Archive for December, 2009
With the year-end coming, there’s lots of talk about the good, the bad and the ugly aspects of not just the past year, but the first decade of the new millenium. Naturally, this talk then moves to which deal was THE worst in either 2009 or the period from 2000 to 2009.
I’ve certainly discussed this topic before. I’ve been quoted in national newspapers on the subject (see The Independent‘s article entitled ‘Was ABN the worst takeover deal ever?‘). It’s a difficult topic to avoid in academia (where I now sit) or amongst practitioners, whether active or retired, as I also am. Certainly at business schools, much of the discussion is about failed deals and what we can learn from them: in my own M&A course at Cass Business School, I include a number of case studies of failures (such as the classic of Quaker Oats’ acquisition of Snapple) or failures at consumating a deal (Sir Philip Green’s aborted attempt to take over Marks & Spencer, for example).
1. Royal Bank of Scotland / ABN Amro
2. Bank of America / Merrill Lynch
3. Citibank / Travellers Group
4. Credit Suisse / DLJ
5. Fortis / ABN Amro
6. Wachovia / Golden West
7. Commerzbank / Dresdner Bank
8. General Electric / Kidder Peabody
9. Allianz / Dresdner Bank
10. Midland Bank / Crocker
It should be noted that Here is the City is followed largely in London by bankers and often is the first source for many readers of industry news and gossip. Thus, the survey respondents — albeit 2,375 of them — are not a representative sample of anything other than a cross-section of such bankers. And the London base of the readership does bias the survey results to UK and European deals: I’m certain a more global survey wouldn’t have Midland / Crocker in the top ten and notice the lack of any Asian deals (shouldn’t Mitsubishi UFJ be in the top 30 somewhere?).
What is fascinating, I think, is that a ‘worst merger of all time’ list that extended beyond banking would still have many of these banking deals in the top ten. Certainly the ABN AMRO deal of 2007 must be in the top three (although I’m not sure whether to include this as one deal or three, as Here is the City did, with the RBS and Fortis purchases of ABN AMRO being considered failures but not Santander’s part of that deal). It may actually still be too early to determine if Bank of America’s purchase of Merrill Lynch is a failure (although it certainly looks that way and, if you use another criteria which is how long the CEO lasts after a major acquisition, then I’m sure Ken Lewis of BofA would think it a failure). Likewise, I wonder if Citigroup would be where it is is the Travellers deal hadn’t taken place … and therefore the impact of that acquisition may be coloured by recent events but not again the long term. Another consideration is certainly the opportunity costs: what would the acquirer have been able to do with the purchase money if they hadn’t done the deal and what would management have been able to be doing strategically if they hadn’t been distracted or fired (see our other blog on Surviving Mergers).
In any case, of the strategic (not financial sponsor) deals that must be included, I would suggest the following in rough order:
1. The Royal Bank of Scotland -led purchase of ABN AMRO
2. AOL / Time Warner
3. Daimler / Chrysler
4. Quaker Oats / Snapple
5. Invensys / Baan
Those five have to be in anyone’s list of the top 10, I’m sure. But others?
By-the-way, if you do want to see some discussion of financial sponsor (private equity firms, venture capitalists, hedge funds, etc) deals that failed, the Wall Street Journal blog Deal Journal has started a discussion on this here.Read Full Post | Make a Comment ( 2 so far )
How do you measure M&A deal success?
This has certainly been the focus of many studies, whether in academia or amongst practitioners. We’ve looked at it here on this blog (‘What is success in an M&A deal?‘) and also in our book (Intelligent M&A: Navigating the mergers and acquisitions minefield).
It was thus with great interest that I read a study conducted by Mergermarket for Merrill Datasite that discussed this (amongst other topics) within their overall report entitled ‘Post Merger Integration: The Key to Successful M&A‘. That study surveyed over 100 corporate executives globally.
Most observers of the M&A markets use shareholder return as the measure of deal success: it’s easy to determine and is easily understood. Differences only exist in determining
- a pre-deal starting point (do you use the share price the day before, one week before, a month before, etc in order to eliminate any impact of market leaks about the deal)
- the end point (immediate reaction on the day of announcement, closing (which may be months away from deal announcement), 90 days after closing, one year later, etc)
- which index to compare the share performance against (historical performance of the company itself, an industry index, an overall country index, etc).
The basic challenge is that it is difficult to isolate the impact of the deal when so much else is going on inside the firm and outside.
But if that’s what academics and analysts do, what do these internal senior executives use to determine success? Interesting, of the five factors mentioned most frequently, share price performance was last! Higher up the list (and in order of use) were 1) cash flow, 2) quality of new products / services, 3) expansion into new markets and 4) revenue of the newly-combined entity.
These factors do take time to determine — unlike share price performance, you don’t get an immediate, day-1 impact or result.
Thus timing is an issue and therefore there’s the question about what do these executives consider the correct time period within which to determine success? Only 5% said 6 months or less (even though a period less than 6 months is often used in academia). The largest group of executives — almost half at 46% — said one year after deal completion (which may be 15-18 months after the deal was announced) and another 38% said two years after completion. The remainder (10%) said that the success could only be determined after more than two years.
Lastly, related to this is how often the senior management team meet to discuss the progress of the integration and therefore the on-going success. Needless to say, they don’t wait long. Almost two-thirds (64%) said this was done monthly after the deal completed. Another 20% said weekly. Thus, the senior management team IS frequently looking at success in terms of the factors above, checking the changes in cash flow, new product introductions, new market opportunities, revenue changes and, of course, share price.
So we now know how executives themselves determine deal success. Why, then, do they continue to do these deals when the same survey showed that only 42% of these executives considered their acquisitions or mergers to be successful more than 50% of the time … which means that 58% considered most of their deals to be failures. Looks like we need to hold executives to their own determinants of success more often.Read Full Post | Make a Comment ( None so far )
It’s December and the M&A market is mostly closed for the year. This isn’t the month when many deals are done (although I would love to be surprised by a big announcement in the next several weeks, it would be a surprise!). We’ve discussed this recently here, where we showed that it is rare for deals to be announced in the last quarter of the year. Note by the way that this dearth of year-end announcements is related to the very large (mega-) deals, as smaller ones don’t show such an historical trend.
In any case, the focus is now on 2010. Will it be better than 2009? 2008?
Of course, my crystal ball is as foggy as anyone’s. However, ever willing to stick my head out, here goes:
First, despite an overall lack of European outbound M&A in 2009 (Financial News reported in mid-November that volume of such deals was its lowest since 2004), I believe the interest in globalisation hasn’t diminished in the board room, although the appetite to take on such risks has decreased. Especially in Europe, it appears. I believe as the new year starts and 2008 and 2009 are put behind us, the interest in growth will reappear including acquisition as a means of such growth.
Second, financial sponsors (hedge funds, private equity funds, venture capitalists) will return. In the first nine months of 2009, only about 3% of global M&A volumes were from these groups — the lowest since 2000 and well down from the approximately 25% of 2007’s volume. Of course, they helped drive the last merger wave that ended in 2007 (indeed, one-third of all deals in private equity’s 30-year history took place in 2006 and 2007). Check out this report from Private Equity News. Even a small increase in this percentage in overall terms could be a catalyst to the growth of M&A in 2010. I may eat my words, but I don’t think it can go any lower what with the backlog of money to invest in the pipeline (it was reported that at the start of 2009, there. It has to go somewhere, and the financial sponsors are very reticent to return it to their limited partners!
Third, the emerging markets remain of great interest. China’s M&A market (again, according to Financial News) is up 6% on last year, which makes it one of the bright spots in the global M&A market. Not just China, but other Asian markets will be places where firms need to expand. I actually believe this trend may be the catalyst to the next merger wave when it appears — hopefully in 2010!
Fourth, and perhaps even most important, there’s optimism in board rooms. We noted in an earlier blog (see: ‘What Next in M&A‘ and the related research from Intralinks) that there’s an expectation now that more deals will be done next year by a majority of board-level executives interviewed. This can be a self-fulfilling prophesy, as the M&A market rises and falls based on the willingness of boards to approve deals and their confidence (usually misplaced, by-the-way, even in rising markets) that the deals will increase profits, market share, shareholder returns, etc.
Now, what about the timing? I hear from many advisors that the backlog isn’t great. This would indicate that we won’t necessarily see an immediate increase in deal. Offsetting this is another fact from talking to those advisors: most are busier than they have been in a couple years. Part of this busy-ness is due to the reduction in the size of the M&A teams in the past 18 months, but this doesn’t explain it all as even those teams not reduced (and yes, there ARE some around in the more forward-looking advisory firms) say they are working flat out. I’ve been trying to meet up with one of them for the past several months and it was never was possible in evenings or even weekends, and we finally had to settle for a 7:30am breakfast earlier this week — at which I was informed that she hadn’t had more than 5 hours sleep in any day in the past three weeks. Although probably not good for her personal health, it probably IS for the health of the advisor’s bottom line and the M&A market in general.
And let’s not forget as well that the debt markets are not fully open again for acquisition finance. No one expects an era of easy financing to return anytime soon, but it does have to ease up somewhat for the market to return to anything like the volumes of a few years ago.
Anyone else with thoughts on the timing?Read Full Post | Make a Comment ( 1 so far )
I was asked the other day whether I thought that mega-deals have disappeared for a while, because not many have been announced recently. The commentary on M&A in the press is still focussed on the Kraft / Cadbury / Hershey / etc deal that was announced back in September (here’s the original press statement from Kraft which valued Cadbury at £10.2 billion).
If you look at the past 20 years of super mega-deals (the top 20 deals of all time), you’ll find that the largest of these (which, by-the-way, all took place after 1997) do show some very strong seasonality. From the deals in our database, we noted this:
- Over one-third (35%) were announced in a January (including Pfizer / Wyeth in 2009, JP Morgan Chase / Bank One in 2004, Sanofi / Aventis also in 2004, Glaxo-Welcome / SmithKline Beecham in 2000 and Vodaphone / AirTouch in 1999)
- Almost half (45%) were announced in the first quarter of the year.
- Almost two-thirds (65%) were announced in the first half of the year.
- Four-fifths (80%) were announced in the first three quarters (January to September) of the year.
Which leaves only one-fifth (20%) for the fourth quarter of the year, split pretty evenly across all three months of that quarter.
By the way, if you look at all of the announced mega-deals over $50 billion (there’s around 40 of these), the figures are very similar, although only around a quarter were announced in a January of the year and almost half in the first third of the year — still quite significant percentages; the fourth quarter did still show only 20% of the announcements.
Of course, history is an unpredictable predictor of the present or future, but it does give us some useful guidance as there may be some interesting behavioural factors at work here. Human nature, as we know, doesn’t change very much, which is why the study of history is so critical.
Perhaps even more than in other years recently, there is a risk aversion in the markets — including at the CEO- and board-levels where acquisition and merger decisions are made. In most board rooms, the past six months have been better than was expected at the start of the year, and the recovery in the markets since March have reflected this as well (recent corrections notwithstanding). With year-end approaching, no one wants to give this back. One way to do this is to hunker down, consolidate the gains and wait to see if the recovery is sustained in the new year. Thus, despite some relative bargains in the market (based on stock prices still being well below their peaks of 2007), the conservatives sitting in the board room are probably preferring to wait before making any bold moves — or are at least sitting tight until their major competitors make the first moves.
But as the figures above show, early in the year appears to be a good time to announce a pending large deal. With almost half of these announcements being in the first quarter of the year, that’s not just chance. Start of the year = fresh strategic start for the company. Also, as most of these huge deals require external financing, there’s the likelihood that the deal will be closed before year-end and any bridge financing will be off the balance sheet at the all-important year-end when financial statements are published.
There must be other drivers at play here as well, and I’d be interested in hearing anyone else’s thoughts as to why these deals overwhelmingly are announced early in the year. There’s also the question as to whether 2010 will repeat history and see some mega-deals announced.Read Full Post | Make a Comment ( 3 so far )