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A business merger marriage made in good negotiations

01 MARRY FOR RIGHT REASONS

Fortune 1000 acquisition types over time

Indus­tries are being trans­formed by the third indus­tri­al rev­o­lu­tion. Dig­i­tal tech­nol­o­gy is con­tin­u­ing to advance effi­cien­cy, ser­vice and to cre­ate new ways of work­ing. For some firms this is the world into which they were born. For oth­ers, this world has been thrust upon them.

Con­sul­tan­cy PwC’s 2017 M&A Inte­gra­tion Sur­vey found that among the merg­er and acqui­si­tion activ­i­ty it stud­ied, trans­for­ma­tion deals, involv­ing one firm acquir­ing new mar­kets, chan­nels, prod­ucts or oper­a­tions, which will be trans­for­ma­tion­al to the com­bined enti­ty, made up 54 per cent of all deals in 2016, up from 29 per cent in 2010.

At the same time the pro­por­tion of deals that involved an acqui­si­tion of a small­er firm to pick up prod­ucts or tech­nol­o­gy, or con­sol­i­da­tion between sim­i­lar com­pa­nies, both fell.

Among M&A pro­fes­sion­als, the polar­i­sa­tion of growth and decline in these types of deals is not so clear­ly defined.

“M&A is very cycli­cal,” says Richard Cran­field, glob­al chair­man of cor­po­rate prac­tice and co-head of the finan­cial insti­tu­tions group at law firm Allen & Overy. “What we have seen from 2013 through to the cur­rent peri­od is an uptick in M&A in most sec­tors glob­al­ly. The dri­vers may be trans­for­ma­tion­al – new mar­kets, new prod­ucts – or just buy­ing growth and we have been in an envi­ron­ment of low growth. Anec­do­tal­ly, busi­ness-as-usu­al M&A, such as bolt-ons, is still going on; the big­ger deals are just pro­por­tion­ate­ly more promi­nent.”

Typ­i­cal­ly, the activ­i­ty seen with­in one sec­tor can­not be gen­er­alised to oth­er busi­ness areas. There are indus­try-spe­cif­ic changes that dri­ve firms to inte­grate. For exam­ple, among asset man­agers there is a pres­sure on fees lead­ing them to merge their oper­a­tions to gain scale and increase syn­er­gies. Large-scale brew­ers have been con­sol­i­dat­ing for years, but a new raft of small-scale brew­eries has cre­at­ed a dif­fer­ent com­pet­i­tive dynam­ic.

With­in many oth­er sec­tors, dig­i­tal-first com­pa­nies, which have new mod­els for run­ning long­stand­ing busi­ness­es, are being acquired to move busi­ness mod­els into the 21st cen­tu­ry.

David Lom­er, co-head of Europe, Mid­dle East and Africa (EMEA) M&A at invest­ment bank J.P. Mor­gan says: “There are a num­ber of recent deals, involv­ing com­pa­nies which are look­ing to diver­si­fy because of new econ­o­my oppor­tu­ni­ties, where they feel they should begin to buy expo­sure to a sep­a­rate, new busi­ness mod­el.”

02 UNITING TWO FAMILIES

Chart on speed of integration in mergers and acquisitions

Like par­ents who remar­ry, the chief exec­u­tives of merg­ing com­pa­nies may feel a great attrac­tion, but strug­gle to get their imme­di­ate depen­dents onboard with the idea. To inte­grate the two firms is tra­di­tion­al­ly seen as crit­i­cal to the suc­cess of the deal.

PwC found that the speed of inte­gra­tion has increased across sev­er­al mea­sures since 2013, with lead­er­ship align­ment, stake­hold­er com­mu­ni­ca­tion objec­tives and the inte­gra­tion of oper­at­ing poli­cies increas­ing­ly tak­ing less than six months to achieve. The achieve­ment can be cred­it­ed to the evo­lu­tion of skillsets and tech­nol­o­gy appli­ca­tion, often with­in the acquir­ers them­selves.

Allen & Overy’s Mr Cran­field says: “Most of the larg­er clients we deal with have ded­i­cat­ed teams for M&A, and inte­gra­tion and strat­e­gy. The in-house teams have a mas­sive advan­tage of under­stand­ing the busi­ness, where­as the exter­nal advis­ers tend to be more gen­er­al­ists by back­ground, with a few notable excep­tions.”

The board of a firm might see a strate­gic tar­get and think it makes sense to com­bine because togeth­er the firms will cre­ate more val­ue than they would alone. That is ulti­mate­ly quan­ti­fied through syn­er­gies which the teams involved must under­stand.

“Work­ing back­wards, you need to have a real sense of where syn­er­gies are going to come from,” says J.P. Morgan’s Mr Lom­er. “That requires you to pre­fig­ure how you want a busi­ness to be run. Each indi­vid­ual role may impact small finan­cial sums, but what they por­tend is a vision for how the firm will be run over­all. Whether you have five divi­sions or three, which cur­ren­cy you will report in, whether you slice sales by geog­ra­phy or by prod­uct? They have very impor­tant cul­tur­al, strate­gic and per­son­nel con­se­quences.”

To make this assess­ment, you need to under­stand the “body lan­guage” of the trans­ac­tion and deter­mine if is a straight merg­er, where both sides will share in those syn­er­gies, or whether it is a takeover and the acquir­er is going to pay a pre­mi­um. Accord­ing to the prin­ci­ples of val­ue-match­ing, the acquir­er should not be pay­ing more of a pre­mi­um than they are going to realise via syn­er­gies. When pay­ing a pre­mi­um, this must be very clear­ly jus­ti­fied to investors.

In some cas­es, par­tic­u­lar­ly those involv­ing an evo­lu­tion of the busi­ness mod­el, it is imper­a­tive that the larg­er part­ner does not smoth­er the small­er.

Jana Mer­cereau, head of cor­po­rate M&A at invest­ment con­sul­tan­cy Willis Tow­ers Wat­son, says: “There are dif­fer­ent lev­els to which the firms can inte­grate. A busi­ness can wor­ry that it might kill what it buys. In these cir­cum­stances, we are hear­ing more and more that firms are con­sid­er­ing not ful­ly inte­grat­ing a busi­ness or inte­grat­ing over the longer term. The ques­tion is then how to achieve syn­er­gies under that mod­el?”

How­ev­er that is planned, it must be explained to investors and stake­hold­ers, to ensure com­mu­ni­ca­tion is clear and oper­a­tional lines are well drawn.

“Com­pa­nies and their advis­ers need to be trans­par­ent on the strate­gic ratio­nale and the quan­tifi­ca­tion of syn­er­gies that are going to be pro­cured for the good of share­hold­ers, and for the good of the tar­get share­hold­ers,” says Mr Lom­er.

03 AFTER THE WEDDING

Acquisition integration team getting to work earlier chart

Some firms are ser­i­al acquir­ers; oth­ers will be man­ag­ing a deal for the first time. What expe­ri­ence has taught those who repeat the process is the val­ue of prepa­ra­tion for after the event. Yet even they can get it wrong.

“There are exam­ples where peo­ple, who have done a lot of M&A, have real­ly failed to address some basic inte­gra­tion issues,” warns Allen & Overy’s Mr Cran­field. “You find a num­ber of finan­cial insti­tu­tions, who have done a lot of M&A, that are run­ning mul­ti­ple lega­cy IT plat­forms because they have nev­er been able to get across the hur­dle of mov­ing from one plat­form to anoth­er.”

The good news is that PwC found the point at which inte­gra­tion teams were becom­ing involved in deals had moved from the due dili­gence phase of the process to ear­li­er stages and the pro­por­tion get­ting involved only after the deal had closed had halved. That sug­gests senior man­age­ment are increas­ing­ly aware of the val­ue that post-deal plan­ning cre­ates.

“You have to have that vision to artic­u­late how you are going to cre­ate X hun­dred mil­lion pounds of syn­er­gy out of a merg­er,” J.P. Morgan’s Mr Lom­er notes. “That also works back to the need for your post-deal inte­gra­tion strat­e­gy to be well planned.”

This can be par­tic­u­lar­ly impor­tant in trans­for­ma­tion­al deals where the process of inte­gra­tion is not sim­ply to absorb the acquired busi­ness and merge the two enti­ties.

Ms Mer­cereau at Willis Tow­ers Wat­son says: “There are acquir­ers that want to learn from the small­er busi­ness and so look at inte­gra­tion in the longer run, almost reverse osmo­sis, to change their own busi­ness mod­el.”

In its 2016 Insights research note enti­tled Post-merg­er inte­gra­tion, con­sul­tan­cy KPMG found that ear­li­er plan­ning for the post-deal sit­u­a­tion was the thing most exec­u­tives would change about a deal they had made, with aware­ness of cul­tur­al dif­fer­ences, bet­ter over­all plan­ning and appoint­ing a post-deal team also rank­ing high­ly.

Acquisition integration changes for the future chart

“We tend to hear organ­i­sa­tions wish­ing they had paid more atten­tion to the cul­tur­al dif­fer­ences that exist between par­ties and the risks asso­ci­at­ed with the deal,” says Hilary Lon­don, EMEA gen­er­al man­ag­er at vir­tu­al data room provider Mer­rill Cor­po­ra­tion. “As a result com­pa­nies are spend­ing more time and mon­ey on sce­nario plan­ning and improv­ing their busi­ness process man­age­ment.”

It is a mis­take to con­sid­er such aspects “soft” ele­ments, which are quite apart from finan­cial ones; the costs of not engag­ing with the post-deal process can be very real.

“Even the main steps that have to take place between announce­ment and clos­ing can be frus­trat­ed by a lack of clar­i­ty on what the new group is going to look like and how it’s going to be run,” says Mr Lom­er. “Prop­er plan­ning for post-deal inte­gra­tion is key to the com­ple­tion of a suc­cess­ful merg­er and max­imis­ing val­ue.”