Commentary

What next in M&A?

Posted on Wednesday, 25 November 2009. Filed under: Business Intelligence, Commentary, Mergers |

An excellent study was issued by IntraLinks and mergermarket a few weeks ago.  (You can find it here.) In August and September, they conducted a survey of experts in M&A – the people within each company responsible for deals.  The key finding:  almost two-thirds of those surveyed thought that the overall economic environment in their own regions would improve in 2010 (which is in distinct contrast to the economist, politician and journalist Cassandras who feel that we’re in for a double dip or even worse in 2010 and beyond).  Interestingly, 16% felt that this recovery was already underway and 8% that it would happen before year-end.  And in Europe, over 40% of respondents felt that corporate M&A would increase in the next year (and only 12% were pessimistic).

This is a significant finding, because the M&A market is driven at the corporate board and senior exec level by optimism (I would almost prefer to say ‘hubris’) and general business confidence.  The perception of an improving market is critical to the market’s turnaround prospects.

But caution amongst those surveyed is also noted in the study:  when asked about their own company’s activity, only about a third were optimistic or very optimistic.  (Yet only 20% were pessimistic and most (44%) were neutral.)  This is a valid cause for concern.  This would indicate that firms are reticent to commit their own money toward committed rapid expansion – and an M&A deal IS the way for a major existing firm to expand rapidly, even if most deals fail in the execution – despite those firms seeing the general business environment improving.

It was nice to see that 75% agree with me that the M&A market has already reached its inflexion point (see ‘M&A inflexion point: The turn to ‘up’ in activitywhich we published back in late September).

We’ve noted before on this site back in the summer (see ‘Distressed and bankrupt acquisitions: Should you do one of these deals?‘) that distressed acquisitions would be a major driver for some time to come.  This Intralinks / mergermarket survey confirmed that, as almost half of all respondents in Europe felt that distressed deals were the principal driver to the market for the next year (followed by 31% looking at market consolidation as the principal driver).  The overhang from the recession will still take a while to work through the M&A system, which is a wonderful mechanism to assist industry in self-correcting.

What are firms most expecting to do?  When respondents looked at what they would do in their own companies, they still feel that their M&A activity will be driven by finding undervalued targets (over 50% thought this).  If this is true, the growth in M&A activity might be faster, as a continuing stock market rise would make fewer such undervalued targets around.  Nicely, two-thirds of the companies DID expect to make an acquisition in the next 12 months.  Given the lead time to many of these strategic deals, the planning and even negotiations may be underway already.  This is support for the strong backlog of deals that many advisors note.

Overall corporate organisational restructurings were expected by 73% of respondents, and by a whopping 81% of those in Europe.  Europe really does appear to be the region that is pulling out of the recession with the greatest difficulties remaining.

I found most interesting the thoughts about which industries would see more consolidation, at least according to this survey.  There’s so much conjecture about where the next big deals will come, and each observer seems to have different feelings.  It’s nice to see a survey taking in the opinion of many experts, as this IntraLinks / mergermarket survey is.  Contrary to my own personal view, financial services was seen in Asia/Pacific and North America as being the most likely industry to see deal activity.  In Europe, the consumer area was suggested to be the most active.  Notably, pharmaceuticals, industrials & chemicals, the extractive industries and the technology industries that saw huge deals in 2009 were not in the top list.

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Where next in M&A? Who will be targeted now?

Posted on Thursday, 19 November 2009. Filed under: Commentary, Mergers |

According to Reuters a few months back on 10 September 2009 (‘Deal Talk — Rallying stock markets help accelerate M&A plans’), a report by Natixis predicts a higher incidence of M&A in sectors including pharmaceuticals, luxury goods, transport, IT software and oil services.  It said International Business Machines Corp could pursue SAP and lists AstraZeneca and Whitbread  among potential takeover targets.  It’s always fun to look at these predictions several months later.

It’s a dangerous game trying to predict specific deals.  I have seen a list of potential targets put together in the past and a year later they make fun reading for all their errors.  Note some recent predictions by Barron’s / Wall Street Journal, consultants such as KPMG and other journalists such as Money Morning.

Conventional wisdom seems to be that the pharmaceutical industry has played out earlier this year … at least for a while.  Likewise in financial services, barring any further credit crises!  (And in fact this industry will see some of the larger, bailed out firms restructuring and selling off large divisions, which may make the acquisition volumes in this sector appear large for a while yet;  but I don’t see any large mergers happening soon.)

So where’s the activity?  Rather than industry, look at regions.  The sub-continent and Asia will continue to be strong.  The US before Europe, as Europe seems to be lagging in the face of slower economic recovery.

On industries?  How about consumer products – driven by changes in consumer behaviour from pre-recession as they leave behind the higher-priced goods and look for low price linked with quality.  Professional services, with Tower Perrin and Watson Wyatt being a harbinger of things to come (although they currently stand alone in that sector so haven’t yet started the stampede toward consolidation that I predict will happen).

Any other thoughts?  Please help me here, as I know that my crystal ball is very foggy at the moment…

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M&A Valuation: The truth

Posted on Monday, 9 November 2009. Filed under: Commentary, Mergers |

M&A valuation is simple. Yet it often appears to be, in the words of Winston Churchill, ‘a riddle wrapped in a mystery inside an enigma…’

For the maths, all you need to be able to do is add, subtract, multiple and divide.  Oh, and to punch in some numbers to a relatively simple financial calculator that can do net present value (and therefore, if you were to do this the old fashion way, you would need to know how to take numbers to the power of).

But in most deals, this isn’t even needed.  What you do need is some research about recent deals, just as you would do if you were to sell your house.  If another house or two have sold recently on your street, then you should know a general price to sell your house – adjusted, if you can, for the number of bedrooms and bathrooms that your house has versus those other houses that sold.  And asking prices don’t matter:  what is critical is the actual price that was agreed.

You do need to know if there are also any significant changes in the market since those sales, or if you will be offering anything different (such as seller financing).  The deal terms will affect the price:  will you swap houses with the seller (similar in business to a stock offer) or will it be a cash transaction.

Your real estate agent will help you to do this pricing.  You probably buy and sell a house just a handful of times in a lifetime, but the estate agent will (in a good market) sell many houses in a month.  They will have a sixth sense about the market that no amateur could have.  Likewise the investment banker advising on a deal where the managing director will have done hundreds of deals by the time they reach the level where they are the trusted advisor to a company doing a merger or acquisition.  They will know best which other deals do look most similar to yours.

It therefore is somewhat a ‘mystery’, even if not complex.  ‘Art more than science’ as I explain in the chapter on valuation in the book Intelligent M&A:  Navigating the mergers and acquisitions minefield.

Aside from the aforementioned need to look at comparable deals and to consider the ‘art’ aspect of pricing, what else is important when pricing a public deal:

  1. Looking at the valuation from several different perspectives.  Although recent deals successfully conducted by similar companies in the same industry as yours will set the general level for your deal, usually boards of directors and shareholders require more than this to feel confident approving the deal.  Therefore, once the price has been agreed, it will be justified with other valuations (as many as possible) using other methods such as net present value (usually based on cash flows).  Of course, these other methods require a large number of assumptions (which cost of capital to use, which discount rate, etc), so again is actually more art than science.
  2. No two valuations will ever be the same if done by different firms, even if they are using the same base information.  This is because they will use different assumptions (see above) and weight the answers differently.
  3. There are two sides to every deal.  Each side will have created their own valuation, and you can be certain the seller will have a figure in mind which is higher than the buyer.  This leads to the next point.
  4. The final figure agreed is a result of the negotiation between the two (or more) parties.  The level of negotiating experience and the negotiating strength of each party (e.g., is either one being forced into the deal, or can they walk away if they wish).
  5. There will be several anchor points to the valuation.  The most important is the actual market capitalisation of the target company on the day the negotiations begins (sometimes this is structured as a price which is the average closing value of, say, the previous five or ten trading days).    The second is the 52-week high for the target company, as this is an easier sell for the target if the offer price is at a premium to any price in the previous year.  Both figures are anchor points only, and will have differing levels of importance if the market is declining or advancing during the negotiations.

Leave the very complex maths to the equity derivative traders and the designers of structured products — and for the back-up and support once the number’s been agreed (and you WILL need to justify the number for the board, shareholders and others).  M&A valuation is much more fun than that and can be done on a simple Excel spreadsheet.

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YouTube Video: M&A Deal successes and failures

Posted on Friday, 6 November 2009. Filed under: Business Intelligence, Commentary, Mergers |

On 8 October 2009, I was interviewed about why merger and acquisition deals fail or succeed.  Together with several other experts in the industry (including Paul Schiavone of Zurich Financial), the conversation is now available on YouTube here: M&A – successes and failures.  This clip is actually one of eight that are available on YouTube (‘M&A: What lessons have we learnt from the boom and bust?‘ and click on the M&A Directors Forum on the right-hand side of the page), if you want to see the entire conversation including discussions of M&A risks (especially a discussion about risks to directors and officers of the merging companies) and some forecasts about the M&A industry.

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Is there a link between the arrival of a new CEO and M&A deals?

Posted on Wednesday, 21 October 2009. Filed under: Commentary, Mergers |

A significant driver to M&A activity is the relatively short tenure of CEOs as chief executive.

At the M&A Research Centre at Cass Business School, we have been looking at the link between CEO changes and M&A deals, whether acquisitions or divestitures.  We aren’t ready yet with the final analysis (being part of a highly rated business school does mean that we have standards of research that exceed many others and therefore needs appropriate review before being released).  But as a teaser, we have found in the preliminary research that the typical CEO doing a big deal announces his first major acquisition in well under a year and, interestingly, that announcement usually precedes the announcement of his or her first big divestiture.  I certainly found it interesting that the CEO embarks on the first steps of his or her new vision before starting to unwind the previous CEO’s organisation!

Stay tuned here, as we expect to have these results soon.

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What’s happening to bid premiums?

Posted on Monday, 12 October 2009. Filed under: Commentary, Mergers |

A strange thing is happening to bid premiums, at least here in Europe.  They’re dropping.  Or is this strange?  Should we have expected it?

The facts, first:

  • According to Financial News Online (you can see the story here if you have a subscription, and apologies to those who don’t, as it is a subscription-only website) and based on information they used from Dealogic, the average bid premium in the Third Quarter 2009 was only 17.5%, down from 20.8% in the Second Quarter and 26.9% in the First Quarter 2009.  Last year’s Q3 premium was 27.0%.
  • Globally (and including these figures for Europe), the bid premium for the Third Quarter 2009 was higher than the European average, and came in at 23.5%, which was slightly higher than the 22.8% of the Second Quarter 2009, but well down on the 30.3% premium of the First Quarter.

What’s happening here?  The Financial News Online article quoted an analyst at UBS with an explanation that buyer and seller valuations were converging, and thus the lower premiums.  However, this can’t really explain the low premiums, as then we would expect these levels (high teens to low twenties) when the markets are more predictable and everyone — or almost everyone — seems to agree on the direction of the market.  But we don’t see these low levels typically.

I’ve discussed bid premiums before here in this blog (at a time when bid premiums were increasing) and in both my recently published books (Intelligent M&A:  Navigating the Mergers and Acquisitions Minefield and to a lesser degree in Surviving M&A:  How to make the most of your company being acquired).  A large number of studies have shown remarkable consistency in bid premiums over the past thirty years.  Premiums do average within a relatively narrow range from 20% to 40%, but are usually fairly tightly banded around the mid-point of 30%, although the last several years have been in the 28-30% range globally.  As there was some consistency as well in equity valuations during the past 30 years (usually, but not always, of course), if the UBS analyst’s explanation was correct, we should usually be seeing average bid premiums in the high teens to low 20’s.  But we don’t.

What I rather think is happening here is that we have the ’52 week high’ problem.  What’s this?  One figure that is very often used by boards, senior execs and advisors alike in determining a value for a target is the 52 week high in the share price.  Why?  Because if the offer is higher than the 52-week high (or close to it), then the board can recommend to the shareholders that it is a fair valuation.  This even if the share price is recently rising, but is even more the case if there’s been a decline but management have been saying the decline is temporary.  This recommendation is tough to make if the offer price is below the 52-week high because some (and maybe the most voiciferous) shareholders may consider the bid a ‘sell-out’.

With share prices so low in late 2008 and 2009, it’s easy to exceed the 52 week high with an offer these days.  Also, with a large number of economists and market analysts still predicting a second decline in the market (the second half of the so-called ‘W’ economy), it is not hard to agree a smaller premium over the 52 week high if you think it might go down again.  Also, in today’s market, the 52-week high is probably yesterday’s closing price!

Will this decline in average premiums continue?  I think not, as the market has not so fundamentally changed that we shouldn’t expect it to be much different than the long-term trend.

Now, one further question remains:  Why are premiums so much lower in Europe?  The simple answer may be the smaller number of deals and therefore a less reliable average in this very slow market for M&A deals.  Perhaps as well the lack of financial buyers to raise bid premiums and there’s also the general lack of debt in the market to finance these bids (although these are global issues as well).  But is there something else going on?

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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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M&A debt financing: R.I.P., or, like a phoenix, will it rise from the ashes to stalk companies again?

Posted on Thursday, 1 October 2009. Filed under: Commentary, Mergers |

I think ‘phoenix’ is a better analogy than the term Vanity Fair used recently in their exposé of Goldman Sachs when it was labelled a ‘vampire’.  Both rise from the dead.  And there may be those who do believe that financial sponsors (venture capitalists, hedge funds and private equity firms) suck the very lifeblood from the companies they purchase.  But in terms of the rise of debt financing for M&A deals, since much of this has historically supported the purchase of strategic acquisitions by corporate buyers, I prefer the term ‘phoenix’.

Just as the phoenix rises from it own ashes after it has (been) burned, the markets have come back to life (see our reporting of this here in our article entitled ‘Has the M&A market returned?  Can we start harvesting the green shoots already?’).

What is still missing, however, are the huge amounts of debt-financed M&A, and this may be missing for a while yet.  The private equity and venture capital industries are still largely absent from the announced deal flow (notwithstanding the recent purchase by a venture capital group of 65% of Skype from eBay), as are highly leveraged corporate deals.  With the debts markets fundamentally changed from two years ago and earlier, this will take further time to change, but change it will.  The disappearance of junk-bond financing at the end of the 80’s was a temporary phenomenon and the creative genius of investment bankers will again be applied to the debt markets in the future, even if not immediately and while the structured debt market remains under a microscope in the halls of Westminster and Washington.

Note as well that corporate buyers have been able to access the debt markets.  Does this mean that acquisition war chests being filled?  In the US, over a third more investment grade debt has been issued this year than last year at this time, and in Europe the figure is closer to 40%.

Some of this WILL be spent on acquisitions, and well over $1 trillion has been raised in just those two markets alone.  That’s a large war chest, even if most of the debt is being used for other purposes such as the need to strengthen balance sheets for the core business after all the hits those same companies took in this recession.

Is this another ‘green shoot’?

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M&A inflexion point: The turn to ‘up’ in activity

Posted on Tuesday, 22 September 2009. Filed under: Commentary, Mergers |

It’s dangerous calling a bottom to a market as you can be wrong and no one (and certainly not me) has a clear crystal ball, but doesn’t there certainly seem to be a marked turn in sentiment about the M&A market – and this is happening before everyone is ready to call the end to the recession or the stock market lows.  Disturbingly, I still talk to a number of economists who say we’re in a ‘fool’s rally’ or on the uptick in the first part of a ‘W’ cycle where we might see further lows before the economy really gets a sustained recovery – the so-called ‘double dip’.  Could the recent rise in M&A deals be the same?

Historically, the M&A markets have been driven largely by other factors, although still somewhat correlated to the overall economic cycle.   (It is important to remember that correlation is not necessarily causation).  Certainly there are parts of the M&A market that link closely to the economy:  one of these is the market for depressed companies (even those who declared bankruptcy or had gone into insolvency), and the M&A Research Centre at Cass Business School released a study of that market in June which did — correctly — indicate that the level of such deals does increase after a downturn.

As noted in another write-up here (see: Has the M&A market returned?  Green shoots turn into harvest time… ), the M&A market is showing strong signs of recovery, and not just in the aforementioned distressed deals.  Companies are more willing now to dust off the plans for restructuring and acquisition, whether in the confectionary (Kraft / Cadbury, and possibly other bidders), entertainment (Disney / Marvel), social networking (MySpace to buy iLike for an undisclosed amount) or oil field services industries (where Baker Hughes’ $5.5bn takeover of BJ Services is the largest oil services industry deal in more than a decade), and not just the pharmaceutical deals of earlier this year when the recovery appeared to many to be a one-industry upturn!

Note that some of these deals were likely to have been long in the making, and some may even be deals that were planned back in 2007 but then postponed when the market collapsed.  Kraft’s bid for Cadbury was most likely stimulated by Mars’ purchase of Wrigley in 2007 for $23 billion.  Disney has long been adding to it list of characters, and Spiderman and the The Hulk have existing strong franchises.  One can only imagine the new rides being planned now in Disneyland for Spiderman and the others.  And the Baker Hughes deal has its roots in a long-term consolidation of the energy extraction industries.

Suddenly there’s an urgency in the board room and in the executive suite:  will the general market recovery quickly raise the price of potential targets above the ‘bargain basement’ levels currently available?  Especially if the specific target has been wounded by the recession, especially financially and cannot launch as powerful a defence to remain independent.

This broader base – and now somewhat sustained – recovery does, in this writer’s opinion, represent the inflexion point when the M&A market turns up.  Do others see it the same?

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This wave of M&A deals: Who will be made redundant now?

Posted on Thursday, 17 September 2009. Filed under: Commentary, Mergers, Personal Planning for Mergers |

Strategic acquisitions are once again headline news with the announcement of a number of massive deals on both sides of the Atlantic (see our blog entry: ‘ Has the M&A market returned? Green shoots turn into harvest time…’).

Wait a few weeks or months, and the headlines will talk more about the people who will be (or are already) being made redundant from those deals. As naturally as dusk follows day and water flows downhill, the merger of two companies results in people being fired, plants and offices closed, product lines shut down or merged and one of the two CEOs (plus one of the two CFOs, HR heads, Senior VPs for IT, etc) taking ‘early retirement’ or departing ‘for personal reasons’ and later showing up at a lesser well-regarded competitor.

Is there anything you can do about this if you’re one of the people in a company where a merger has just been announced? Yes, there definitely is. There are actions you can take as you ask yourself the question: ‘What do I do now that my company’s being acquired?’

As reported on 2 September 2009 in The Times in a review of my new book just released in July (Surviving M&A: Make the most of your company being acquired),

‘The spectre of a merger is enough to send a chill down the spines of most employees — with good reason. Mergers always carry a risk of redundancies: on average, 10 to 15 per cent of employees across both organisations lose their jobs in a merger, sometimes as many as a third. Even those who keep their jobs are likely to be fearful of the change to the status quo.

‘In a book just published, Surviving M&A: Make the Most of Your Company Being Acquired by Scott Moeller, director of the M&A Research Centre at Cass Business School in London, explains how to improve your chances of keeping your job, based on 350 interviews with employees who have been through M&A deals. “The first question you need to ask yourself is: ‘Do you want to stay?’ ” Professor Moeller said. “A merger might be the best time to leave.”’

There are many steps you can take to stay, as discussed in that book, ranging from ‘showing off’ your (hopefully) excellent work (and going against the natural tendency to ‘stay low’ at a time like this), increasing your internal networking and even volunteering for the planning and transition teams.

If the M&A market has truly started growing again and if we really are therefore at the start of a new strong M&A wave, then many people will be faced with the need to ‘survive’ in a way that they hadn’t anticipated. Best to get started now with some planning, even if you feel your company isn’t at risk. Do you think most of the employees at Cadbury anticipated the need to plan an acquisition survival strategy in 2009? Or did Mavel’s employees expect that they’ll need superhuman skills to retain their jobs in 2010?

[Note: you can find a variation of this posting on my other blog, Surviving Mergers]

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