Archive for June, 2007

Surviving a Merger

Posted on Sunday, 24 June 2007. Filed under: Commentary, Mergers, Personal Planning for Mergers |

[Note:  further information on surviving a merger can be found in my other blog:  www.survivingmergers.com]

If your company is merging, acquiring, or (the worst situation, unless you’re the owner and negotiated the deal) being acquired, should you stay or leave?  This is another area where scenario planning and business intelligence is critical .  These topics can therefore apply to individual managers and employees as well as the company itself.  Most of this blog has been addressing mergers from the corporate perspective, but that doesn’t even matter if you haven’t looked out for #1.

The first question to ask oneself:  ‘Can the merger can actually serve as a jump start to a new career?’  In answering this question, stay focussed on career goals.  Do you want to remain with the new company, or is this a perfect opportunity to change?  The merger can often be used as the excuse to move.  Fortunately as well, prospective employers will assume that every merger has the consequence that good people leave (and the market often assumes that the best people are the ones who leave first as they have the most external career opportunities and are the people who don’t want to waste time to wait to see if they are retained). 

Perhaps there will be an opportunity to take an attractive redundancy or termination package.  Redundancy packages can often be higher immediately after a merger than at other times because the company has taken financial provisions for such redundancies and/or you will be part of a larger group being made redundant; most acquirers also want to avoid negative publicity during a merger.  A redundancy package would be especially attractive if you were considering leaving anyway, as many companies not only pay for you to leave, but offer at the same time outplacement counselling, re-training, relocation benefits, or other benefits.  Most employees made redundant are also considered ‘good leavers’ and thus keep many of the benefits that they had accrued during their career, such as health care and other insurances, long-term incentive options, and even deferred cash bonuses.

Of relevance today to the fight by the Royal Bank of Scotland and Barclay’s bank for ABN AMRO is the acquisition of Bankers Trust, acquired in 1999 by Deutsche Bank in a transaction that was, at the time, the largest purchase of a US bank by a foreign company.  Of course, the two bids for ABN AMRO dwarf that deal from almost a decade ago, but there are some interesting lessons.

In 1998, the senior management of Bankers Trust, the eighth largest bank in the United States, knew that it would be acquired.  The principal banking regulator in the US, the Federal Reserve Board, had told Bankers Trust management that they needed to take steps to improve their capital base and reduce risks.   They were told to look for a strong partner.

Given that management knew that they would likely be acquired, preparations were made by many in the bank to reduce their personal financial risks.  There was some history to this preparation, as disclosed by the equity research analysts at Sanford Bernstein.

In 1997, Bankers Trust had acquired Alex Brown, the oldest investment bank in the United States.  At the time of acquisition, it became known that the top twenty executives of Alex Brown had signed employment contracts and that Bankers Trust had earmarked nearly $300 million over three years for incentive compensation of a group of several hundred Alex Brown staff members. 

Given this history of retention payments and the expectation that they were to be acquired, it is not surprising that when Deutsche Bank acquired Bankers Trust just under two years later, Bloomberg reported that the Chairman of Bankers Trust signed a contract worth $55 million over five years plus $14 million over three years in deferred compensation, but it was rumored that his severance package was $100 million when he ultimately left Deutsche Bank only a month after the deal closed in June 1999.  The Bankers Trust CFO also left, reputedly with another sizeable package.

It was not only the very top staff who benefited from these retention and redundancy payments.  At the time of the acquisition, Deutsche Bank announced that it expected to take a charge of DM 2 billion ($1.2 million) to cover severance payments and to set aside DM 700 million (almost $420 million) over three years for retention payments to retain 200 key staff.

Not a bad deal if you can plan for it in advance!  One wonders how many managers in ABN AMRO have had such packages hastily added to their contracts.  We may find out soon, or we may never know.  Are there any other such examples?

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What is success in an M&A Deal?

Posted on Wednesday, 20 June 2007. Filed under: Commentary, Mergers |

There is a fair amount of discussion about when a deal can be judged to be a success or a failure, and even how to determine success. 

Our own research has shown that the first six months following a deal’s closing is an excellent predictor of longer term success – the latter being defined as a period from three to five years following the deal closing.  Much after that, and the effect of the deal will have dissipated or be too mixed with other changes at the company, in the industry, or in the economy as a whole.

But what is success?  We like to consider shareholder performance as the ultimate criteria, but we acknowledge that there can be many different measures and stock performance is a very Anglo-American concept ignoring such factors such as local economy impact, workers and their families, suppliers and related companies (upstream and downstream), etc.  However, it is simple to measure (try isolating and measuring worker or supplier impact across deals, countries, and time!) and easily understood.  Thus, it has its appeal.

We discuss this further in our forthcoming book where we look as well at comparisons between experienced and inexperienced acquirers.  The experienced acquirers don’t fare well, by-the-way:

Prior experience may not be a predictor of success, although some studies have shown that acquirers do better when making an acquisition that is similar to deals they have done previously.  Here again the need for specific intelligence is central.  Many studies have shown that relatively inexperienced acquirers might inappropriately apply generalised acquisition experience to dissimilar acquisitions.  The more sophisticated acquirers would appropriately differentiate between their acquisitions.  For example, VeriSign appears to have failed with its 2004 purchase of Jamba AG despite having made 17 other acquisitions in the prior six years, many in related internet businesses.  Intelligence cannot, therefore, be taken for granted.

One challenge in trying to determine success of an acquisition lies in how to define ‘success.’  Is it shareholder value?  If so, over what period?  Or should one look at sales growth?  The ability to retain key customers?  Employee retention? Cost savings? And how would the company or companies have performed if they had not merged?  Perhaps as some have suggested, success should be defined by the publicised goals of the merging companies themselves and then measured against achieving those stated objectives. 

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More on the need for Scenario Planning

Posted on Monday, 11 June 2007. Filed under: Business Intelligence, Commentary, Mergers, Scenario Planning |

I’ve received a lot of e-mail traffic on the topic of scenario planning and the M&A process — and some postings on this blog — with much of the discussion focussed on the agreement that use of this technique (originally from the military) would yield better results for M&A practitioners.  Please see the earlier posting on this topic (M&A Frenzy and the Need for Scenario Planning). There are also some excellent websites (shown in the Blogroll at the bottom of this page) which cover this topic well in other fields.

This need not be done in the traditional sense of ‘scenario planning’ which is relatively formulaic.  Think perhaps about the following:

Because humans find it difficult to calculate probability rationally, a company’s intelligence function can use the power of the bookmaker.  Daymon Runyan, paraphrasing Ecclesiastes, said that ‘The race might not be to the swift, nor the battle to the strong but that’s where the smart money goes.’  By using trading (e.g., http://www.intrade.com) and/or spread-betting (e.g., http://www.cantorindex.com) sites, a company can see how the world really views the likelihood of specific events and, significantly, how their own company is viewed by the market. 

In 2003, an insensitive but smart analyst at DARPA (the Pentagon’s Defense Advance Research Projects Agency) proposed setting up a speculative futures market on terrorist attacks.  Notwithstanding the obvious temptation for real terrorists, the idea was sound.  Getting people to bet real money on future events focuses the thinking of those people and saves the inordinate costs of expensive computer models.  There really is wisdom in crowds.

Companies could actually create their own internal speculative markets to leverage the knowledge contained within the organization.  By allowing employees to bet on specific questions (using company money for real returns), an efficient market for ideas can be created.  More real, more relevant, and more fun than a ‘suggestions box.’  Apparently, the pharmaceutical company, Eli Lilly, has used this approach to predict the success of drug research with remarkable accuracy, and there is no reason to doubt its applicability to the M&A market as well.

Just think how this might have helped Multiplex – the Australian developers of England’s Wembley Stadium, which was delivered late and with large penalties (over A$200 million).  The result of their problems was the announcement today that they would be purchased by a Canadian infrastructure specialist.  Or another example:  Did Barclay’s (or, for that matter, ABN AMRO) do adequate scenario planning in the lead-up to their proposed merger?  Certainly, one very likely scenario would be the entrance of another bidder, in this case, a formidable one (Royal Bank of Scotland who joined forces with Santander Bank and Fortis – this forming a British / Spanish / Belgium consortium).  And if that wasn’t enough for Barclays, they now have Atticus Capital challenging them on the deal, saying that they do not want Barclays to enter into a bidding war.  Hedge funds and their like are becoming more activist – just look how they brought down both the CEO and Chairman of the Deutsche Börse when they targeted the London Stock Exchange in 2005.  All very predictable, and not even with 20/20 hindsight but rather with scenario planning.

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Beating the Odds is very Difficult Even for the Experienced

Posted on Wednesday, 6 June 2007. Filed under: Commentary, Mergers |

The central challenge today in M&A is how to beat the odds that are stacked against a company being successful in M&A deals. 

This is even more difficult when you see, as we have in the past few days, some of the excesses of the M&A market — especially as the current merger wave begins to show it’s age.  Note, for example, the high leverage of deals and the levels of junk bonds (see the Wall Street Journal’s excellent blog (http://blogs.wsj.com/deals/2007/06/05/another-day-another-ma-record-broken/) which has a story from yesterday entitled:  Another Day, Another M&A Record Broken).  Note especially that it is KKR that is issuing the extremely high level of junk bonds in this most recent deal.  Few have more experience than they do in deal-making.

We have found through our research that even serial acquirers such as GE, Cisco and others are not giving their shareholders better returns than their industry competitors that don’t do deals frequently.   

No matter how measured, a fair degree of consistency has emerged in the results of studies that have examined M&A ‘success’ through the Twentieth Century.  Essentially all of the studies found that well over half of all mergers and acquisitions should never have taken place because they did not succeed by whatever definition of success used.  Many studies found that only 30% to 40% were successful.  Yet most companies that have grown into global giants used M&A as part of their growth strategy.This paradox raises the following questions:

·         Can a company become a large global player without having made acquisitions?

·         Is organic growth sufficient to become a leading global player?

The challenge for management is to reconcile the low odds of deal success with the need to incorporate acquisitions or mergers into their growth strategy.  Figure out how to beat the odds and be successful in takeovers.  This is where business intelligence techniques are essential.

One wonders, as the Wall Street Journal did as well, whether KKR and it’s advisors will be left holding the bag due to another deal gone bad.  Let’s hope they’ve used all the intelligence at their disposal.

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Merger Waves, Arms Races, and the Cold War

Posted on Sunday, 3 June 2007. Filed under: Business History, Commentary, Mergers |

There were some e-mails asking more about the references to the various merger waves, and especially as to when this current merger wave will be over (as discussed in the post on Scenario Planning, two posts below this one).  To understand these merger waves, it is important to look back at history and also the parallels with the political attempts at takeovers — wars. 

In many ways, the merger waves are not dissimilar to the military battles of the 19th and 20th Century, as we explain in our book:

Merger activity tends to take place in waves – a time of increased activity followed by a period of relatively few acquisitions.  Each wave has been stimulated by events outside the merger world, but which have had a significant impact on the level of merger activity.  Each wave is sharply distinguished from earlier waveswith creative new ways of consolidating companies and defeating the defenses of targets, although each wave built on the merger techniques and other developments from the previous wave. 

There is also the tendency, as with the military, of preparing to fight the last war’s battles.  Just as the Maginot Line couldn’t stop the Third Reich’s panzers as they rolled through Belgium and into Northern France, it is not sufficient for a company to have out-of-date takeover defences.    Strategic initiative or power does not guarantee success to the bidder, as the United States learned militarily in Vietnam in the 1960’s and in Iraq in the 1990’s and 2000’s.  The parallel in business usually means relying too much on a large chequebook and first mover ‘advantage’ as Sir Philip Green discovered in 2004 when trying unsuccessfully to take over Marks & Spencer.

Merger activity can be likened to the Cold War arms race where one country’s development of new weapons stimulates the development of more sophisticated defensive systems, thus forcing the first country to make further advancements in their offensive weapons to remain ahead.  In the M&A arena, as acquiring companies have developed more sophisticated tools to make the acquisition of companies more certain, faster, easier, or less expensive, the advisors to the target companies have designed stronger defences for their clients.  These defences have then stimulated further activity to create better acquisition methods.  Just as with the arms race, the process becomes more complicated and expensive for all the players.

Knowledge of previous takeover techniques is therefore important for any bidder or target – and is a critical aspect in the application of business intelligence. 

The impact of military intelligence on many of the battles and wars of the 19th and 20th Century is well-known.  There’s much to be learned from them in applications to the current M&A deals.  Maybe is some of the ego and hubris of the architects of the deals in the current merger wave were eliminated – and a bit of considered thought was given to the lessons from the past not just in business – we could and would see an improvement in deal success.

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