The Blog-Health-o-Meter™ reads Fresher than ever.

Crunchy numbers

The average container ship can carry about 4,500 containers. This blog was viewed about 16,000 times in 2010. If each view were a shipping container, your blog would have filled about 4 fully loaded ships.

In 2010, there were 22 new posts, growing the total archive of this blog to 99 posts. There were 3 pictures uploaded, taking up a total of 190kb.

The busiest day of the year was January 6th with 111 views. The most popular post that day was 2010 M&A Forecast.

Where did they come from?

The top referring sites in 2010 were digg.com, arbitrageview.com, bunhill.city.ac.uk, reversemergerblog.com, and facebook.com.

Some visitors came searching, mostly for scott moeller, surviving a merger, intelligent mergers, book cover, and m&a 2011.

Attractions in 2010

These are the posts and pages that got the most views in 2010.

2010 M&A Forecast December 2009

Worst Mergers or Acquisitions of all Time December 2009

About me April 2007
1 comment

Intelligent M&A Book April 2007
3 comments

Due Diligence Requirements in M&A Deals June 2010

There’s a lot of interesting things about the chart above.  Most commentators have noticed the obvious improvement in activity in 2010 over 2009 (and 2009 does look set to be the ‘low’ point after the peak of 2007).

But look a bit more carefully at this ‘low’ of 2009:  it is almost double the low (2002) that happened between the last two merger waves.  Thus 2009 wasn’t really all that much of a low as only seven years earlier — although if you had listened to many, it was as if Armageddon had come to the M&A markets in 2009!  Many thought it had continued into 2010.

Look even more carefully at the above chart:  There were five years since 2000 when the market was worse than 2010, and that only four years exceeded it!  This means that 2010 is not the terrible year that everyone seems to think it was.  It is only so compared to the incredible peak of 2007 … itself a peak that few people feel will be reached again anytime soon (and I agree!).

What is notable about 2011 as we start the year is the uptick in confidence (note my own blog on the importance of business confidence in the M&A cycle:  ’Why you should do an M&A deal now‘).  There is increased activity as well from private equity firms and large cash hoards in corporations (which in the past have been used to do deals).  I continue to hear anecdotally from people working in the M&A industry that they are very busy, and I know that many of the largest advisors are seeking new employees.  (I can tell you that my own unofficial statistic on this is from the requests that I receive from banks looking for new entry-level employees who are recent graduates of my own M&A class at Cass Business School.)

Last year when I put forth my forecast for the year (‘2010 M&A Forecast‘), I noted as well the increase in cross-border activity and the emerging markets.  These will continue as well.  In fact, I’m very proud of that forecast and several updates that I’ve made, as it appears at least this time that I was generally on the mark.

I still think there’s some stickiness to the current market levels that will keep the overall volumes constrained, but you should expect more deals in 2011 than the past two years.  Just don’t expect TOO many more.

I am sure a number of board meetings early in the year will have on their Board Agenda a strategic discussion of potential acquisition targets (or merger partners).  If this isn’t already on the agenda, it should be.  And the discussion should include a detailed assessment of what competitors will be doing in this regard.  Because it is likely those competitors will be doing the same.  No one in the board room wants to be left behind.

Any other thoughts about 2011?

If you’ve decided that an acquisition is the best route forward, then you have the big decision to make about which country (or countries) to enter?  This question is easy to ask, but often expensive and difficult to answer.  Help is now at hand!

Cass Business School has an M&A Research Centre (full disclosure:  I’m the director of that research centre).  We’ve recently published, in conjunction with Allen & Overy, Credit Suisse and Ernst & Young, a new index which ranks 175 countries on the ease with which one can do an M&A deal there:  The Cass MARC M&A Maturity Index.  Ernst & Young have turned this study into an interactive website, and the study itself can be obtained from Cass here.

Whereas others have looked at the attractiveness of markets for M&A solely based on financial and economic factors, for example, or even the legal environment, this index looks at six country development indicators:

• Regulatory factors (e.g., rule of law and regulatory quality)
• Economic factors (e.g., GDP growth and economic freedom)
• Financial factors (e.g., stock market capitalisation and access to financing)
• Political factors (e.g., political stability and corruption of officials)
• Technological factors (e.g., R&D expenditure and innovation)
• Socio-cultural factors (e.g., people, talent and labour skills)

These are combined in the index and a score for each country is generated, ranging from 1.0 (best) to 5.0 (worst).  Approximately two-thirds of countries, including Indonesia, Egypt, Ukraine and Nigeria, appear in the bottom grouping as relatively unattractive — and the reasons differ per country, of course.  The top one-third has those that are mature (Canada heads the list, and ends with China) and those that are ‘transitional’, which is the most interesting group.

In fact, the press coverage of this study since its release three days ago has been greatest about this transitional group, which has a number of countries from the Middle East (led by the UAE but also including Qatar, Saudi Arabia and Kuwait), Central Europe (Czech Republic, Poland and some others), Latin America (Chile, Mexico, etc) and Asia (Thailand, India, Philippines, etc).  You can see some of these articles here:  Middle East and Asia, for example.  There’s even a video: Cass M&A research signals the emergence of Asia.

I found one of the most interesting findings to be that the technological factors were the discriminating factor amongst those transitional countries as to whether they were attractive for M&A activity or not:  in fact, technological development represented 40% of the differences between these countries.  Amongst the most mature markets, socio-cultural factors were most important.

Very interesting will be to see the movement in a year when the second such index is issued, and at which time I expect to see some of the ‘transitional’ countries to move into the ‘mature’ category.

Should the information about the deal get outside the company and its close-knit group of advisors, it could affect the pricing and even the ultimate success of the deal … maybe allowing a competitor to buy what you’re wanting to buy.  If other outsiders learn of the deal, they could trade on that inside information, making illegal profits.  And if the deal is prematurely annouced because of such a leak, the careful planning on the planned announcement date may be incomplete.

Thus it is that most companies (and their advisors) create a code name for the deal prior to public announcement.  During that period, the actual target and bidder’s names will not appear in any of the planning documents.  If one of those documents was seen by someone outside that inner circle, presumably they would not be able to determine who the target and bidder were.  (Of course, a deep analysis of any such document might reveal the identities of the two companies, as the discussion of those companies may be uniquely linked to just one possible real company for each of those with a code name.)

How to choose the names is fun.  Should it relate in some way to the company name itself?  Thus, when Bank of New York started looking to merge with Mellon Bank, they called the deal ‘Project Melody’, where the first three letters of the project name and the company name were the same.  Interestingly, some regulators today, concerned about market leaks, might think this was not enough in code to prevent inadvertent disclosure.

Or should the project name be linked to where the firm is located?  And thus Cadbury used the code name ‘Project Eagle’ for Kraft, as it was from the US as denoted by an American Eagle;  similarly, Banco Santander of Spain called it’s acquisition of Abbey National of Great Britain by the name of ‘Project Jack’, which was derived from a common term for the British flag, ‘Union Jack’; and Mellon Bank, in it’s code name for the above deal, called Bank of New York ‘Project Cider’, which was a play on words from nickname for the headquarters city of that bank, the ‘Big Apple’.

I was recently interviewed by Quentin Webb of Reuters for an article that was widely distributed on just this topic.  You can find it here in an article entitled ‘M&A deals are all in a code name’.  In it, he quotes me as saying:

Banker-turned-academic Scott Moeller said while at Deutsche Bank he worked with a list of composers Blu-Tacked to the wall; the musical giants stood in for financial technology companies that could be bid targets.

Moeller, now director of the M&A research centre at London’s City University, said codes must be memorable and should not be “too cute” or otherwise offensive to clients — making musicians a safe bet.

“Nobody can complain about being called Bach, or Beethoven, or Mozart,” he said in a telephone interview.

“My only other criterion was I had to be able to spell whatever it was — so no matter what, we’re not going to have Project Mussorgsky or Project Tchaikovsky,” he added.

I should add that the reason that we started using composer names was because we ran out of animals.  Originally in the Corporate Development department at Deutsche Bank, we had various code names for potential targets where the first letter of the animal name was the first letter of the potential target.  Thus, Project Penguin was Paine Weber, Project Dolphin was Donaldson Lufkin & Jenrette, Project Monkey was Morgan Stanley, etc.  This made it easier as we updated information about each of our competitors and potential acquisition candidates back in the mid-1990′s.  But there just aren’t as many animals as there are composers, and Deutsche Bank was making lots of acquisitions at the time.

Because they are fun and often tell a story about the start of the deal, I would love to collect some other code names, so please share them here.

What does this mean?

There was an interesting comment reported by Bloomberg in an interview with Steven Koch, the co-chairman of M&A at Credit Suisse (the video of the interview is here).  He said the following:

If you look over the last several booms that have gone on over the last 20 or 30 years, the M&A cycles that happen, a leading edge indicator of an M&A cycle starting up again, tends to be hostile deals. Because, what happens is, sellers aren’t that happy about selling, at a given price. Where they see the market, they think, this isn’t the best time to sell. But, as buyers tend to heat up, and get a little more interested, before sellers become interested in selling you see a bit of a hostile trend emerge. And, people begin to do deals, but maybe not on such a consensual basis. So, if you look over time, it’s usually an indicator that you’re going to see an M&A cycle start up again. And, it’s sort-of the early form of that.

I must totally agree.  Several additional points to note:

1. Most of these ‘hostile’ deals will end up friendly when the target company agrees to be purchased at a price much higher than they had expected to see their share price anytime soon.  HP, for example, has now won a bidding war with Dell for 3Par, and the final price was over three times the undisturbed share price of 3Par before the bidding began.  It’s not surprising the board of 3Par ultimately agreed!
2. ‘Hostile’ usually means ‘unsolicited’.  It doesn’t have to be unfriendly, with the CEOs exchanging lawsuits and even punches (as happened when Sir Philip Green of Arcadia / Topshop accosted Sir Stuart Rose of Marks & Spencer in London in 2004 as he was trying to take over M&S in a truly hostile bid).  And once the right price has been reached, as happened earlier this year when Kraft took over Cadbury, it becomes ‘friendly’.
3. These deals early in a merger cycle (or even before the cycle begins) are likely to be strategic and not financial acquisitions.  At this particular time, the Private Equity market hasn’t yet returned (despite some ‘green shoots’), so the ‘hostile’ bidders are the strategic buyers that we are seeing in the market now.

There is also a significant body of research that shows that the companies that make acquisitions early in a merger cycle are more successful than the followers (‘me-too’ deals) later in the cycle as the price of companies gets bid up, fewer targets are available and the most attractive ones have already been taken.

If the hostile deals continue, we may just have the real start to the next merger cycle starting.

I continue to insist that M&A is a confidence market:  even if valuations are reasonable, even if the acquirers have lots of excess cash and even if many M&A bankers are saying that they have healthy pipelines of deals, there is one component that must be in place for the market turn.  That factor is confidence in the board rooms and executive suites of the buyers.  If the chief executive cannot convince the board that NOW is the time to do the deal and that they will not be embarassed by the purchase announcement (especially if it turns out that they could have bought the target cheaper in two or three months — that is, before closing — than they are offering now), then the deals will not be done.

I think there’s still too much talk of ‘double dip’.  There’s still too much uncertainty, despite the old Wall Street chestnut that ‘rising markets climb a wall of worry’.

Yet, there’s been a slew of articles written in the past several weeks that talk about ‘merger mania’ or similar sentiments that just might cause a board to seek their first mover advantage in announcing a deal.  Especially if that deal has been in discussion with the target for the past several months or even years, waiting for the right time to be consumated.

Look at this article, entitled ‘Mergers and acquisitions mania disrupts bankers’ summer breaks‘ from the Guardian in the UK.  As the title suggests, it talks about M&A bankers being forced to cut back their holidays this summer because of the deal volume.  And that the size of announced deals was larger a couple weeks ago in mid-August than any other August week since 2006, when the M&A market was almost peaking.  (But caution to the reader:  one or two large deals can skew these figures, and the announcement of BHP Billiton’s $43.8 billion takeover of Canada’s Potash Corp has done just that, similar to the Pru / AIA deal earlier in the year that did the same at the time.)  The Guardian also noted that M&A fees have been increasing at investment banks again, although ‘this year represent[ing] about 35% of global investment banking fees, still below a 10-year average of 38%, according to Guardian calculations based on ThomsonReuters data. The sector peaked in 2008, when M&A accounted for 48% of all investment banking fees.’

Look at this article title from Financial News which also was written about a week ago in mid-August: ‘”Planets align” for M&A recovery’.   That article wrote: ‘the M&A market has been building momentum since April, with the three month moving average for weekly M&A rising 71% in the past four months. July and August, traditionally quiet months, have been the busiest summer since the late 1980s.’  It also noted the rise in cash balances at potential acquirers: ‘For the first time in three years, companies also have the means to do deals. Daniel Stillit, special situations analyst at UBS, said: “Leverage multiples [the ratio between net debt and Ebitda] are at their lowest since 2003…”‘  Perhaps most importantly in my mind, the article noted that companies have squeezed out just about all the cost savings they can in order to raise (or even just maintain) profitability, so M&A may be the next area to look for growth.

And in the US, The Wall Street Journal wrote at the same time in an article about the insurance industry that ‘the prospects for European M&A are uncharacteristically hot,’ with ‘knock-down prices’.

It’s not just the journalists, although they are experts at picking up short-term trends.  The consultancies, although not without some bias, have written of a resurgence as well.  Look at this McKinsey article, and the title of the article says it all: ‘A singular moment for merger value?‘  As I talk to private equity investors, they are beginning to be more optimistic, too.

Hmmm.  Maybe the confidence is returning.

The Wall Street Journal has written on this topic as well: ‘Why Your New CEO Should Be a Deal Maker’, which emphasises that the firms of CEOs who do deals in their first year in office outperform those who do not do a deal in their first year.  The Wall Street Journal has also put together a video interview on this, tieing it to the recent Prudential deal to purchase the Asian assets of AIG … a deal which was recently pulled.  See the interview here:  ‘Bankers: New CEO Means New M&A. Make That Call Now!‘ and another related article with the same video here: 
‘New CEOs Have an Urge to Merge’.

• There is an urgency for companies to conduct intensive due diligence in financial deals, both before announcement (when it should be easy to call off the deal) and after.
• Traditional due diligence merely verifies the history of the target and projects the future based on that history; correctly applied due diligence digs much deeper and provides insight into the future value of the target across a wide variety of factors.
• Although due diligence does enable prospective acquirers to find potential black holes, the aim of due diligence should be this and more, including looking for opportunities to realize future prospects for the enlarged corporation through leveraging of the acquiring and the acquired firms’ resources and capabilities, identification of synergistic benefits, and postmerger integration planning.
• Due diligence should start from the inception of a deal.
• Areas to probe include finance, management, employees, IT, legal, risk management systems, culture, innovation, and even ethics.
• Critical to the success of the due diligence process is the identification of the necessary information required, where it can best be sourced, and who is best qualified to review and interpret the data.
• Requesting too much information is just as dangerous as requesting too little. Having the wrong people looking at the data is also hazardous.

The whole due diligence can therefore be summarised with four ‘w’ questions:  What? When and where? Who? 

• What do you need to review?  Be careful, as note above, of requesting too much as you may then only superfically review even the important things.  Focus on the critical, the potential deal-breakers and the things you need to know to design the best post-merger integration (too often managers seek this information AFTER the deal, but by then it’s too late to design a proper post-deal integration strategy).
• When do you need the information and where do you find it?  Much due diligence can be done even before a deal is announced … and even before you start discussions with the target.  For example, you often don’t need to ask the target for their sales information:  even if they are privately held and don’t disclose this information, you can get it from industry sources such as publications, government data bases, suppliers and customers.  Management consultants can provide excellent market information.  Thus think about whether you can get information from other sources early, as then you don’t waste time once the deal process has started in earnest (once you’ve contacted the target) on things that you could have found out from other sources.  It also allows you to focus during the intense due diligence process on facts that are only available from the target itself:  such as it’s strategic plans and key contracts (with managers, suppliers, clients, etc).  Also, some information can safely be deferred until after the deal is done.
• Who reviews the due diligence information?  This critical question is often mishandled because of the (often overemphasised) need for secrecy in the pre-deal announcement period.  At that time in the deal process, the finance departments are often driving the deal on behalf of the CEO and Board.  You then find accountants reviewing human resource due diligence (employment contracts, for example), IT systems and even looking at operational data.  The experts in these area don’t yet know a deal is taking place, but they are best placed to review any due diligence.  This continues after the deal is announced, when you’ll find those same accountants walking a shop floor or factory looking for problems.  But one of your own plant managers is best placed to look at the target’s factory;  your HR team knows best how an employment contract should be written and therefore whether there are problems with the contracts of target company staff.  Expand the due diligence team to allow for this proper review by the proper people!  And do not outsource the review of this critical process, as you will need the findings from the due diligence process for the entire period — often many years — of integration so you will want this information in-house.

Lastly, do not forget that even the target needs to do due diligence on the buyer:  who would want to do a deal only to find out that the bidder could not complete the deal due to circumstances that could have been anticipated.

In QFinance, a very extensive on-line financial markets resource, I’ve written an article entitled ‘Coping with Equity Market Reactions to M&A Transactions‘.  In it, I make the following arguments:

• Overall, stock returns to acquirers tend to be negative or insignificant—in contrast to target companies, where stockholders can benefit greatly.
• Companies that believe they may be targets can influence the value of an ultimate acquisition through the design of defensive techniques and by how they react to bids when they occur. Similarly, acquirers can influence the target share prices through their actions prior to the bid.
• Most acquirers are overconfident in their ability to conduct acquisitions successfully.
• Careful planning, including a robust internal and external communications plan, is required to mitigate the impact on equity markets of acquirers.
• Many factors influence equity market reactions to an M&A bid, including how friendly or hostile the bid is, the financing structure of the bid, the relative size of the two companies, and whether the transaction is a merger or an acquisition.
• Deals conducted in the most recent merger wave appear to have taken some of these issues into account and show better relative performance (relative to the market) than deals conducted in the 1980s and 1990s.

Read in light of the downturn in activity that has taken place since that article was written, this is another reason for caution in executing deals at this particular time.  Where there are markets with great uncertainty, as we certainly have now here in Europe if not globally, boards are cautious anyway about announcing large M&A transactions.  When the share price is volatile, further negative pressure is the last thing that shareholders need.

In an excerpt from Stefan’s article:

Scott Moeller, director of Marc, says we should not be surprised to see new CEOs deciding pretty fast that a big deal is just what the company needs…

Whatever they choose to do, most new CEOs know that they may not have a lot of time in which to act. The median tenure period for CEOs in the Marc survey, not including those who stayed for less than 12 months, was 4.4 years. “I suppose there may be some CEOs who are confident that they will beat the odds and even go on for ever,” says Prof Moeller, “but they will be the exception.”