The international statistics for value creation through mergers and acquisitions are not good. KPMG’s 2003 Global Survey revealed that 66 percent of M&As last year failed to add value. While this percentage had improved from KPMG’s 1999 survey where 83 percent failed to add value, it is still sobering statistic for any director considering acquisitions as part of business strategy.
But are these figures relevant to New Zealand? The answer is categorically “yes”.
Just look, for example, at the statistically difficult geographic expansion-based acquisitions by New Zealand companies. The high profile examples include Air New Zealand’s acquisition of Ansett (negative); The Warehouse’s acquisition of Crazy Clints and Silly Sollys (currently negative); and Pacific Retail Group’s acquisition of Powerhouse (work in progress). On the other hand, there are some deals which are statistically more successful. For instance, the “industry roll-ups” which include Westpac’s acquisition of Trustbank, Ballance’s acquisition of Southfert, and Fulton Hogan’s many acquisitions of regional roading businesses. Add to that ANZ’s acquisition of National Bank (work in progress).
Perhaps it is case of damned if you do, damned if you don’t!
If deals so often fail to create value, it may be tempting to think that part of the solution is to do fewer deals. Unfortunately, for many leading companies that simply is not an option: industry convergence, deregulation, technological change and host of other factors can create conditions in which mergers or acquisitions become strategic necessity. Even today’s challenging market conditions do not detract from these requirements: many drivers are immune to the fluctuations of the capital markets. On the other hand, completing deal which does not deliver the anticipated benefits will have damaging consequences – not only for the health of the existing business, but for the reputation of the board and management.
Board’s role
When it comes to acquisitions boards should act the conductor and not the musicians. Boards should focus on creating an environment that will ensure:
1. Management identifies and pursues the right deals; and
2. The right deals are well executed.
To do the right deals, the board and management must combine strategic vision with tactical dexterity – the former without the latter means crucial opportunities are missed. good starting point in minimising the execution risks is to put the spotlight on the critical junctures in the transaction that affect the potential for value creation. Deal execution encompasses number of these, including price negotiation and the implementation of the integration programme. But they only matter if it is the right deal that is being done.
Ask and evaluate
Boards should rigorously challenge the strategic and commercial logic behind the deal identification processes as well as the subsequent deal proposals. Boards, and non-executive directors in particular, must demand sufficient information to allow them to effectively discharge their obligations. However they must also avoid the temptation to become “black hats”, being totally risk averse and blocking bold, but well-considered deals.
Where the right deal has been identified, and the case is well proved, the management team will make the board’s decision easier and may even find it easier to attract funding in today’s capital markets.
Doing the right deal is the number-one issue. KPMG’s survey provided some strong indicators that the approach adopted to identifying the right deals makes difference to the outcome.
Of the deals that enhanced value in the survey, 67 percent came about as result of management identifying suitable target in advance. Only 28 percent resulted from management reacting to opportunities that had not been planned for, or from situations where the targeting strategy was not clear.
The survey suggests that management teams that are proactive and identify targets and make an approach are more likely to enhance value than those that patiently wait for the target to be put on the block by the owners. But either approach is more likely to succeed than relying on opportunism.
Taking both the strategic objectives of the deal and the method of deal identification together, the deals most likely to enhance value were those where companies were seeking to protect or increase market share, and where management identified suitable target and approached it. In the research, 64 percent of the companies that fall into this category enhanced value, well above the 34 percent of deals enhancing value overall.
However, the survey suggests that the method of identifying the target is more likely to affect whether the deal enhances value than the overriding objective behind getting involved in the first place. None of the deals enhanced value where management was principally motivated by market-share considerations and relied on opportunism for it to come about.
The board must put in place an appropriate framework for management to identify the right deals. This framework must reflect the strategic vision for the business, which should have clearly set out the objectives for getting involved in any mergers and acquisitions.
Acquisition objectives tend to fall into four broad categories:
• Geographic expansion;
• Protect or increase market share growth through mergers of equals;
• Protect or increase market share growth through industry roll-ups; and
• Business stream diversification.
Many international studies suggest industry roll-ups produce higher success rates. This is partly because with roll-up, the acquirer already understands the market and the business of the target.
Key questions
What board needs to know to evaluate potential deal boils down to four key concerns:
• Are we paying the right price?
• Can value be created through the transaction?
• Can the businesses be successfully integrated?
• What are the risks involved?
There is, however, an alarming array of issues and risks that can undermine the answers to these questions. But in our experience, three factors tend not to be given enough attention. These include:
• Whether the cultural integration issues are understood and can be managed;
• Whether the theoretical synergy benefits can actually be delivered in practice; and
• Whether the management team got caught up in the deal’s own momentum?
Deals often fail to create value because they underestimate the practical human integration factors, because the assumed synergy benefits turn out to be either mirage or too difficult to implement, or because the overwhelming effort put into the transaction process is geared to overcoming problems and achieving positive outcome, and therefore “to pull out at late stage” becomes difficult. Thus, deals get done under the weight of their own momentum.
The question arises whether synergy benefits are indeed achievable in practice or simply mirage?
Again, KPMG’s survey evaluated two synergy-related issues: what expectations did companies have for post-deal synergies; and the extent to which reality confirmed or belied these expectations.
For all deals, the survey compared expected major benefits from the three main areas of synergy: savings in operational and overhead costs and revenue benefits. The results were as follows:
For each deal covered by the survey, respondents were then asked to grade their progress in the three synergy areas according to the following scale: fully achieved (10); partly achieved (5); too early to tell (2.5); and not achieved (0).
The aggregate mean score for the three main synergy areas was as follows:
This result indicates that operational cost reductions can be achieved more easily – or faster – than revenue benefits.
On the other hand, the survey showed that it is the revenue benefits that are more critical in concluding that the deal will enhance value. This table shows how success in achieving s
