However, we’re able to integrate them into our intranet and e-mail systems of course, integrate them into our websites and our corporate newsletters, and we just make sure that we visit them often enough to make them feel loved.

OBJ: So, would you say the acquisition went smoothly?

HEBB: Very smoothly, actually. They’re a relatively small company and we had about 300 people altogether before we acquired them, in our SATCOM company. They’re like another 10 per cent, and they’re only doing development, not manufacturing, and engineers speak the same language around the world so we understood them.

The pre-existing relationships also made things a lot easier, as we trusted them and we have a very good general manager in Australia who immediately did everything he needed to do to fit us in.

In fact, normally when you do an acquisition you might expect that there would be some synergies taken where you end up laying off a bunch of those people because of redundancies, but actually we have hired people since we acquired them. We acquired in July of last year when they had about 30 people, now there’s about 40 people, so there’s a 33-per-cent growth and already a need to move into a larger facility. It’s been great for them.

Around the same time we acquired them, while we were having the kick-off video conference to welcome them to our company, we were able to tell them that we had started negotiating with Inmarsat on a major new contract to develop a handheld satellite phone that would work anywhere in the world, and that was a major win for us. We actually have DSpace leading that development for us now; that’s part of the reason they’ve been able to grow the way that they have.

OBJ: What sort of tips can you share about international acquisitions such as this one?

HEBB: With the distance and time it takes to get there, you can tend to underwhelm the problem and it might not seem worth it to make one last trip to iron out the details. You might be willing to leave some things to chance, but you can’t avoid it if you want to do this. You have to take it very seriously, put your resources on and try to ignore the fact that it’s a long ways away. You’ve got to spend time, make the trip, get all the experts involved from engineering, finance, human resources and operations – everyone has to make as many trips as required to work out all the details. It’s easy to take shortcuts but that’s ill-advised.

You have to have good lawyers and good accountants, legal representation in the country; there’s a lot of pitfalls if you just go in and really don’t know what you’re doing … Don’t underestimate how much advice you need, because it can be very difficult to organize with the taxes and the laws.

Your employees are going to be nervous when they don’t know the plans, they’re going to expect layoffs and try to guess why you acquired them, and they may get it wrong and jump to conclusions, so it’s important to communicate frequently and in a robust fashion. And do what what you’re going to do, don’t send mixed messages; they are so far away that it’s easy to undercommunicate, you think they understand but meanwhile they’re jumping to the wrong conclusions.

THE EXPERTS SAY

If you’re looking at investing in (a field like) satellite communications, you have to be very clear on who your user base is and if the user base is in good shape, if the tech assets of the company both in terms of ground tech and the life of the satellites is in good shape. Then maybe it makes sense, but it’s not a decision that can be made on a large-scale basis. You really have to dig down and say, “OK who in particular uses this type of service?” because everyone uses communications, and satellite is just increasingly integrated into that fabric. It’s almost meaningless to talk about satellite communications as a market. Even mobile satellite communications really serves such a broad range of different types of users that it’s easily possible for one company to be wildly successful and another a dismal failure through no fault of their own, just because one set of users is spending and the other is not … This is a very good example of someone with a very clear vision of what they’re trying to do, and … you have to be equally focused at least in terms of knowing the user base well enough to know if it makes sense to invest, because it’s the user base that matters.

Max Engel, satellite and broadband analyst, Frost and Sullivan

I can tell you for sure that one of the fundamental requirements of doing cross-border acquisitions is a high tolerance for lack of sleep – talking about time zones is quite fascinating, because when you’re up working, it’s the middle of the night for them, so it tends to be a long day. The biggest risk elements are also the different jurisdictional issues, which can be partly cultural and partly legal; the U.S. is an at-will employer that has a high ability to hire and fire people, but in the E.U. the model is that after a certain time period, it’s almost employment for life, so the risk with people is much higher.

Then there’s the infamous question of taxes, because what’s one type of transaction in one jurisdiction can be entirely different for tax purposes. You also have to be alert to cultural difference between the parties themselves, and the language issues when you go cross-border, because what you think you said and what he thinks he heard can be very different things.

Paul LaBarge, partner, LaBarge Weinstein Professional Corp.

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