Commentary
M&A and the value of historical perspective
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.
Read Full Post | Make a Comment ( None so far )When will this merger wave end? Part 2
After writing the post last week on the end of this merger wave, I saw some comments on FT Alphaville from Morgan Stanley about now being the biggest market buying opportunity in a long time. Their analyst is very bullish — and this from the same Morgan Stanley analyst who urged ‘sell, sell, sell’ back in June, according to the Financial Times.
Look at two of the comments:
This final leg of the bull market will be characterized by all the things we have not seen yet this decade, including big retail buying of equities, big strategic M&A, an increase in corporate confidence leading to a capex boom and multiple expansion in equity markets.
We recommend investors start buying equities. The scenario we think is most likely is that this is a bull market correction, and that markets will go to new highs before this bull market finishes.
But there’s an acknowledgement that this not yet the consensus view.
We received a healthy amount of pushback on our call from mid-August to start buying equities again. Pushback is good. We know that we may well be on the right track with a call, when we get a lot of investor pushback. It means we are not consensual. Six to twelve months later, with the benefit of hindsight, we know we will look very silly or very right.
This links well with our comments here last week about the end of the merger wave (‘When Will This Merger Wave End?‘) wherein we suggested that some will see the recent downturn as a time to buy companies cheaper than they could have done so a few months ago. This does make sense — and especially if you believe Morgan Stanley’s analysts — if the deal was already being planned before the recent market declines and if paid with cash (not affected by the downturn) or with shares that had not plummetted as much as the target’s. Note that Morgan Stanley’s analyst also suggested, as we did, that strategic investments (and not the financial ones from hedge funds and private equity investors) could drive this next period of mergers.
Read Full Post | Make a Comment ( None so far )When will this merger wave end?
The hottest topic in M&A circles right now is when the current merger wave will end — and is it actually already in a downturn?
There are as many opinions about this as there are experts, of course. Several factors have combined to make this topical. Among others, I’d like to comment on three:
- Obviously, the market turmoil of the past several months — following the subprime credit market problems that have spilled over into the global economy generally — is a major cause of any downturn. But for those awash in cash (and there is still a lot of cash in corporates and funds), this only makes targets less expensive and could accelerate a deal that had been in the planning. For some, this is a time of buying opportunity. Also, many companies have not had their shares affected much by the downturn in the markets, and therefore they could still make an offer using stock, and perhaps for a target that is cheaper than it would have been several months ago. For example, a company wanting to buy into the financial services industry would find bargains today.
- The length of the current merger wave would indicate that it needs to come to an end sometime soon — at least if we look at the longevity of the merger waves since the late 1980’s. This merger wave started in 2003. We are therefore now four years into the current merger wave. The late 1980’s and late 1990’s merger waves did not last this long before turning down.
- At some point the acquisitions made in the past four years by the private equity, venture capital and hedge funds need to be monitized. These financial investors have been driving much of the acquisition activity since 2003. These firms are not long term investors in the same sense that a corporation acquiring another company for strategic reasons probably does not plan to exit that business in five to seven years to return funds to investors. In previous merger waves (with the possible exception of the LBO activity of the late 1980’s before the junk bond markets closed with the demise of Drexel Burnham), the level of activity at the peak was driven by strategic investment — or at least the companies making the purchases thought they were making strategic investments! The financial investors will need to sell their purchases at some point — and those who made purchases in 2003 and 2004 must be looking for exits soon. As these come to market, there could be a supply / demand imbalance.
Consensus — and my own opinion — would say that the activity in the second half of 2007 will be significantly lower than the first half’s volume (this is evident already with the deal volumes announced in the summer, but the summer is typically a slow period anyway). M&A dealmakers at the leading firms confirm this privately. Backlogs remain high and their staff are still working very long hours, but the backlog is no longer growing.
But don’t forget: the downturn does not necessarily spell the end of mergers. The lowest point in the down cycle in merger activity recently (2001) was still higher than the peak of merger activity in the 1980’s merger wave. This is likely to be the case this time around, too.
Read Full Post | Make a Comment ( 1 so far )Surviving a merger: Don’t think it can’t happen to you!
[Note: further information on surviving a merger can be found in my other blog: www.survivingmergers.com]
On 7 August, Management-Issues had an article based on the final chapter of our book (Intelligent M&A: Navigating the Mergers and Acquisitions Minefield). That chapter, entitled ‘How to Survive a Merger’ provides a number of strategies and tips on how to increase your chances of being retained in a company that has just merged, acquired, or been acquired.
The Management-Issues article was also entitled ‘How to survive a merger’; it concluded with a reminder about a particularly critical point, as advised by one of their thought leaders, Patricia Soldati. She’s put together a list of the top 10 smart ways to get ahead of ‘the corporate curve ball’, as she called it. The one noted in the article (and the first of her list of ten) was: ‘Don’t think it can’t happen to you.’ Said another way, that’s why everyone’s at risk, even the high performers.
During a merger or acquisition integration, all too often the decisions about who to retain and who to make redundant are made on political grounds or with an appalling lack of due diligence and ‘intelligence gathering’ on the part of those responsible for the hire/fire decisions. Even the top performers should be concerned that they may not be part of the post-merger organisation. Or perhaps especially, as they are high profile, likely to be highly paid (at least relative to many others in the organisation), and all too often difficult to manage.
P.S. Please do check out the blog noted above (Management-Issues); when you get there, type ‘mergers’ into their search engine and you will find a number of very useful articles on M&A topics, especially in the career and talent development areas.
Read Full Post | Make a Comment ( 1 so far )ABN AMRO directors demonstrate well how to survive a merger
Christmas may be over four months away, but if ABN AMRO is acquired by Barclays or the RBS consortium, it looks as if the current members of the ABN AMRO board will be able to place better Christmas presents under the tree this year.
As reported in The Times on 2 August 2007 (see the full article online here at TimesOnLine), if the Barclay’s bid goes through, the ABN AMRO supervisory board chairman, would see his pay increase from €113,000 (£76,000) a year to as much as £750,000 if he become chairman of the enlarged group. This is the level of compensation of Marcus Agius, Barclays’ present chairman. The Scottish bank doesn’t pay it’s chairman as well, by-the-way, as Sir Tom McKillop, the chairman of RBS since April 2006, receives a basic salary of £471,000. [Note on the foreign exchange: to translate the pounds into dollars, just double the pound amount.]
It’s not just the Chairman of the Board who benefits. ABN AMRO’s finance director would get £600,000 a year should he become chief administrative officer at the new company (up from about £444,000 at ABN AMRO) and would be eligible for a maximum bonus of £1.5 million next year (and a minimum of £600,000, not including other benefits such as a company car). According to the regulatory filings sourced by The Times for their story, the six ABN AMRO supervisory board members expected to join Barclays’ board if the bank wins control of ABN AMRO would see their pay jump from between €40,000 and €70,000 a year to between £76,000 and £200,000.
Although this appears to be a conflict of interest that would lead those directors to prefer the Barclays bid, The Times also made the following point about the RBS bid:
‘Sources … pointed out that RBS’s higher cash offer would give ABN’s board members a more immediate financial boost, based on their share options in the Dutch bank, than the salaries on the table at Barclays.’
In my earlier blog posting in June on Surviving a Merger, we questioned whether the ABN AMRO directors would be adding post-merger compensation agreements to their employment contracts. In this case, they probably didn’t need to re-write their contracts, but rather knew that the deal — no matter which bidding bank won — would result in large increases in their personal wealth. As we noted in that blog, ‘not a bad deal if you can get it.’
This is just one more example of the personal planning that goes into surviving an acquisition and the application of good intelligence: in this case, doing the due diligence to determine how the acquirer’s board was compensated and then negotiating to keep the terms of the acquirer, not the target (despite one stated goal of the deal being to reduce expenses).
Such compensation increases need not be limited to board members. Intelligence can be gathered about positions at just about every level in the two merging companies before any deal is consummated. Such information is essential to have BEFORE making a decision whether to stay or take a redundancy package.
Read Full Post | Make a Comment ( None so far )Book Review: Financial Times, 1 August 2007
The Financial Times published a long (almost 700 word) review of the book, Intelligent M&A: Navigating the Mergers and Acquisitions Minefield, on 1 August 2007. The review was entitled ‘Giving diligence its due’, and noted in summary that ‘the authors have strong points to make on any activity [M&A] in which thoroughness and common sense are sometimes lacking.’
The full review can be seen on FT.com at http://www.ft.com/cms/s/352c1298-403f-11dc-9d0c-0000779fd2ac,_i_rssPage=f38b85e4-51de-11da-9ca0-0000779e2340.html.
Read Full Post | Make a Comment ( 1 so far )Harry Potter and the ABN AMRO takeover battle
I expect that not many of the readers of this weblog were up at 5:30am on 30 July watching World Business Report on the BBC (or it’s rebroadcasts in the UK later that morning and globally on BBC World). So you did miss my discussion on the ABN AMRO takeover battle.
Later that morning, ABN AMRO’s board was to decide whether it would continue to recommend the Barclay’s offer over the RBS (Royal Bank of Scotland) consortium’s offer. The RBS team (which included Banco Santander of Spain and Fortis of Belgium) still had the higher offer, despite Barclay’s attempts over the prior days to sweeten their offer.
But back to Harry Potter. I did say on the air that it was likely that the ABN board would hedge their bets and provide no recommendation — that is, letting the shareholders decide without guidance from them. Here’s where the Harry Potter reference occurs: ‘No longer can the ABN AMRO board consider the RBS consortium as the Death Eaters from the Harry Potter books, and Barclays as The Order of the Phoenix good guys. They must consider both to be equally satisfactory acquirers.’
The BBC presenter, Sally Bundock, didn’t miss a beat when she responded with the question, ‘Well, I guess that means that it isn’t going to be a Fight to the Death.’
Hopefully, the interchange did wake some people up who were otherwise not paying attention to the business news.
But on a totally serious note, this decision by the ABN board was not without precident. Just remember the Manchester United board who had done everything they could to stop Malcolm Glazer from purchasing the team, but since his offer had been so attractive, they couldn’t in all fairness tell shareholders that they should reject the offer. So the Manchester United board reluctantly stood on the fence in 2005, just as the ABN board did on Monday.
Read Full Post | Make a Comment ( 1 so far )The link between Sports and M&A
I had the great pleasure of being invited by the founder of EA Consulting, Steve Robson, to speak at a wonderful summer’s event in the London docklands on Thursday evening, July 19. There were two speakers, and clearly the most popular would be Sean Fitzpartick, who captained the New Zealand All-Blacks rugby team during a legendary period of the 1990’s.
I did speak first, talking naturally about M&A. I was introduced by a former colleague at Deutsche Bank, Roger Bates, who’s now a director at EA Consulting. He kindly noted my new book on M&A (on which this blog is based).
Although I had only a half hour to speak, I gave some highlights of many of the topics that I have been recently researching, some covered in that book: 1) the recent success of deals in this merger wave (since 2004 more deals have been successful in the short-term, which is a distinct change from earlier merger waves), 2) how serial acquirers tend to do worse than more focussed acquirers, 3) the need for attention to the post-merger cultural integration issues at every stage in the deal, 4) the role of business intelligence (including the importance of gathering information and even the weak signals from the environment) and 5) the importance of communication especially after the deal’s been announced. It was all very timely, being a day when Macy’s, Sainsbury’s, Jaguar, Nestle, Pepsi and many other companies were in the news with merger deals of their own, either as target or bidder. Examples during the talk came from Morgan Stanley / Dean Witter, HP / Compaq, Verisign / Jamba, Texas Pacific / Gate Gourmet, Oracle, Santander / Abbey National and the hottest deal of the day, ABN AMRO with either Barclays or RBS.
Sean’s talk was about how he came to be captain of one of the world’s leading rugby teams in a country where that sport was clearly THE national sport and where he quoted the New Zealand prime minister telling him (and I paraphrase here): ‘Sean, when you win, I would prefer to be in your position than mine, but when the All-Blacks lose, I couldn’t imagine a worse job.’
Sean didn’t try to draw any parallels with the world of mergers and acquisitions. Yet the juxtaposition of his talk and mine probably led a number of people in the large audience to tie the two together. He spoke of the need for teamwork, pride and identifying new ways of doing something (in his case, rugby, of course). He descibed leadership from the perspective of a captain who led his team to the finals of the 1995 World Cup. He described good sportsmanship and gave examples where there was none. He showed how excellence can inspire. He could have been talking about a CEO leading a company.
There were two other very relevant points he made about international rugby, but that could have been said about M&A deals: 1) that there’s ever only one winner (and in any merger or acquisition, eventually one side ‘wins’) and 2) there are no equals (that is, there is no such thing as a ‘merger of equals’).
Needless to say, although he spoke longer than promised, no one left the room.
Read Full Post | Make a Comment ( None so far )Book Review: Daily Express, 24 July 2007
Another book review of Intelligent M&A: Navigating the Mergers & Acquisitions Minefield appeared in the British national press on 24 July 2007, in the Daily Express and their on-line newswire, Daily Star:
Read Full Post | Make a Comment ( None so far )PROFESSOR Scott Moeller, of Cass Business School, London, has written a guide to takeovers, called Intelligent M&A: Navigating the Mergers and Acquisitions Minefield.
Warning that most managers of target companies leave within three years, his top tips include: becoming part of merger planning; not assuming your boss will take care of you; and, most drastic of all, not going on holiday.
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Intelligent Mergers 
Northern Rock as an Acquisition Candidate
Posted on Sunday, 16 September 2007. Filed under: Commentary, Mergers |
Lots of speculation now in the press about Northern Rock, the beleagered mortgage bank in the UK. Not surprising, of course, now that they’ve been knocked down by the market and bailed out by the Bank of England. With a corresponding plummeting stock price, too.
It can be expected that the vultures would begin to circle, and fast: looking for the parts of Northern Rock that may be available. Any large UK bank would be remiss if it didn’t have a team looking at Northern Rock’s assets. The same is true of foreign banks wishing to have a UK presence or wanting to expand an existing UK presence (why does the acquisitive Grupo Santander, the purchaser of Abbey National in 2004, come to mind, and even though they are somewhat distracted by their part in the expected purchase of ABN AMRO?).
Inherently, the UK mortgage market is attractive: it will remain highly cyclical (especially with housing prices at a peak), but is fundamentally strong for a buyer willing to invest for the long term.
Banks that have been in trouble can prove to be very attractive to the right purchaser. Just because a bank is tainted doesn’t mean that there is no value. In fact, Merrill Lynch posted a ‘buy’ recommendation on Northern Rock’s stock last week AFTER the Bank of England bail-out (but after the share price decline, of course), as reported in FT Alphaville.
Remember as well the purchase of Bankers Trust by Deutsche Bank in 1999 for $10.1 billion (after BT had regulatory and legal problems with its derivatives business dating back to 1994), or ING’s purchase of Barings Brothers for £1.00 after Nick Leeson’s $1.6 billion fraud in 1995. With the benefit of hindsight, both those deals turned out to have been strategically critical to the current competitive positioning of the two acquirers. Someone can be expected to do the same with Northern Rock.
Read Full Post | Make a Comment ( None so far )