Business History

‘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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Symmetry of M&A in the last Decade (2000-2009)

Posted on Saturday, 2 January 2010. Filed under: Business History, Commentary, Mergers |

The first decade of the new millennium is over.  Happy New Year everyone!  So along with so many other observers of the financial markets, I would like to comment on the past ten years.  Some of these comments have appeared elsewhere – and in fact from me as a number of publications have asked me about my thoughts on M&A in the ‘Noughties’ (including the Financial Times, Financial News, Reuters and Bloomberg).

Most telling I think is how much HASN’T changed:  I like the symmetry of the AOL / Time Warner deal:  10 days into the new year in 2000 the deal was announced and only 9 days into the last month of the decade the deal was unwound.

The new millennium started with the merger of the two companies (it was 10 January 2000 when Steve Case of AOL and Jerry Levin of Time Warner announced the deal) and, in late 2009 on 9 December and less than a month before the decade ended, the two companies finally split up again.  Other deals were bigger, other deals took place first (Vodaphone Mannesmann was a great kick start to the new millennium, wasn’t it).  But nothing bracketed the decade as the AOL Time Warner deal.

That particular merger was actually structured as a purchase of Time Warner by AOL.  Long ago, the AOL name was dropped.  Long ago did shareholders turn away from this deal.  At its peak, AOL had a market capitalisation of around £242 billion.  Now, it has a market value of $3 billion – a staggering loss in value of 98.8%.  It is now run by a former Google exec:  who would have thought a decade ago that a Google man would be running AOL?

That deal did mark the end of the hubris.  We’ll need a few more years to find out, but maybe the 2009 split-up marks the end of the restructuring of the markets and could (along with some other big deals of 2009) be taking place around the time of the resurgence in the M&A market.  That’s the symmetry that I like.

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Worst Mergers or Acquisitions of all Time

Posted on Tuesday, 29 December 2009. Filed under: Business History, Commentary, Mergers |

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).

It was thus with great interest that I saw a survey of market participants recently in Here is the City entitled:  And The Worst Bank Merger Of All Time Is…. The top ten in that survey of 30 are:

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.

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Hostile M&A Deals: The trends

Posted on Friday, 9 October 2009. Filed under: Business History, Commentary, Mergers |

There’s been a lot of attention on hostile M&A deals since Kraft launched its unsolicited bid for Cadbury last month (September).  Nothing quite like chocolate to make the headlines — in fact so much so, that several journalists I’ve spoken to recently have said that they are completely tired of writing about that deal.

Because it was an unsolicited offer — bordering on being a hostile deal (which will ultimately depend on what develops) — I’ve been asked about whether this is a harbinger of things to come:  that is, will there be lots more hostile deals as the market recovers and what’s really been happening to hostile deals recently anyway.

Here’s the facts:

  1. Hostile (including unsolicited deals) are uncommon, despite the headlines they cause as they are, by their very nature, much more newsworthy than friendly deals.  Think back to Microsoft / Yahoo and all the column inches in newspapers that deal had!  In fact, these deals represent only 1.01% of all deals announced so far this year (that’s less than 80 deals year-to-date), which isn’t far off the average of the prior three years of 1.04%.
  2. If we annualise the number of deals to date in 2009, we get only about 100 for the full year — again on average with the prior three years which included some good years and one very poor one.  Still, 2008 had 127 hostile / unsolicited deal announcements, which was a recent high.
  3. Most of these deals never get to completion:  approximately 60% get withdrawn, and unsurprisingly last year was a recent high with 63% being withdrawn — most likely because of the market turmoil in the fourth quarter which is usually a very busy quarter for M&A deals.
  4. Despite all of the hype around the Kraft / Cadbury deal, it actually isn’t one of the largest.  If we look back over the past four years, the biggest hostile / unsolicited deals were (1) BHP Billiton with an offer of $188 billion for Rio Tinto, (2) RBS (together with Santander and Fortis) at $98 billion for ABN AMRO, (3) E on’s $82 billion bid for Endessa, (4) France Telecom’s offer of $47 billion for TeliaSonera and (5) Xstrada’s bid for Anglo American of $43 billion.  Then came Microsoft’s bid of $42 billion for Yahoo, so that one didn’t even make the top 5;  the Kraft / Cadbury offer is way down at 16.  By-the-way, of those top six bids, only one was ultimately completed and, as I said on Reuters TV yesterday, I am sure that Sir Fred Goodwin wishes he had withdrawn his bid as all the others did.

So what’s likely to happen now?  My view is that hostile bids (or at least unsolicited bids) will continue at this relatively low pace.  No big surprises there but still some interesting stories because hostility always makes for a nice headline.   But there just won’t be too many of them.  CEOs and boards seem to know (intuitively?) that these types of offers just have too many ways to fail.  Which is why, of course, most get withdrawn and why most take place in non-people businesses such as metal, mining and other extractive industries and in technology and industrials where assets are purchased, not so much the employees or management.

Then again, many of these offers may have been made with the full expectation that they would be rejected.  Making an offer can be a strategic signal to the market or even a way to destabilise a competitor.  But care must be taken, because the bidder can be affected in a bad way too.

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It’s not Armageddon: M&A Deal Volumes in the First Half 2008

Posted on Tuesday, 1 July 2008. Filed under: Business History, Commentary, Mergers |

Reading the papers and listening to the news, you would think the bottom’s dropped out of the M&A market in the first half of 2008.  Just last week, the headline in the Financial Times on 27 June 2008 was ‘Value of M&A falls sharply as buy-out boom ends’. 

A closer read of the stories yields another answer.  Granted, the value of M&A deals in the first half is down nearly a third compared to the first half of last year:  $1.86 trillion, according to Dealogic.  But if you annualise this figure, you will find that the volume of over $3.7 trillion would make 2008 the third or fourth largest year ever — and larger than 2006 that many people at the time thought would be the peak of the current merger wave.

M&A Deal Volumes

There are some significant changes, although some things (such as Goldman Sachs topping the list of advisors) never seem to change.  Deutsche Bank and Morgan Stanley appear to have fared most poorly.  And overall, at least in Europe, investment banking fees are down commensurate with the market (35% in the first half, according to the Wall Street Journal).  Private equity / venture capital deals are 78% lower and represent just 6% of the global M&A market, according to the FT.  Their deals, of course, drove the market up in this last most recent merger wave in the mid-2000’s.  Asia is holding up the volumes in 2008, by-the-way. 

What will the second half bring?  We do need to see some continuing announcements of blockbuster deals, but if there are a few (and I understand there are some in the works), then 2008 won’t look as bad as predicted by the Cassandras of the press and other industry pundits.  I do hope I’m right and they’re wrong!

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Is this merger wave over?

Posted on Wednesday, 26 September 2007. Filed under: Business History, Commentary, Mergers |

Regular readers of this blog will know how often I look for the historical parallels to current events.  It is therefore very heartening to see others do this as well.  Helen Thomas at FT Alphaville has been reporting on the disappearence of the M&A market in August and September (see her two most recent articles:  The incredible shrinking world of M&A and Piff, Paff, Poof — UK M&A Vanishes).  Yesterday, Helen reported in a blog entitled Six weeks doth not an M&A trend make on the unnamed ‘prophets at UBS’ who wrote drew on parallels to earlier merger waves to reach their conclusions about what’s happening to the M&A market today:

Few public-to-public deals have been pulled, and we are not surprised CEOs are deferring what are key decisions. Our analysis of M&A during the US S&L, and LTCM/Russian debt crises suggests it is too early to write off corporate M&A.

While showing a chart of M&A activity correlated to stock market activity back to 1980, Helen then goes on to write: 

 Of course, what does put an end to M&A activity is a stock market (as opposed to credit) panic and/or something that feels like a good old fashioned recession…

In discussing the current volumes with several of the bulge bracket M&A bankers in the past several weeks, I’ve been told that they would concur with the FT  and the folks at UBS.  That is, the current market has certainly seen deals postponed, but most deals haven’t been pulled.  Yes, it may be more difficult to get large amounts of committed funding for deals to take place today, but the funding commitments aren’t being cancelled. 

Postponement may actually be good for the shareholders of the acquirers.  It may help eliminate some of the hype and slow down in some cases what might have been perceived by boards and shareholders to be an unstoppable deal.  Hopefully it will take the wind out of the sails of marginal deals.  These marginal deals would ultimately have been the statistics that pull the success rate of M&A deals downwards.  It’s not bad to see them postponed forever.  But the strategic deals that made sense two months ago, will largely still make sense today.  Some will reprice, which may assist the post-deal success.  Others will transact at the same price and terms as earlier, but today’s pause — the addition of time to prepare for the post-merger integration period — improves the likelihood of long term deal success. 

No, the wave isn’t over yet (although we may have seen the peak already), and the come-back (second bounce?) may be even better because of this current slowdown in deal activity.

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What Price Northern Rock?

Posted on Wednesday, 19 September 2007. Filed under: Business History, Commentary |

How low can it go?  That’s the question on the minds of many about the bid price for a buyer of Northern Rock.  Of course, bid prices can be negotiated upwards, but the initial bid does set a floor of sorts on the transaction.

Check out Interactive Investor and their commentary today by Richard Beddard on the topic (quoting us), entitled ‘From bail-out to buy-out’ and

A popular assumption is that somebody’s going to buy Northern Rock, or its assets and that, along with the various guarantees offered by the Bank of England and the government, must be informing the decisions traders are making.

According to Citywire on Monday, broker Keefe, Bruyette & Woods has valued the bank at 475p a share, “somewhere between its net asset and run-off values”. I put that figure to Professor Scott Moeller, a mergers and acquisitions expert at Cass Business School and fellow blogger.

He says the price depends on the nature of the buy out. Whether there is a strategic buyer, which he thinks is increasingly unlikely (I presume a strategic buyer might pay a higher price), or whether the buyer is after the distressed assets (”more likely now”). “I’ve heard some numbers around 185p/share in that instance.” He says, “It’s a moving target”.

As I write, the share price is 280p, so despite all the guarantees it seems to me trading in NRK is still speculative, and the ‘floor’ under the price could be lower than some traders expect.

That’s just my view, though. Scott wrote an article for the BBC on the potential for a carve up at NRK on Monday.

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M&A and the value of historical perspective

Posted on Saturday, 15 September 2007. Filed under: Business History, Commentary, Mergers |

Thanks to Andrew F. and his comment here which mentioned the importance of looking back to the late 1990’s in trying to keep a calm perspective on the current turmoil in the market.  We have noted earlier on this blog the parallels between the arms races of the Cold War and how the merger markets develop (see the blog commentary, ‘Merger Waves, Arms Races, and the Cold War’).  Lastly, there was a Harvard historian interviewed in ‘Management-Issues’ (which is also listed on our blogroll at the bottom of this page) who commented on why great business leaders would benefit from a better understanding of history (see  ‘Niall Ferguson on history and business leadership’). 

 I’d like to add another perspective on this topic.  The fact is that there ARE many historians already active in business.  This is also not a new phenomenon:  when I was hired by Morgan Stanley in 1983, it was a private partnership with a management committee of four.  All had majored in History when they were undergraduates (two at Yale, two at Princeton).  (Notably, all four also then went on to get their MBAs before entering investment banking.)  The 1980’s were a time of great success for Morgan Stanley, and I think the success of the firm in those days can, in some way, be attributed to some of the same perspective noted by Professor Ferguson, especially on the qualities of great leaders and how they differ between the military and political arenas and the business arena.

Our recent book on M&A looks at how military and business intelligence techniques can be applied to mergers and acquisitions.  This necessarily builds on an historical perspective as well.  We couldn’t have writen our book without drawing numerous lessons from many case studies, including some classic business deals that date back to the 1980’s (such as KKR’s acquisition of RJR Nabisco), but also some other deals (the oldest one referenced in the book being the UK’s merger of the Foreign Department with the Diplomatic Service back in 1919).

One important bias to note:  my own first two degrees were also in history, and I had the great fortune to write my Master’s Thesis under the tutelage of the master historian of 20th Century American history, John Morton Blum, now an Emeritus Professor at Yale. 

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Merger Waves, Arms Races, and the Cold War

Posted on Sunday, 3 June 2007. Filed under: Business History, Commentary, Mergers |

There were some e-mails asking more about the references to the various merger waves, and especially as to when this current merger wave will be over (as discussed in the post on Scenario Planning, two posts below this one).  To understand these merger waves, it is important to look back at history and also the parallels with the political attempts at takeovers — wars. 

In many ways, the merger waves are not dissimilar to the military battles of the 19th and 20th Century, as we explain in our book:

Merger activity tends to take place in waves – a time of increased activity followed by a period of relatively few acquisitions.  Each wave has been stimulated by events outside the merger world, but which have had a significant impact on the level of merger activity.  Each wave is sharply distinguished from earlier waveswith creative new ways of consolidating companies and defeating the defenses of targets, although each wave built on the merger techniques and other developments from the previous wave. 

There is also the tendency, as with the military, of preparing to fight the last war’s battles.  Just as the Maginot Line couldn’t stop the Third Reich’s panzers as they rolled through Belgium and into Northern France, it is not sufficient for a company to have out-of-date takeover defences.    Strategic initiative or power does not guarantee success to the bidder, as the United States learned militarily in Vietnam in the 1960’s and in Iraq in the 1990’s and 2000’s.  The parallel in business usually means relying too much on a large chequebook and first mover ‘advantage’ as Sir Philip Green discovered in 2004 when trying unsuccessfully to take over Marks & Spencer.

Merger activity can be likened to the Cold War arms race where one country’s development of new weapons stimulates the development of more sophisticated defensive systems, thus forcing the first country to make further advancements in their offensive weapons to remain ahead.  In the M&A arena, as acquiring companies have developed more sophisticated tools to make the acquisition of companies more certain, faster, easier, or less expensive, the advisors to the target companies have designed stronger defences for their clients.  These defences have then stimulated further activity to create better acquisition methods.  Just as with the arms race, the process becomes more complicated and expensive for all the players.

Knowledge of previous takeover techniques is therefore important for any bidder or target – and is a critical aspect in the application of business intelligence. 

The impact of military intelligence on many of the battles and wars of the 19th and 20th Century is well-known.  There’s much to be learned from them in applications to the current M&A deals.  Maybe is some of the ego and hubris of the architects of the deals in the current merger wave were eliminated – and a bit of considered thought was given to the lessons from the past not just in business – we could and would see an improvement in deal success.

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