Archive for June, 2010
There’s been a lot of press reaction to our recent report on what happens when a new CEO takes over: ‘Here’s the deal: move fast as a new CEO’. The report was written by Cass Business School and the M&A Research Centre (MARC) (which I head). See also my blog entry ‘What comes next? Change your CEO and (bang!) you’re acquiring another company‘ and another one regarding the intial coverage by Stefan Stern, the ‘On Management’ columnist, in the Financial Times and in the blog entry ‘Article on CEOs and M&A deals‘. Clearly good use of business intelligence when a board is appointing a new CEO!
The Wall Street Journal has written on this topic as well: ‘Why Your New CEO Should Be a Deal Maker’, which emphasises that the firms of CEOs who do deals in their first year in office outperform those who do not do a deal in their first year. The Wall Street Journal has also put together a video interview on this, tieing it to the recent Prudential deal to purchase the Asian assets of AIG … a deal which was recently pulled. See the interview here: ‘Bankers: New CEO Means New M&A. Make That Call Now!‘ and another related article with the same video here:
‘New CEOs Have an Urge to Merge’.
In QFinance, a very extensive on-line financial markets resource, I’ve written an article entitled ‘Due Diligence Requirements in Financial Transactions‘. Due diligence is a critical business intelligence process, and in our book on the use of business intelligence in doing M&A deals better (Intelligent M&A, Navigating the Mergers and Acquisitions Minefield), the chapter on due diligence is the longest. In it, I make the following arguments:
- There is an urgency for companies to conduct intensive due diligence in financial deals, both before announcement (when it should be easy to call off the deal) and after.
- Traditional due diligence merely verifies the history of the target and projects the future based on that history; correctly applied due diligence digs much deeper and provides insight into the future value of the target across a wide variety of factors.
- Although due diligence does enable prospective acquirers to find potential black holes, the aim of due diligence should be this and more, including looking for opportunities to realize future prospects for the enlarged corporation through leveraging of the acquiring and the acquired firms’ resources and capabilities, identification of synergistic benefits, and postmerger integration planning.
- Due diligence should start from the inception of a deal.
- Areas to probe include finance, management, employees, IT, legal, risk management systems, culture, innovation, and even ethics.
- Critical to the success of the due diligence process is the identification of the necessary information required, where it can best be sourced, and who is best qualified to review and interpret the data.
- Requesting too much information is just as dangerous as requesting too little. Having the wrong people looking at the data is also hazardous.
The whole due diligence can therefore be summarised with four ‘w’ questions: What? When and where? Who?
- What do you need to review? Be careful, as note above, of requesting too much as you may then only superfically review even the important things. Focus on the critical, the potential deal-breakers and the things you need to know to design the best post-merger integration (too often managers seek this information AFTER the deal, but by then it’s too late to design a proper post-deal integration strategy).
- When do you need the information and where do you find it? Much due diligence can be done even before a deal is announced … and even before you start discussions with the target. For example, you often don’t need to ask the target for their sales information: even if they are privately held and don’t disclose this information, you can get it from industry sources such as publications, government data bases, suppliers and customers. Management consultants can provide excellent market information. Thus think about whether you can get information from other sources early, as then you don’t waste time once the deal process has started in earnest (once you’ve contacted the target) on things that you could have found out from other sources. It also allows you to focus during the intense due diligence process on facts that are only available from the target itself: such as it’s strategic plans and key contracts (with managers, suppliers, clients, etc). Also, some information can safely be deferred until after the deal is done.
- Who reviews the due diligence information? This critical question is often mishandled because of the (often overemphasised) need for secrecy in the pre-deal announcement period. At that time in the deal process, the finance departments are often driving the deal on behalf of the CEO and Board. You then find accountants reviewing human resource due diligence (employment contracts, for example), IT systems and even looking at operational data. The experts in these area don’t yet know a deal is taking place, but they are best placed to review any due diligence. This continues after the deal is announced, when you’ll find those same accountants walking a shop floor or factory looking for problems. But one of your own plant managers is best placed to look at the target’s factory; your HR team knows best how an employment contract should be written and therefore whether there are problems with the contracts of target company staff. Expand the due diligence team to allow for this proper review by the proper people! And do not outsource the review of this critical process, as you will need the findings from the due diligence process for the entire period — often many years — of integration so you will want this information in-house.
Lastly, do not forget that even the target needs to do due diligence on the buyer: who would want to do a deal only to find out that the bidder could not complete the deal due to circumstances that could have been anticipated.Read Full Post | Make a Comment ( 1 so far )
Of principal concern to a dealmaker — whether the board of the acquiring company or the CEO recommending the deal — is whether the share price of the company will rise on the announcement of the acquisition of a target company … and by how much. Of course the target company’s share price will rise; I’m not talking about them, but rather the bidder’s share price.
In QFinance, a very extensive on-line financial markets resource, I’ve written an article entitled ‘Coping with Equity Market Reactions to M&A Transactions‘. In it, I make the following arguments:
- Overall, stock returns to acquirers tend to be negative or insignificant—in contrast to target companies, where stockholders can benefit greatly.
- Companies that believe they may be targets can influence the value of an ultimate acquisition through the design of defensive techniques and by how they react to bids when they occur. Similarly, acquirers can influence the target share prices through their actions prior to the bid.
- Most acquirers are overconfident in their ability to conduct acquisitions successfully.
- Careful planning, including a robust internal and external communications plan, is required to mitigate the impact on equity markets of acquirers.
- Many factors influence equity market reactions to an M&A bid, including how friendly or hostile the bid is, the financing structure of the bid, the relative size of the two companies, and whether the transaction is a merger or an acquisition.
- Deals conducted in the most recent merger wave appear to have taken some of these issues into account and show better relative performance (relative to the market) than deals conducted in the 1980s and 1990s.
Read in light of the downturn in activity that has taken place since that article was written, this is another reason for caution in executing deals at this particular time. Where there are markets with great uncertainty, as we certainly have now here in Europe if not globally, boards are cautious anyway about announcing large M&A transactions. When the share price is volatile, further negative pressure is the last thing that shareholders need.Read Full Post | Make a Comment ( 1 so far )