Commentary
Value for money: M&A fee income related to business intelligence
It was difficult to miss the headlines last week about fee income for M&A deals. The Financial Times reported that the advisory fees paid to investment bankers was $10.7 billion for the first six months of the year. This is 20% higher than last year’s first six months. Not surprising, either, given the deal volumes also running. For comparison, note that the low point in this millenium was in 2003 when the first half of the year yielded ‘only’ $3.0 billion in M&A fees.
There’s been talk of pressure on the amount that dealmakers can bill for deals, especially as the deals get larger. This appears to be true, as the value of deals has increased by 50% this year (first half 2007 vs first half 2006: $2.8 trillion vs $1.4 trillion). But this is as much as case of their being more mega-deals, where the fee level is smaller as a percentage of the deal. Note that the total fees earned by investment banks in the first half of the year is just under 0.4% of the announced deals.
The value for money comes in what is provided by the investment banks in this advisory work. We’ve been addressing ‘business intelligence’ in this weblog, and would suggest that this could be something that companies seek more from their advisors, often from consultants other than the investment banks:
Read Full Post | Make a Comment ( 2 so far )Despite their expense,studies conducted at Cass Business School have shown that the inclusion of a financial advisor is good for buyers because the advisors increase shareholder wealth by finding bidders or targets with greater value, providing advice on premiums, identifying liability concerns (including demonstrating to shareholders that they did the most they could to achieve the best deal for the shareholders), providing local knowledge in the increasingly complex cross-border deals and because of their competence demonstrate a higher probability of deal successful completion.
Each of the advisors can play an important intelligence role, although often each advisor’s actual role is limited to their traditional functions. Accountants check and produce the numbers, but if asked, can provide important information about the industry and other companies in the market. Investment banks may drive the overall process and be responsible for the valuation, pricing, and negotiation, but are also important reservoirs of information about the market, and competitors. They have Chinese walls that operate to keep information from one deal being used on another, but the general experience of the senior investment bankers themselves is often enough to provide a client with information that otherwise could not be obtained.
Both large, global consultants and small boutique advisors are renowned for their ability to seek out non-public information about client and customers. There is a demonstrated willingness of employees, suppliers, and clients to provide information for no other reason than having been asked. Often it is difficult for a company to ask this information directly, because they would need to identify who is asking. Consultants, on the other hand, do not need to disclose their clients unless asked – and frequently are just not asked! Why people are so willing to divulge confidential information to experts is not always clear, but what is clear is that many will do so for no other reason than that someone has asked them.
Some specialist consultants focus specificially on due diligence work and intelligence gathering. One or several steps up from the detectives made popular by Hollywood, these consultants can be masters at finding information that is otherwise difficult to obtain. Although there are those that operate on the wrong side of generally acceptable ethical and moral principals (granting that these may differ by culture, country, and individual), there is also much that can be done for targets or bidders by these investigative firms on the totally right side of the law. Selection of such consultants is therefore a key factor in successfully obtaining the information required.
Surviving a Merger
[Note: further information on surviving a merger can be found in my other blog: www.survivingmergers.com]
If your company is merging, acquiring, or (the worst situation, unless you’re the owner and negotiated the deal) being acquired, should you stay or leave? This is another area where scenario planning and business intelligence is critical . These topics can therefore apply to individual managers and employees as well as the company itself. Most of this blog has been addressing mergers from the corporate perspective, but that doesn’t even matter if you haven’t looked out for #1.
The first question to ask oneself: ‘Can the merger can actually serve as a jump start to a new career?’ In answering this question, stay focussed on career goals. Do you want to remain with the new company, or is this a perfect opportunity to change? The merger can often be used as the excuse to move. Fortunately as well, prospective employers will assume that every merger has the consequence that good people leave (and the market often assumes that the best people are the ones who leave first as they have the most external career opportunities and are the people who don’t want to waste time to wait to see if they are retained).
Perhaps there will be an opportunity to take an attractive redundancy or termination package. Redundancy packages can often be higher immediately after a merger than at other times because the company has taken financial provisions for such redundancies and/or you will be part of a larger group being made redundant; most acquirers also want to avoid negative publicity during a merger. A redundancy package would be especially attractive if you were considering leaving anyway, as many companies not only pay for you to leave, but offer at the same time outplacement counselling, re-training, relocation benefits, or other benefits. Most employees made redundant are also considered ‘good leavers’ and thus keep many of the benefits that they had accrued during their career, such as health care and other insurances, long-term incentive options, and even deferred cash bonuses.
Of relevance today to the fight by the Royal Bank of Scotland and Barclay’s bank for ABN AMRO is the acquisition of Bankers Trust, acquired in 1999 by Deutsche Bank in a transaction that was, at the time, the largest purchase of a US bank by a foreign company. Of course, the two bids for ABN AMRO dwarf that deal from almost a decade ago, but there are some interesting lessons.
In 1998, the senior management of Bankers Trust, the eighth largest bank in the United States, knew that it would be acquired. The principal banking regulator in the US, the Federal Reserve Board, had told Bankers Trust management that they needed to take steps to improve their capital base and reduce risks. They were told to look for a strong partner.
Given that management knew that they would likely be acquired, preparations were made by many in the bank to reduce their personal financial risks. There was some history to this preparation, as disclosed by the equity research analysts at Sanford Bernstein.
In 1997, Bankers Trust had acquired Alex Brown, the oldest investment bank in the United States. At the time of acquisition, it became known that the top twenty executives of Alex Brown had signed employment contracts and that Bankers Trust had earmarked nearly $300 million over three years for incentive compensation of a group of several hundred Alex Brown staff members.
Given this history of retention payments and the expectation that they were to be acquired, it is not surprising that when Deutsche Bank acquired Bankers Trust just under two years later, Bloomberg reported that the Chairman of Bankers Trust signed a contract worth $55 million over five years plus $14 million over three years in deferred compensation, but it was rumored that his severance package was $100 million when he ultimately left Deutsche Bank only a month after the deal closed in June 1999. The Bankers Trust CFO also left, reputedly with another sizeable package.
It was not only the very top staff who benefited from these retention and redundancy payments. At the time of the acquisition, Deutsche Bank announced that it expected to take a charge of DM 2 billion ($1.2 million) to cover severance payments and to set aside DM 700 million (almost $420 million) over three years for retention payments to retain 200 key staff.
Not a bad deal if you can plan for it in advance! One wonders how many managers in ABN AMRO have had such packages hastily added to their contracts. We may find out soon, or we may never know. Are there any other such examples?
Read Full Post | Make a Comment ( 1 so far )What is success in an M&A Deal?
There is a fair amount of discussion about when a deal can be judged to be a success or a failure, and even how to determine success.
Our own research has shown that the first six months following a deal’s closing is an excellent predictor of longer term success – the latter being defined as a period from three to five years following the deal closing. Much after that, and the effect of the deal will have dissipated or be too mixed with other changes at the company, in the industry, or in the economy as a whole.
But what is success? We like to consider shareholder performance as the ultimate criteria, but we acknowledge that there can be many different measures and stock performance is a very Anglo-American concept ignoring such factors such as local economy impact, workers and their families, suppliers and related companies (upstream and downstream), etc. However, it is simple to measure (try isolating and measuring worker or supplier impact across deals, countries, and time!) and easily understood. Thus, it has its appeal.
We discuss this further in our forthcoming book where we look as well at comparisons between experienced and inexperienced acquirers. The experienced acquirers don’t fare well, by-the-way:
Read Full Post | Make a Comment ( 2 so far )Prior experience may not be a predictor of success, although some studies have shown that acquirers do better when making an acquisition that is similar to deals they have done previously. Here again the need for specific intelligence is central. Many studies have shown that relatively inexperienced acquirers might inappropriately apply generalised acquisition experience to dissimilar acquisitions. The more sophisticated acquirers would appropriately differentiate between their acquisitions. For example, VeriSign appears to have failed with its 2004 purchase of Jamba AG despite having made 17 other acquisitions in the prior six years, many in related internet businesses. Intelligence cannot, therefore, be taken for granted.
One challenge in trying to determine success of an acquisition lies in how to define ‘success.’ Is it shareholder value? If so, over what period? Or should one look at sales growth? The ability to retain key customers? Employee retention? Cost savings? And how would the company or companies have performed if they had not merged? Perhaps as some have suggested, success should be defined by the publicised goals of the merging companies themselves and then measured against achieving those stated objectives.
More on the need for Scenario Planning
I’ve received a lot of e-mail traffic on the topic of scenario planning and the M&A process — and some postings on this blog — with much of the discussion focussed on the agreement that use of this technique (originally from the military) would yield better results for M&A practitioners. Please see the earlier posting on this topic (M&A Frenzy and the Need for Scenario Planning). There are also some excellent websites (shown in the Blogroll at the bottom of this page) which cover this topic well in other fields.
This need not be done in the traditional sense of ‘scenario planning’ which is relatively formulaic. Think perhaps about the following:
Because humans find it difficult to calculate probability rationally, a company’s intelligence function can use the power of the bookmaker. Daymon Runyan, paraphrasing Ecclesiastes, said that ‘The race might not be to the swift, nor the battle to the strong but that’s where the smart money goes.’ By using trading (e.g., http://www.intrade.com) and/or spread-betting (e.g., http://www.cantorindex.com) sites, a company can see how the world really views the likelihood of specific events and, significantly, how their own company is viewed by the market.
In 2003, an insensitive but smart analyst at DARPA (the Pentagon’s Defense Advance Research Projects Agency) proposed setting up a speculative futures market on terrorist attacks. Notwithstanding the obvious temptation for real terrorists, the idea was sound. Getting people to bet real money on future events focuses the thinking of those people and saves the inordinate costs of expensive computer models. There really is wisdom in crowds.
Companies could actually create their own internal speculative markets to leverage the knowledge contained within the organization. By allowing employees to bet on specific questions (using company money for real returns), an efficient market for ideas can be created. More real, more relevant, and more fun than a ‘suggestions box.’ Apparently, the pharmaceutical company, Eli Lilly, has used this approach to predict the success of drug research with remarkable accuracy, and there is no reason to doubt its applicability to the M&A market as well.
Just think how this might have helped Multiplex – the Australian developers of England’s Wembley Stadium, which was delivered late and with large penalties (over A$200 million). The result of their problems was the announcement today that they would be purchased by a Canadian infrastructure specialist. Or another example: Did Barclay’s (or, for that matter, ABN AMRO) do adequate scenario planning in the lead-up to their proposed merger? Certainly, one very likely scenario would be the entrance of another bidder, in this case, a formidable one (Royal Bank of Scotland who joined forces with Santander Bank and Fortis – this forming a British / Spanish / Belgium consortium). And if that wasn’t enough for Barclays, they now have Atticus Capital challenging them on the deal, saying that they do not want Barclays to enter into a bidding war. Hedge funds and their like are becoming more activist – just look how they brought down both the CEO and Chairman of the Deutsche Börse when they targeted the London Stock Exchange in 2005. All very predictable, and not even with 20/20 hindsight but rather with scenario planning.
Read Full Post | Make a Comment ( 2 so far )Beating the Odds is very Difficult Even for the Experienced
The central challenge today in M&A is how to beat the odds that are stacked against a company being successful in M&A deals.
This is even more difficult when you see, as we have in the past few days, some of the excesses of the M&A market — especially as the current merger wave begins to show it’s age. Note, for example, the high leverage of deals and the levels of junk bonds (see the Wall Street Journal’s excellent blog (http://blogs.wsj.com/deals/2007/06/05/another-day-another-ma-record-broken/) which has a story from yesterday entitled: Another Day, Another M&A Record Broken). Note especially that it is KKR that is issuing the extremely high level of junk bonds in this most recent deal. Few have more experience than they do in deal-making.
We have found through our research that even serial acquirers such as GE, Cisco and others are not giving their shareholders better returns than their industry competitors that don’t do deals frequently.
No matter how measured, a fair degree of consistency has emerged in the results of studies that have examined M&A ‘success’ through the Twentieth Century. Essentially all of the studies found that well over half of all mergers and acquisitions should never have taken place because they did not succeed by whatever definition of success used. Many studies found that only 30% to 40% were successful. Yet most companies that have grown into global giants used M&A as part of their growth strategy.This paradox raises the following questions:
· Can a company become a large global player without having made acquisitions?
· Is organic growth sufficient to become a leading global player?
The challenge for management is to reconcile the low odds of deal success with the need to incorporate acquisitions or mergers into their growth strategy. Figure out how to beat the odds and be successful in takeovers. This is where business intelligence techniques are essential.
One wonders, as the Wall Street Journal did as well, whether KKR and it’s advisors will be left holding the bag due to another deal gone bad. Let’s hope they’ve used all the intelligence at their disposal.
Read Full Post | Make a Comment ( 4 so far )Merger Waves, Arms Races, and the Cold War
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.
Read Full Post | Make a Comment ( None so far )Current deals, ‘Winner’s Curse’, and the true cost of M&A transactions
The news today is again dominated in the business press in London with the offers being made for ABN Amro Bank by the Royal Bank of Scotland (RBS) and Barclays. This brings to mind the concept of ‘winner’s curse’ in M&A. Studies have shown that in M&A auctions, such as this one has come with the competitive bidding by both RBS and Barclays, the ‘winner’ is in fact the firm that does not get the target, because the bidding process leads to overpayment.
What can be said in this case is that both bidders have apparently done their homework. They have done the due diligence necessary to determine what they would do with the assets once purchased. The RBS consortium will split ABN up more than Barclays will, but even so, claims fewer ABN jobs will be lost. Nevertheless, the prices being paid are tremendous — with RBS’ bid yesterday coming in at €71 billion, a very nice premium over Barclays’ bid of €64.5 billion. Barclays’ bid is an all-share offer, whereas the RBS offer is mostly cash.
Where the ‘winner’s curse’ comes into play is in the costs that are not in those headline figures. As we write in our book Intelligent M&A, there’s more than just the price of the deal and the transaction costs (such as the investment banks, auditors, lawyers, due diligence specialists, and so on).
In assessing the economics of a deal, the shareholders and other analysts will look to see that the gains from the merger will exceed the costs. In an M&A deal, the costs can be significant. Naturally, there is the expense of the target company: how much the target shareholders will need to be paid to part with their holdings, which includes the acquisition premium. Then, there are the ‘known’ and relatively easily calculated expenses such as the fees paid to the investment bankers, lawyers, accountants, and other professional advisors and the expenses of taking over the new company, including debt borrowed. Opportunity costs and post-merger integration costs … are almost impossible to quantify accurately even with the best use of business intelligence. Nevertheless, a complete financial analysis should include an attempt to bracket these costs, perhaps by providing a range of possible values.
Most observers miss the ‘Opportunity Costs’ such as management distraction, loss of sales force focus and the resulting negative reaction of customers and clients, and competitive responses both on the product side and in poaching staff. The boards and senior management of RBS and Barclays have clearly expended a lot of time on these deals, and not with client or developing new business. The often underestimated costs of post-merger integration include redundancy payments, training, system integration costs, rebranding costs, communication expenses, etc.
Winner’s Curse!
Read Full Post | Make a Comment ( 1 so far )M&A Frenzy and the need for Scenario Planning
This past week has seen many articles about the continue growth of the M&A market (see, for example, the Financial Times for a discussion of European M&A, or other articles on the Asian market). It is difficult to walk down the street in the City of London or Canary Wharf and not overhear people talking about M&A deals. The higher equity prices in the market generally are attributed to the continuing number of deals being announced. The trend is global. It makes front page news — and in fact, some days the front page of the Financial Times has all three or four of its major stories being M&A deals (this happened on Wednesday of this week with the only exception being a picture of the charred ruins of the clipper ship Cutty Sark).
It make me, and many of those I speak with, wonder about the hype. Yet the M&A market continues to defy anyone’s predictions of when it will end. I thought in 2005 that it might be the peak, but 2006 certainly exceeded my expectations. My foundation is in history (I actually have two degrees from university in history and only one in business). History DOES repeat itself. At some point the market will begin to decline. But just as the trough between the 5th merger wave (late 1990’s) and the current one (started in 2003) was higher than the peak of the 4th merger wave (late 1980’s — and for anyone else who lived through that merger wave, we thought it was going to be a record level of deals for a VERY long time to come), so the downturn that will happen sometime may still be at higher levels than we think. M&A is here to stay. One cannot be global as a company and not do deals (although there are some notable exceptions, the few number of such exceptions does prove the rule).
And I hear that Goldman Sachs is predicting a 30 year bull market. I do think that different perspectives and forecasts are critical in planning what to do at this point in the M&A market.
Where can military and business intelligence techniques fit into this? In our book, we discuss the need for scenario planning — a key military intelligence tool. One section of our book, we discuss scenario planning as follows:
The first thing to realize is that the process of scenario planning is the consequence of a culture obsessed by the future – its risks and opportunities. At Samsung, for example, scenario planning is enshrined in what is referred to as their VIP House (Value Innovation Programme). The house is where the Samsung product managers, researchers, engineers, and assorted others ‘live’ while solving problems and/or planning projects. The reason that this house is considered so important is because Samsung believes that 70-80% of ‘quality, cost, and delivery time is determined in the initial stages of product development.’ Samsung’s CEO and Vice Chairman, Jong-Young Yun, is clear about one thing, ‘the race for survival in this world is not to the strongest but to the most adaptive.’ Like the tsunami tribes and animals, he views the business world as an environment of existential threat and potential disaster. The VIP house provides his disaster avoidance radar.
Another company famed for its extensive usage of scenario planning is Shell. Using their own jargon, Shell’s scenarios team are tasked to ‘help charter routes across three interrelated levels; the Jet Stream level of long-term trends, uncertainties, and forces; the Weather Systems that reflect specific features of key regions; and the Turbulence of market level factors.’ To get a feel for the Jet Stream level, go to www.shell.com/scenarios. Whether a scenario planning function is structured as a Samsung hot house or a highly centralised Shell-like group, the point is to monitor simultaneously the past, present, and future. In all instances in addition to the expected, it is essential to attempt to imagine the unimaginable. From those imaginings, scenarios must be built such that when a ‘new’ scenario presents itself, it is recognisable.
I wonder what Samsung and Shell are thinking now about future deals…
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The need for business intelligence and what we mean by it…
As we have written in our forthcoming book, there is an urgent need to improve the M&A process through the use of business intelligence techniques. Just to be clear at the outset as to what we mean by the term ‘business intelligence’, we show here part of the introduction to that book:
Read Full Post | Make a Comment ( 6 so far )In the realm of corporate activity, mergers and acquisitions (‘M&A’) have played a defining role in shaping the corporate landscape over the past century. Given the breath-taking pace at which M&A transactions transform corporations and the sheer scope and scale of modern-day deals, it is no surprise that the work of investment banks and corporate finance boutiques alike has come to dominate the headlines. Yet, for all the bravura of M&A, such transactions also carry a high degree of risk as a result of the premiums paid and the organizational upheaval caused. The lament heard after most failed deals is that certain elements were not known, indeed it will often be claimed that they could not have been known. Any intelligence specialist will tell you that all things are knowable — it is merely a question of how badly you want to know and how hard you are prepared to work to acquire that informationexplain that everything can be known.
For definitional clarity, when we talk about `business intelligence’ (often called ‘competitive intelligence,’ particularly in the US) we are referring to the `business intelligence function’ not the hard and soft information systems which have identified themselves as `b systems.’ The function itself (sometimes called ‘corporate intelligence’) is a vital aid to managerial decision making in any industry and at any time. By furnishing companies and other organizations alike with detailed and timely information about the commercial and competitive environment, the ‘art’ of intelligence enables companies to determine more accurately where they have been, to orientate themselves in the present, and to plan for the future.
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Intelligent Mergers 
Book Review: The Times, Saturday, 21 July 2007
Posted on Saturday, 21 July 2007. Filed under: Books on Intelligent M&A, Commentary, Mergers |
A brief review of Intelligent M&A: Navigating the Mergers and Acquisitions Minefield appeared in the print and on-line versions of The Times on Saturday, 21 July 2007. You can see the on-line version of the book review here. An excerpt is as follows:
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