The Need for Business Intelligence in M&A Decisions

Mergers and acquisitions are an integral part of the global strategic and financial business landscape. Deals, especially when hostile, cross border or among large companies, might be front-page news, yet there is a great deal of conflicting evidence as to whether they are successful or not. Scott Moeller and Chris Brady investigate.

Some M&A failures have been dramatic. The AOL-Time Warner deal lost 93% of its value during the integration period as the internet service provider merged with the publishing company in an attempt to combine content with delivery. VeriSign, another internet-related services company, lost $17bn of its 2000 $20bn acquisition of Network Solutions and its stock fell 98%.

“A full merger or acquisition should be attempted only when there is a compelling reason.”

It is not just the fallout from dot.com acquisition failures that lose money. A classic example of failure – and one where the very basic elements of business intelligence were ignored – is Quaker Oats, the food and beverage company founded in the 19th century.

In 1994, they acquired Snapple, a quirky fruit-drinks company, for approximately $1.9bn, thus becoming the third largest producer of soft drinks in the United States. Less than three years later, in 1997, Quaker Oats sold its Snapple division for just $300m.

BUSINESS INTELLIGENCE FAILURE

Only following the acquisition of Snapple was it determined that the pricing and distribution methods were different for the two drinks lines and, most importantly, the cultures were incompatible. Additionally, in the quarter just prior to the acquisition, Snapple had experienced a 74% drop in sales on a year-over-year basis, a fact that was only revealed to Quaker Oats shortly before the deal was announced even though this should have been evident to even a casual industry observer.

The key word in the above paragraph is – ‘following’. It is the key identifier of an intelligence failure. The term intelligence here is defined as the use of legitimate competitive intelligence techniques. Quaker Oats had simply failed to gather the most basic intelligence in advance of the deal.

Failed deals are, unfortunately, the norm not the exception. No matter how it is measured, a fair degree of consistency has emerged in the results of studies that have examined M&A ‘success’. Well over half of all mergers and acquisitions should never have taken place and many studies have found that only 30% to 40% were successful.

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. This is where an embedded intelligence function is essential.

“Intelligence is defined as the use of legitimate competitive intelligence techniques.”

Prior acquisition experience may not be a predictor of success, although some studies have shown that companies do better when making an acquisition that is similar to deals they have done previously. Here again the need for specific intelligence is central.

Studies have shown that inexperienced acquirers might inappropriately apply generalised acquisition experience to dissimilar acquisitions. VeriSign appears to have failed with its 2004 purchase of Jamba AG despite having made 17 other acquisitions in the previous six years, many in related internet businesses. Intelligence cannot, therefore, be taken for granted.

DIFFERENT TYPES OF MERGERS AND ACQUISITIONS

Different types of mergers and acquisitions are driven by different goals and raise different issues for the use of business intelligence.

Horizontal mergers are mergers among competitors or those in the same industry operating before the merger at the same points in the production and sales process. For example, the deal between two automotive giants, Chrysler in the US and Daimler, the maker of Mercedes cars and trucks, in Germany, was a horizontal merger. That deal, of course, was of questionable strategic value, but other horizontal mergers have been very successful: Exxon Mobil, GlaxoSmithKline, Royal Bank of Scotland (acquiring NatWest) and many others.

In horizontal mergers, the managers of one side of the deal will know a lot about the business of the other side. Intelligence may be easy to gather, not just because there will likely be employees that have moved between the two companies over time in the course of business, but the two firms will also most likely share common clients, suppliers and industry processes.

Vertical mergers are deals between buyers and sellers or a combination of firms that operate at different stages of the same industry. One such example is a merger between a supplier of data and the company controlling the means through which that information is supplied to consumers, such as the merger between Time Warner, a content-driven firm owning a number of popular magazines and AOL, the world’s largest internet portal company at the time of the deal.

There is often less common knowledge between the two companies in a vertical deal, although there may still be some small degree of shared clients and suppliers, plus some previous shared employee movement. Cultures are likely to be very different.

“Different types of mergers and acquisitions are driven by different goals.”

Conglomerate mergers take place between unrelated companies, not competitors and without a buyer / seller relationship. This type of merger was common in the past, but has fallen out of favour with shareholders and the financial markets except as practiced by some hedge funds and private equity houses. When they do occur, they can benefit greatly from the more creative uses of business intelligence. For example, detailed scenario planning involving simulations based on high-quality information can identify unforeseen issues that can drive such deals and provide a logical rationale.

WORTH THE RISK?

M&A deals are risky. A full merger or acquisition should be attempted only when there is a compelling reason because the odds of success are so low. There’s the tendency to overpay when acquiring another company. For bidder and target alike, it is critical to use the intelligence function as an integral element of the process.

The outcome of a merger or acquisition is never pre-ordained. It is necessary to crawl carefully through the minefield, using as much intelligence as possible to avoid the potential and often very real dangers.

Edited excerpt from Chapter 1 of Intelligent M&A: Navigating the Mergers and Acquisitions Minefield by Scott Moeller and Chris Brady, published by John Wiley, 2007.