Archive for May, 2010

Article on CEOs and M&A deals

Posted on Sunday, 23 May 2010. Filed under: Commentary, Mergers |

Thanks to Stefan Stern, the ‘On Management’ columnist in the Financial Times for his article on 18 May on our recent report on what happens when a new CEO takes over: ‘Here’s the deal:  move fast as a new CEO’.  That is, they do M&A deals.  See my blog entry ‘What comes next? Change your CEO and (bang!) you’re acquiring another company‘.  The report was written by Cass Business School and the M&A Research Centre (MARC) (which I head).

In an excerpt from Stefan’s article:

Scott Moeller, director of Marc, says we should not be surprised to see new CEOs deciding pretty fast that a big deal is just what the company needs…

Whatever they choose to do, most new CEOs know that they may not have a lot of time in which to act. The median tenure period for CEOs in the Marc survey, not including those who stayed for less than 12 months, was 4.4 years. “I suppose there may be some CEOs who are confident that they will beat the odds and even go on for ever,” says Prof Moeller, “but they will be the exception.”

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What comes next? Change your CEO and (bang!) you’re acquiring another company

Posted on Tuesday, 18 May 2010. Filed under: Commentary, Mergers |

Many things happen when a company gets a new CEO.  Cass Business School and the M&A Research Centre (MARC) (which I head) have just released a study showing that CEO’s embark on M&A deals very quickly after being appointed.

In the study which looked at 276 CEO changes from 1997 to 2009 in the UK, France, Germany and Spain, we found that CEOs were more likely to invest than divest assets in their first year in office, although it is important to note that most did neither.  This shows that most CEOs look to kick off their new strategy rather than first unwind the strategy of their predecessor.

We looked at a subsample of the CEOs who were hired with a mandate for change (when the previous CEO had been forced out of office or the new CEO recruited externally).  For these CEOs, they were more likely to perform a major deal, again evidence of needed to change the strategic direction of the company.

Most notably, those CEOs who did perform a major deal in their first year in office outperformed their peers in the long run in terms of shareholder performance.  Success does go to the bold.

However, it doesn’t pay off to be too bold, as those new CEOs who performed more than one major deal in their first year in office showed lower returns.  Anecdotally, it appears that they had not yet fully integrated the first acquisition before embarking on the second.

And lastly, we looked further at the divestiture vs acquisition decision.  It turns out that those who do a divestiture in their first year will outperform (albeit only for two years) those who do an acquisition in the first year.  It appears that the cash infusion and refocus of the organisation from the divestiture do help the company, but only for a time.

You can request a copy of the full study here.

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Why is European M&A so slow right now?

Posted on Monday, 10 May 2010. Filed under: Commentary, Mergers |

In the past two weeks, I’ve received numerous calls asking to explain why the M&A market in Europe was so slow in April.  Some of my comments have appeared in the Wall Street Journal and Financial News in articles entitled ‘Europe M&A Lags Behind World‘ and ‘European M&A set for worst month in a decade‘ respectively.  I’ve had inquiries from other reporters both in the US and here in Europe.

The questions arise because, in April, Europe represented only 15% of the global market activity, which is the lowest monthly proportion of global M&A since August 1998, when Europe made up 11%.  But it isn’t only on a relative basis, and this can’t be explained solely on the growth of M&A in other regions.  As Liam Vaughan wrote in one of those above articles, ‘April has also been dire for European M&A in terms of both the total value and number of deals. Not since August 2001 has the total value of deals been less and not since August 2004 have there been fewer deals.’

Why is this happening?  And why now?

As I have noted on several occasions on this website (see ‘Mergers & Acquisitions and Behavioural Finance‘) and elsewhere (as in the Financial Times in a special section ‘Deals and Dealmakers’ in March that had an article that I authored entitled:  ‘A tough challenge for M&A markets’), M&A markets depend on CEO and board-level confidence to be high.  In Europe, a ‘perfect storm’ of uncertainty has arisen over the past several months, including most notably the Greek debt crisis with fears of contagion to other European states and the uncertainty over the British elections.  From the vantage point of today, both were certainly valid concerns:  the Greek crisis continues unabated and here in the UK we have had an inconclusive election leading to the first hung parliament since 1974.

Another factor is the rise in cross-border M&A activity.  CEOs need even greater confidence to do a deal outside their own country.  In Europe, as Cass Business School reported together with Towers Watson in the recent Towers Watson Quarterly Deal Performance Monitor, cross border deals are only 27% of the North American M&A market, but represent 60% of European activity in the first quarter 2010.  With the uncertainly in foreign exchange levels due to the euro turmoil surrounding Greece, it is no surprise that companies are avoiding taking a stance on Europe at this moment.  Also, it is generally accepted that cross-border deals are more difficult to conduct, and thus if they represent more of the European M&A market, again this contributes to the slowdown in activity in a time of uncertainty.

Will there be a change soon?  I think not.  Again, as I have noted here in March (‘Another view on the M&A Market in 2010 and 2011‘) and before that terrible month of April, there will be stickiness at these lower levels of activity for a while.

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Why you should do an M&A deal now

Posted on Monday, 3 May 2010. Filed under: Commentary, Mergers |

Several months ago, Legg Mason strategist Michael Mauboussin published a report entitled ‘Surge in the Urge to Merge‘.  Based on some academic research reported in 2008 in the Academy of Management Journal, companies that invested in deals early in a merger cycle are more likely to be successful with their takeovers than those who invest at the peak or later.  From his own and that research, Mauboussin concludes:

  • An M&A wave may be on the way. If history is any guide, M&A activity tends to follow the stock market with a modest lag. The market’s bounce off of the March 2009 lows, when combined with more amenable credit market conditions, have set the tone for a resumption of active deal activity.
  • The early bird gets the worm. Academic research strongly suggests that companies doing deals early in the M&A cycle provide better returns for their shareholders than the companies that participate later. The reason is straightforward: early in the cycle there are more companies to choose from and the targets are cheap. As the cycle matures, options dissolve and valuations rise.

I agree with both of these conclusions.  As I have noted elsewhere (‘“Upside Risk” in M&A‘ and ‘M&A Forecast for 2010 — Update’), I believe we have bottomed out of the M&A cycle, which does mean that I agree that we are soon to be on the upswing … although I don’t think this will really happen until 2011 for behavioural reasons discussed several weeks ago in an article I wrote for the Financial Times entitled  ‘A tough challenge for M&A markets‘.  However, some industries will lead the market:  pharmaceuticals and media are two that I hear discussed more often recently, so they may already be at the start of their upturn.

I also concur and have done additional research that doing deals early in the M&A cycle will reward those who are brave enough.  In research that Cass Business School conducted for Towers Watson back in January 2010 (‘Corporate Deal Makers Have Reason for Optimism‘), we found that companies that completed a deal in 2009 outperformed their peers that were too timid to acquire — and by a not insignificant 3.2 percentage points.  Notably, those who did deals in the fourth quarter of 2009 outperformed their peers by 4 percentage points.

If more executives were bold enough and willing to use this information, they could convince their boards that they should not be shy but should seize the opportunities to expand through acquisition now.

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