Archive for November, 2009
Dr Robert Davies, in his fascinating blog on strategy (see weblink at the bottom of this page in the blogroll or check it out here), has written an interesting article on what he sees as the eight major issues that will drive corporate strategy and behaviour over the next several years (see his blog: ‘2010 AND BEYOND: The real issues and trends‘).
These issues range from the drive toward localisation (and away from globalisation) to the increase in stress in society (and on individuals). It certainly is worthwhile considering whether these will impact the M&A market if several of these actually do turn out to be correct. Briefly, the eight issues are (in Robert’s very conversational and catchy style):
- ISSUE #1: GOODBYE GLOBALISATION, HELLO LOCALISATION. There are too many forces pushing against globalisation for you to bet on the end of history and a harmonised world. Even academics are divided upon the issue of the sustainability of a single global society. Remember too that we have not suffered a global recession, we are in the midst of a series of localised depressions, recessions, recoveries or in some cases, just mere slowdowns.
- ISSUE #2: CHANGE COMES IN PHASES. Unlike some, I don’t see a simple ‘bounce back’. The real effects of the recession in terms of your markets and the behaviours of your customers will take between three to five years to appear. Understanding and monitoring four key phases of change must be a central task for any customer focused organisation.
- ISSUE #3: FROM LUXURY TO SECURITY. FROM CONSUMERISM TO REPLETION. Customer needs (both in consumer and business markets) will change. How they change will largely be determined by the direction taken by globalisation. For some, purely Web based customer management strategies may prove problematic in at least one future new where new consumers seek more personal inter-action.
- ISSUE #4: BIG BROTHER, MY FRIEND. Some large corporate brands have been tarnished – especially in the financial sector. There is some emerging evidence that new consumers may trust central government more than large corporates.
- ISSUE #5: CSR – A NEW GENERIC STRATEGY? In the face of new regulation, many especially in financial services, will find it difficult to gain competitive advantage. Is corporate social responsibility the answer?
- ISSUE #6: BACK TO THE PAST – THE FRUITS OF CREATIVE DESTRUCTION. Within all the doom and gloom there is the prospect of quite massive levels of innovation, bringing with it opportunity. But you may have to move quickly. So, in what shape are you to innovate?
- ISSUE #7: THE DEATH OF ‘WHAT WORKED BEFORE’. Be careful about extrapolating from the past. The datasets and variables have changed.
- ISSUE#8: BEWARE OF STRESS. It’s going to take time to get through this. So are you taking care of your staff?
Now, what does this imply for those who are interested in M&A? Could these issues be influencers on M&A generally? (Actually, think about these as ‘trends’, which they areally are (aren’t they?), as most have already begun in some fashion and even have antecedents from years ago.
I’d be interested in the views of others, but first let me say that I agree with most of these issues — especially their application to the next several years. On a longer-term basis, I do believe we’ll find ourselves largely back on the same trajectory that we’ve been for the past two or three decades and that the past 18 months won’t be considered quite the sea change that many other pundits believe.
Nevertheless, these issues will impact the M&A market. Some positively:
- Localisation means that there’s a greater need for local presence, which can be obtained by purchasing a local company already knowledgeable about the local markets and recognisable to the people there.
- Creative destruction will drive the purchase of distressed and bankrupt (or insolvent) companies. (See as well the M&A discussion of distressed deals.)
- It may be easier to have an appreciated impact on CSR issues if the organisation is large and able to afford high-impact, high-cost CSR programmes. How do companies get scale? They go out and buy another company…
But others negatively, such as the ‘big brother’ trend of increased trust in governments which implies lower trust in corporations, especially the largest ones. (But the flip side of this may be increased M&A activity as companies downsize and refocus back to the core, thus divesting divisions: one company’s sale is another company’s acquisition!).
We’ve discussed before the need to incorporate appropriate business intelligence into the M&A process, which otherwise often seems opportunistic at best and ‘me-too’ at worst. These trends discussed by Robert in his blog should be used by all M&A corporate development teams and their advisors in stress-testing their proposed mergers and acquisitions. (See our writings on scenario planning as well.)
Your thoughts?Read Full Post | Make a Comment ( 1 so far )
An excellent study was issued by IntraLinks and mergermarket a few weeks ago. (You can find it here.) In August and September, they conducted a survey of experts in M&A – the people within each company responsible for deals. The key finding: almost two-thirds of those surveyed thought that the overall economic environment in their own regions would improve in 2010 (which is in distinct contrast to the economist, politician and journalist Cassandras who feel that we’re in for a double dip or even worse in 2010 and beyond). Interestingly, 16% felt that this recovery was already underway and 8% that it would happen before year-end. And in Europe, over 40% of respondents felt that corporate M&A would increase in the next year (and only 12% were pessimistic).
This is a significant finding, because the M&A market is driven at the corporate board and senior exec level by optimism (I would almost prefer to say ‘hubris’) and general business confidence. The perception of an improving market is critical to the market’s turnaround prospects.
But caution amongst those surveyed is also noted in the study: when asked about their own company’s activity, only about a third were optimistic or very optimistic. (Yet only 20% were pessimistic and most (44%) were neutral.) This is a valid cause for concern. This would indicate that firms are reticent to commit their own money toward committed rapid expansion – and an M&A deal IS the way for a major existing firm to expand rapidly, even if most deals fail in the execution – despite those firms seeing the general business environment improving.
It was nice to see that 75% agree with me that the M&A market has already reached its inflexion point (see ‘M&A inflexion point: The turn to ‘up’ in activity’ which we published back in late September).
We’ve noted before on this site back in the summer (see ‘Distressed and bankrupt acquisitions: Should you do one of these deals?‘) that distressed acquisitions would be a major driver for some time to come. This Intralinks / mergermarket survey confirmed that, as almost half of all respondents in Europe felt that distressed deals were the principal driver to the market for the next year (followed by 31% looking at market consolidation as the principal driver). The overhang from the recession will still take a while to work through the M&A system, which is a wonderful mechanism to assist industry in self-correcting.
What are firms most expecting to do? When respondents looked at what they would do in their own companies, they still feel that their M&A activity will be driven by finding undervalued targets (over 50% thought this). If this is true, the growth in M&A activity might be faster, as a continuing stock market rise would make fewer such undervalued targets around. Nicely, two-thirds of the companies DID expect to make an acquisition in the next 12 months. Given the lead time to many of these strategic deals, the planning and even negotiations may be underway already. This is support for the strong backlog of deals that many advisors note.
Overall corporate organisational restructurings were expected by 73% of respondents, and by a whopping 81% of those in Europe. Europe really does appear to be the region that is pulling out of the recession with the greatest difficulties remaining.
I found most interesting the thoughts about which industries would see more consolidation, at least according to this survey. There’s so much conjecture about where the next big deals will come, and each observer seems to have different feelings. It’s nice to see a survey taking in the opinion of many experts, as this IntraLinks / mergermarket survey is. Contrary to my own personal view, financial services was seen in Asia/Pacific and North America as being the most likely industry to see deal activity. In Europe, the consumer area was suggested to be the most active. Notably, pharmaceuticals, industrials & chemicals, the extractive industries and the technology industries that saw huge deals in 2009 were not in the top list.Read Full Post | Make a Comment ( None so far )
According to Reuters a few months back on 10 September 2009 (‘Deal Talk — Rallying stock markets help accelerate M&A plans’), a report by Natixis predicts a higher incidence of M&A in sectors including pharmaceuticals, luxury goods, transport, IT software and oil services. It said International Business Machines Corp could pursue SAP and lists AstraZeneca and Whitbread among potential takeover targets. It’s always fun to look at these predictions several months later.
It’s a dangerous game trying to predict specific deals. I have seen a list of potential targets put together in the past and a year later they make fun reading for all their errors. Note some recent predictions by Barron’s / Wall Street Journal, consultants such as KPMG and other journalists such as Money Morning.
Conventional wisdom seems to be that the pharmaceutical industry has played out earlier this year … at least for a while. Likewise in financial services, barring any further credit crises! (And in fact this industry will see some of the larger, bailed out firms restructuring and selling off large divisions, which may make the acquisition volumes in this sector appear large for a while yet; but I don’t see any large mergers happening soon.)
So where’s the activity? Rather than industry, look at regions. The sub-continent and Asia will continue to be strong. The US before Europe, as Europe seems to be lagging in the face of slower economic recovery.
On industries? How about consumer products – driven by changes in consumer behaviour from pre-recession as they leave behind the higher-priced goods and look for low price linked with quality. Professional services, with Tower Perrin and Watson Wyatt being a harbinger of things to come (although they currently stand alone in that sector so haven’t yet started the stampede toward consolidation that I predict will happen).
Any other thoughts? Please help me here, as I know that my crystal ball is very foggy at the moment…Read Full Post | Make a Comment ( None so far )
M&A valuation is simple. Yet it often appears to be, in the words of Winston Churchill, ‘a riddle wrapped in a mystery inside an enigma…’
For the maths, all you need to be able to do is add, subtract, multiple and divide. Oh, and to punch in some numbers to a relatively simple financial calculator that can do net present value (and therefore, if you were to do this the old fashion way, you would need to know how to take numbers to the power of).
But in most deals, this isn’t even needed. What you do need is some research about recent deals, just as you would do if you were to sell your house. If another house or two have sold recently on your street, then you should know a general price to sell your house – adjusted, if you can, for the number of bedrooms and bathrooms that your house has versus those other houses that sold. And asking prices don’t matter: what is critical is the actual price that was agreed.
You do need to know if there are also any significant changes in the market since those sales, or if you will be offering anything different (such as seller financing). The deal terms will affect the price: will you swap houses with the seller (similar in business to a stock offer) or will it be a cash transaction.
Your real estate agent will help you to do this pricing. You probably buy and sell a house just a handful of times in a lifetime, but the estate agent will (in a good market) sell many houses in a month. They will have a sixth sense about the market that no amateur could have. Likewise the investment banker advising on a deal where the managing director will have done hundreds of deals by the time they reach the level where they are the trusted advisor to a company doing a merger or acquisition. They will know best which other deals do look most similar to yours.
It therefore is somewhat a ‘mystery’, even if not complex. ‘Art more than science’ as I explain in the chapter on valuation in the book Intelligent M&A: Navigating the mergers and acquisitions minefield.
Aside from the aforementioned need to look at comparable deals and to consider the ‘art’ aspect of pricing, what else is important when pricing a public deal:
- Looking at the valuation from several different perspectives. Although recent deals successfully conducted by similar companies in the same industry as yours will set the general level for your deal, usually boards of directors and shareholders require more than this to feel confident approving the deal. Therefore, once the price has been agreed, it will be justified with other valuations (as many as possible) using other methods such as net present value (usually based on cash flows). Of course, these other methods require a large number of assumptions (which cost of capital to use, which discount rate, etc), so again is actually more art than science.
- No two valuations will ever be the same if done by different firms, even if they are using the same base information. This is because they will use different assumptions (see above) and weight the answers differently.
- There are two sides to every deal. Each side will have created their own valuation, and you can be certain the seller will have a figure in mind which is higher than the buyer. This leads to the next point.
- The final figure agreed is a result of the negotiation between the two (or more) parties. The level of negotiating experience and the negotiating strength of each party (e.g., is either one being forced into the deal, or can they walk away if they wish).
- There will be several anchor points to the valuation. The most important is the actual market capitalisation of the target company on the day the negotiations begins (sometimes this is structured as a price which is the average closing value of, say, the previous five or ten trading days). The second is the 52-week high for the target company, as this is an easier sell for the target if the offer price is at a premium to any price in the previous year. Both figures are anchor points only, and will have differing levels of importance if the market is declining or advancing during the negotiations.
Leave the very complex maths to the equity derivative traders and the designers of structured products — and for the back-up and support once the number’s been agreed (and you WILL need to justify the number for the board, shareholders and others). M&A valuation is much more fun than that and can be done on a simple Excel spreadsheet.Read Full Post | Make a Comment ( None so far )
On 8 October 2009, I was interviewed about why merger and acquisition deals fail or succeed. Together with several other experts in the industry (including Paul Schiavone of Zurich Financial), the conversation is now available on YouTube here: M&A – successes and failures. This clip is actually one of eight that are available on YouTube (‘M&A: What lessons have we learnt from the boom and bust?‘ and click on the M&A Directors Forum on the right-hand side of the page), if you want to see the entire conversation including discussions of M&A risks (especially a discussion about risks to directors and officers of the merging companies) and some forecasts about the M&A industry.Read Full Post | Make a Comment ( None so far )