Archive for May, 2007
The news today is again dominated in the business press in London with the offers being made for ABN Amro Bank by the Royal Bank of Scotland (RBS) and Barclays. This brings to mind the concept of ‘winner’s curse’ in M&A. Studies have shown that in M&A auctions, such as this one has come with the competitive bidding by both RBS and Barclays, the ‘winner’ is in fact the firm that does not get the target, because the bidding process leads to overpayment.
What can be said in this case is that both bidders have apparently done their homework. They have done the due diligence necessary to determine what they would do with the assets once purchased. The RBS consortium will split ABN up more than Barclays will, but even so, claims fewer ABN jobs will be lost. Nevertheless, the prices being paid are tremendous — with RBS’ bid yesterday coming in at €71 billion, a very nice premium over Barclays’ bid of €64.5 billion. Barclays’ bid is an all-share offer, whereas the RBS offer is mostly cash.
Where the ‘winner’s curse’ comes into play is in the costs that are not in those headline figures. As we write in our book Intelligent M&A, there’s more than just the price of the deal and the transaction costs (such as the investment banks, auditors, lawyers, due diligence specialists, and so on).
In assessing the economics of a deal, the shareholders and other analysts will look to see that the gains from the merger will exceed the costs. In an M&A deal, the costs can be significant. Naturally, there is the expense of the target company: how much the target shareholders will need to be paid to part with their holdings, which includes the acquisition premium. Then, there are the ‘known’ and relatively easily calculated expenses such as the fees paid to the investment bankers, lawyers, accountants, and other professional advisors and the expenses of taking over the new company, including debt borrowed. Opportunity costs and post-merger integration costs … are almost impossible to quantify accurately even with the best use of business intelligence. Nevertheless, a complete financial analysis should include an attempt to bracket these costs, perhaps by providing a range of possible values.
Most observers miss the ‘Opportunity Costs’ such as management distraction, loss of sales force focus and the resulting negative reaction of customers and clients, and competitive responses both on the product side and in poaching staff. The boards and senior management of RBS and Barclays have clearly expended a lot of time on these deals, and not with client or developing new business. The often underestimated costs of post-merger integration include redundancy payments, training, system integration costs, rebranding costs, communication expenses, etc.
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This past week has seen many articles about the continue growth of the M&A market (see, for example, the Financial Times for a discussion of European M&A, or other articles on the Asian market). It is difficult to walk down the street in the City of London or Canary Wharf and not overhear people talking about M&A deals. The higher equity prices in the market generally are attributed to the continuing number of deals being announced. The trend is global. It makes front page news — and in fact, some days the front page of the Financial Times has all three or four of its major stories being M&A deals (this happened on Wednesday of this week with the only exception being a picture of the charred ruins of the clipper ship Cutty Sark).
It make me, and many of those I speak with, wonder about the hype. Yet the M&A market continues to defy anyone’s predictions of when it will end. I thought in 2005 that it might be the peak, but 2006 certainly exceeded my expectations. My foundation is in history (I actually have two degrees from university in history and only one in business). History DOES repeat itself. At some point the market will begin to decline. But just as the trough between the 5th merger wave (late 1990’s) and the current one (started in 2003) was higher than the peak of the 4th merger wave (late 1980’s — and for anyone else who lived through that merger wave, we thought it was going to be a record level of deals for a VERY long time to come), so the downturn that will happen sometime may still be at higher levels than we think. M&A is here to stay. One cannot be global as a company and not do deals (although there are some notable exceptions, the few number of such exceptions does prove the rule).
And I hear that Goldman Sachs is predicting a 30 year bull market. I do think that different perspectives and forecasts are critical in planning what to do at this point in the M&A market.
Where can military and business intelligence techniques fit into this? In our book, we discuss the need for scenario planning — a key military intelligence tool. One section of our book, we discuss scenario planning as follows:
The first thing to realize is that the process of scenario planning is the consequence of a culture obsessed by the future – its risks and opportunities. At Samsung, for example, scenario planning is enshrined in what is referred to as their VIP House (Value Innovation Programme). The house is where the Samsung product managers, researchers, engineers, and assorted others ‘live’ while solving problems and/or planning projects. The reason that this house is considered so important is because Samsung believes that 70-80% of ‘quality, cost, and delivery time is determined in the initial stages of product development.’ Samsung’s CEO and Vice Chairman, Jong-Young Yun, is clear about one thing, ‘the race for survival in this world is not to the strongest but to the most adaptive.’ Like the tsunami tribes and animals, he views the business world as an environment of existential threat and potential disaster. The VIP house provides his disaster avoidance radar.
Another company famed for its extensive usage of scenario planning is Shell. Using their own jargon, Shell’s scenarios team are tasked to ‘help charter routes across three interrelated levels; the Jet Stream level of long-term trends, uncertainties, and forces; the Weather Systems that reflect specific features of key regions; and the Turbulence of market level factors.’ To get a feel for the Jet Stream level, go to www.shell.com/scenarios. Whether a scenario planning function is structured as a Samsung hot house or a highly centralised Shell-like group, the point is to monitor simultaneously the past, present, and future. In all instances in addition to the expected, it is essential to attempt to imagine the unimaginable. From those imaginings, scenarios must be built such that when a ‘new’ scenario presents itself, it is recognisable.
I wonder what Samsung and Shell are thinking now about future deals…
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