Transcript No Slide Title

Tailored learning
Cass Executive Education bespoke programmes
Mergers and Acquisitions
(background)
Prof Scott Moeller
M&A Volumes go in Waves…
and we're now on the downward slope
Source: Thomson Financial
2
Most acquisitions historically have been failures…
1987
McKinsey
116 acquisitions
61% failed
.
Porter
1996
Mercer/
Business Week
150 deals
57% failure rate,
30% had 'substantial' losses
.
Economist
150 acquisitions
70% failed to meet expectations
.
McKinsey
160 acquisitions
Only 12% accelerated their growth
1997
Sirower
168 mergers
Only 20% return in 4 years
1998
A. T .Kearney
115 mergers
58% added no value
1999
McKinsey
2001
KPMG
118 acquisitions
70% created no value / 31% destroyed value
2004
BCG
277 deals
64% destroyed value for acquirers’
shareholders
56% of all acquisitions get sold off
77% fail to yield expected synergies
3
Blue – Non CFO – CFO survey
Why do M&A deals fail?
Rank
Top 10 Pitfalls in Achieving Synergies
Negative
Impact
1
Incompatible cultures
5.60
2
Inability to manage target
5.39
3
Unable to implement change
5.34
4
Synergy non-existent or overestimated
5.22
5
Did not anticipate foreseeable events
5.14
6
Clash of management styles/egos
5.11
7
Acquirer paid too much
5.00
8
Acquired firm too unhealthy
4.58
9
Need to spin off or liquidate too much
4.05
10
Incompatible marketing systems
4.01
Note: Survey of Forbes 500 CFOs. Assessed on a scale of 1 to 7, where 7 is high.
4
M&A Paradox

Most mergers fail, but few companies succeed without acquiring or
merging.
–
–
–

Can you be a large organisation without having made acquisitions?
Is organic growth sufficient to become a leading player?
Is there a 'best time' to make acquisitions?
Management’s challenge:
'How can you reconcile the low odds of deal success with
the need to incorporate mergers into the growth strategy.'
Or today…
'How to make deals successful NOW when the
market's going down?'
5
The current merger wave is different…
1987
McKinsey
116 acquisitions
61% failed
.
Porter
1996
Mercer/
Business Week
150 deals
57% failure rate,
30% had 'substantial' losses
.
Economist
150 acquisitions
70% failed to meet expectations
.
McKinsey
160 acquisitions
Only 12% accelerated their growth
1997
Sirower
168 mergers
Only 20% return in 4 years
1998
A. T .Kearney
115 mergers
58% added no value
1999
McKinsey
2001
KPMG
118 acquisitions
70% created no value / 31% destroyed value
2004
BCG
277 deals
64% destroyed value for acquirers’
shareholders
2006/7
Cass / Towers Perrin
1,400 acquisitions
‘Only’ 47% destroyed value since 2003
2007
McKinsey
1,000 deals
58% overpaid since 2003…
but since 2003 deals created value
56% of all acquisitions get sold off
77% fail to yield expected synergies
6
And 2008 looks to be even better!
Short term Shareholder Return
7
What has changed in the past several years?
Drivers
Most organisations are
now far more disciplined
and focused in their
transactions than ever
before.
In particular, we have
noted, and confirmed by
live interviews, the
following recurring
themes:
Get
Culture Right
Improved
Deal
Selection
Razor Sharp
Focus on
Integration
8
Three essential Components to a Merger Deal
Strategy:
Should we?
With whom?
Price: How
Much?
Post Merger Integration:
How?
9
M&A: The Seven Deadly Sins
Pride
Greed
Lust
• Get me on the cover of Business Week
• Let's do one last deal before I retire
• More power, prestige and money
• A bigger corner office
Envy
• 'Me too' deals
Sloth
• Organic growth is too slow, so let's take the easy
way out and acquire growth
Gluttony
Anger
Source: financialworld.co.uk, March 2007
• Big is better, but isn't bigger even better?
• Beaten at one deal, immediately go out and do
another whether it makes strategic sense or not
10
Good and bad reasons for doing deals
Good
• Improve
management
(on either or both
sides)
Questionable
• Market Power:
'Big is better'
• Taxes
Bad
• Pure diversification
• Reactive to industry
changes
• Operating synergy
• 'Me-too' deals
• Financial synergy
• Hubris
• Undervaluation
• Proactive industry
change:
'Shake things up'
11
Criteria for Target Assessment
Strategic and Operational Fit
Target's Management Supports Bid
Due Diligence Available
Speed with which value can be created
Money required for purchase and integration
How much regulation involved
Cultural 'fit'
12
Alternatives to M&A
'Do Nothing'
Minority
Investments
JVs /
Strategic
Alliances
Internal
Growth
Merge
or
acquire
Divest
13
Total Deal Cost
Deal
Expenses
Opportunity
Costs
Premium
Postmerger
Integration
Costs
Target
Value
14
Public Deals: 6 Step Process
1. Deal Strategy:
• Acquisition or merger?
• Long list of possible candidates
2. Deal Organisation:
6. Post-acquisition review:
• Select project leader
• Form internal teams
• Identify advisors
• Organisational learning
5. Post-merger integration:
• Integration planning starts with Step 1
4. Deal Completion:
•
•
•
•
•
Structuring the deal
Finish due diligence
Arrange financing
Regulatory approvals
Closing
3. Deal Negotiation:
•
•
•
•
Top management retention
Organisational issues
Start due diligence
Valuation and pricing
15
Simplified Deal Process
Formulate
Locate
Strategy
Investigate
Negotiate
Deal
Integrate
Educate
Post Deal
16
Due Diligence
‘Know thy enemy and know thyself; in a hundred
battles you will never be in peril.’
Sun Tzu 400-320 BC
17
Due Diligence Key success factors
What?
• Identifying the
most
important
items to
collect
• There isn't
time to look at
everything
Where and
How?
By Whom?
• Identifying the
right sources
of the
information
• Not just the
right
information,
but where so it
can be rapidly
collected
• Identifying the
right people
to review the
data
• This should
include people
who may be
managing the
business postacquisition.
18
Post Merger Integration
‘A wise person once said that a beautiful marriage
is one in which two people become one. The
trouble starts when they try to decide which one.’
19
Change or Preserve?
High
Digestion
Target
organisation
absorbed into
Acquirer
Change
in Target
Business
as Usual
Target remains
intact within the
acquirer
Brave New
World
Both companies
combine to
become a new
business
Reverse
Takeover
Acquirer
adopts culture
of target
Low
High
Change in Acquirer
20
Focus of Integrations
Source: Mergermarket / CMS Cameron McKenna, Feb 2007
21
LEARN CIA principle
L
E
• Lead from
the top
• Engineer
successes
C
• Communicate
A
• Act quickly
I
• Integrate the
two cultures
R
N
• Retain key
employees
• Nurture
clients
A
• Adjust, plan,
and monitor
22
Poor communication (use of "killer" phrases)
highlights poor underlying strategy
"This is a merger of equals“
• There's never a merger of equals even when the two organisations are the
same size
• This misconception creates the perception that decisions will be made in
some democratic or egalitarian fashion (redundancies, systems to adopt,
brands to retain, overlapping products to rationalise, etc.)
• There must be someone senior to resolve the inevitable conflicts and make
the final decisions - not some consensus driven decision making body
"No further acquisitions will be required"
• Is just not credible, plus limits future strategic options
• Cannot anticipate how the markets will change and whether further
acquisitions will be necessary
23
Two related "killer" phrases
“The right decisions about the organisation will take time“
• This usually means the decisions weren’t made when they should have been.
• There will always be resistance to change
• People usually prefer certainty to uncertainty, even if they are negatively affected
as it will allow them to move on
• Decisions during merger integration can be fast and painful ... or slow and painful
• Make decisions on 80% knowledge - don't wait for 100% certainty
"We'll tell you when there's something to tell“
• There should be continual communication
• A period of no formal communication is one when gossip and rumour will prevail over
which management will have no control
• Within the integration period, there is ALWAYS something to communicate
• You can decide when the formal integration period is over (the first 100 days?), but still
communication should continue
24
More communication indicators of poor implementation
"We’ll pick the best of both organisations“
• Sometimes is a delaying tactic because of indecision or lack of willpower on the part of
top management
• Although often the instruction from the top, there is so much grey area in decisions
about systems, processes, brands, products, suppliers, distributors, etc.
• Politics will be important
"There will be no more redundancies"
• If job losses occur anywhere near the time of the integration, employees will blame the
merger/acquisition
• There are always reasons to make changes in the workforce, even if driven by
external changes in the market and not the merger
• Make ALL the redundancies at one time early in the integration, even if more than
necessary; avoid more than one round of redundancies
25
Summary: Key Success Factors in
Post-Merger Integration
Focus on value creation, not just getting to closing
or even integration
Set clear goals
Speed
Manage as a 'benevolent dictatorship'
Don't bite off more than you can chew: focus on a
few key areas
Communicate, communicate, communicate … and
then communicate some more
26
Mergers and Acquisitions