Current deals, ‘Winner’s Curse’, and the true cost of M&A transactions
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.
Winner’s Curse!
Intelligent Mergers 
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Friday, 17 August 2007