Archive for March, 2010

Joint Ventures: Are they a viable alternative to a full merger or acquisition?

Posted on Wednesday, 24 March 2010. Filed under: Commentary, Mergers |

Much of the research and reporting in M&A get done about the headline-grabbing large acquisitions and mergers.  However, the unsung hero of corporate alliances are joint ventures.  But we expect to see more of these, including some very big JVs.  Note the announcement on 1 February of a $12 billion joint venture between oil companies Shell and Cosan.  The Telegraph, one of London’s leading daily newspapers, noted in their Sunday paper (21 March 2010) the need to consider alliances and joint ventures instead of acquisitions — citing the recent announcement by Prudential to acquire AIG’s Asian business and whether Resolution should do the same when planning for the next year.  You can see this in the three paragraphs at the end of the article here.

Liam Vaughan, of Financial News, in an article on 23 March, also commented on the study and linked it to the above-mentioned Royal Dutch Shell joint venture with Brazilian counterpart Cosan, and then wrote that ‘Shell’s Brazilian JV follows high-profile joint ventures in the telecoms and natural resources sectors, announced in the second half of 2009. In Septembers Deutsche Telekom and France Telecom announced a joint venture between their UK operations T-Mobile and Orange; and in October Rio Tinto and BHP Billiton ditched merger plans in favour of a 50-50 iron ore joint venture.’  His article can be found here (although do note that access to that article is by subscription).

Cass Business School, through its M&A Research Centre (of which I’m the Director) recently completed what we understand to be the largest global study ever of joint ventures and strategic alliances.  Together with the sponsorship and support of the law firm Allen & Overy, investment bank Credit Suisse, accountancy and advisor Deloitte and the Financial Times / Mergermarket, the M&A Research Centre looked at over 122,000 deals over a 24-year period from January 1985 to May 2009.

The full report is entitled ‘Sharing Risk:  A Study of Corporate Alliances’ and can be ordered here.  Some of the key findings include:

  • Historically, joint venture activity is highest in the recovery period following a major economic downturn.  This is very significant, as we have (hopefully!) recently entered such a period and therefore, if history is any indication, should be seeing greater use of JVs over the next several quarters.  This increase is over 20% higher than average levels.
  • Joint venture deals reduce the participating company’s risk.  These firms see their beta decline by 3.9% as a result of the announced deals, and following a major crisis (such as we’ve recently had), the decrease is larger at 6.2%
  • Overall, joint venture deals create value for participants’ shareholders both in the short- and long-term.
  • Some joint ventures are listed companies themselves.  These do demonstrate year-on-year improvement in a number of financial factors, including return on equity over a five year period.
  • However, most JVs don’t last that long.  Contrary to conventional wisdom, the average JV lasts around three years.  Fortunately, when the termination of the venture is announced, the owners are rewarded with an improved stock market reaction.

We also noted some factors of note for companies considering such alliances.  For example, don’t do a JV with too close a competitor, look for a partner who is similar in size and consider a JV if you are entering a new geographic market.  JVs are an excellent precursor to an M&A deal, probably as an example of ‘dating before getting married’.

Details about all the above findings, as well as additional findings, are available in the full report.

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Another view on the M&A Market in 2010 and 2011

Posted on Friday, 19 March 2010. Filed under: Commentary, Mergers |

On Thursday, 18 March, the Financial Times in a special section (‘Deals and Dealmakers’) had an article that I authored entitled:  ‘A tough challenge for M&A markets’.  In it, I argue that that a number of unavoidable behavioural factors are the principal impediments to a rising M&A market:  just as the growth of the market from 2004 to 2007 was driven by some of these factors, there will be a stickiness to the lack of M&A activity over the next year or two.  I’ve touched before on some of these behavioural factors (see ‘Mergers & Acquisitions and Behavioural Finance‘), but have expanded the discussion in the FT article to include additional factors such as optimism, over confidence, belief perseverance, data anchoring, bias towards recent events, and, of course, management hubris. 

I would very much like to see more debate over the role of behavioural finance in the mergers and acquistitions market, and would welcome further comments here.

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‘Upside Risk’ in M&A

Posted on Monday, 8 March 2010. Filed under: Business History, Commentary, Mergers |

I saw a recent posting on the possibility of the stock markets having a ‘buyers’ panic’ as occurred in late summer 1982.  At that time, the market increased by 37% in less than two months, having started with an increase of almost 20% as institutional buyer kicked off the rally, which then had retail buyers coming in.  The posting on Seeking Alpha, entitled ‘Upside Risk Returns – Is Buyers’ Panic Next?‘, notes some interesting parallels with today’s markets, although the author is very clear to state that he doesn’t expect to see a similar market increase at this time.  But the possibility exists, and is worth noting.

I think there may be some parallels in the M&A market, although not necessarily with 1982 (which was not a particularly strong time for M&A … certainly in comparison with the developments and growth in the market that occurred later in the decade.  The issues to note are the pent-up demand for M&A deals from almost three years of slow activity.  Once the markets begin their upward path, will they break out rapidly?  Or, are the behavioural forces of inertia stronger (see my blog on ‘Mergers & Acquisitions and Behavioural Finance’).

In talking with people in the industry, they are quick to note that they have a large back-log of deals, the financing of M&A deals is now easier to obtain than any time in the past two and one-half years, there is a lot of financial sponsor (hedge fund, private equity fund, venture capital, etc) funding available and waiting to be invested and the M&A advisors at all points in the industry are hiring new employees (although these are often people who were made redundant two years ago when the M&A downturn was severe).  Thus, there could be a stampede to do deals if there’s a concensus that the markets will quickly increase and prices will be higher.  There may be a perception that there’s a very narrow window of opportunity.

More later…

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Should you do an IPO or M&A deal now?

Posted on Friday, 5 March 2010. Filed under: Mergers |

There has been a lot of discussion recently about whether the IPO markets have re-opened.  IPOs have been announced, but also many retracted as well (note the withdrawal on 10 February of Blackstone’s Travelport and, one day later, Merlin offerings, followed a few days later by Permira’s and Apax’s withdrawal of New Look).

Now, it hasn’t been the strongest market for M&A deals either, especially for deals requiring large amounts of debt.  And few financial sponsors (such as Blackstone, Permira and Apax) have been able to participate in that market recently either.

It was thus no surprise that one of the leading participants in the M&A and Corporate Finance markets, Marsh, would sponsor a breakfast briefing in the heart of one of London’s financial districts to discuss this topic.  On 10 February, they assembled a group of experts from the London Stock Exchange, a major law firm, one of the private equity firms (in fact it was Permira), and myself (as the academic and ‘independent’ commentator), all hosted by the editor of Private Equity News.  Close to 100 people were in attendance.

It was a fascinating morning, with some interesting and sometimes heated discussion about whether the IPO market would be open again soon.  Interesting especially as the Travelport withdrawal didn’t occur until later that day, but the discussion anticipated such withdrawals without being specific about which ones.

We discussed as well which companies in today’s market should look to go public and which should look for a trade sale (acquisition). It was my suggestion that ‘if the firm needs to be sold in order to inject fresh capital to bolster a weakened balance sheet or because its cash-strapped owners need to offload the asset, then an IPO would not be the best option. It would be better for them to seek a buyer for that firm.”

The markets for public offerings will reopen again, but it is likely to require a significant change in confidence of both the buyers (potential shareholders) and sellers.  It looks as if acquisitions may continue for a while as the preferred route.

The full report of the session is available here.

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