Latepost Acquisition Advice: Big Bargain Or Proficient Deal?

HP is i of a multitude of companies that has overpaid on acquisitions, in addition to similar those other companies, it cannot claim that it lacked exterior advice in addition to guidance. In fact, HP paid $30.1 1000000 inwards advisory fees to Perella Weinberg in addition to Barclay’s Capital for guidance on how much to pay for Autonomy in addition to whether the bargain made sense. So why did they non spot the accounting manipulation or recognize that synergy would live elusive? In general, why, if acquiring firms pay thus much for "expert" advice, utilization thus many deals become bad?

Conflicting roles: The answer tin live seen inwards an imperfect analogy. Asking an investment banker whether a bargain makes feel is analogous to scream for a plastic surgeon whether at that topographic point is anything incorrect amongst your face. After all, if either party says “No”, they stimulate got no trouble concern to transact in addition to no revenues to generate. Allowing the dealmaker (the investment banker) to likewise live the bargain analyst (provide advice on whether the bargain is a goodness deal) is a recipe for bad deals in addition to nosotros stimulate got no shortage of those. The solution is elementary inwards the abstract but transitioning to it may live difficult. The bargain making has to live separated from the bargain analysis. Put differently, investment bankers should utilization what they utilization best, which is to care the mechanics of the deal, in addition to live paid for the service. There should live a 3rd party, amongst absolutely no stake inwards the deal's success or failure, whose labor it is to assess the bargain to encounter if it makes sense, amongst compensation provided merely for that service. Why has this mutual feel alter non happened yet? First, every bit I noted inwards my final post, many acquiring companies desire affirmation of decisions that they stimulate got already made (to acquire), rather than goodness advice. Second, the same entity (say, Goldman Sachs or Morgan Stanley) cannot sideslip dorsum in addition to forth betwixt beingness a bargain maker on i bargain in addition to a bargain analyst on another, since at that topographic point volition live a shared in addition to collusive involvement thus inwards shirking the bargain analyst role. You would demand credible entities whose main trouble concern is valuation/appraisal in addition to non bargain making.

The bargain table: In many businesses, companies stair out their success based upon marketplace portion in addition to revenues. M&A bankers are no dissimilar in addition to their success is oft measured past times where they autumn inwards the bargain tabular array rankings. Here, for instance, is the latest bargain tabular array from Bloomberg, listing the exceed bankers for M&A globally, inwards 2011 in addition to 2012.

Note that the rankings are based upon the dollar value of deals done, in addition to that at that topographic point are no extra columns for goodness deals in addition to bad deals. Consequently, a banker who does a $11 billion bad bargain volition live ranked to a greater extent than highly than i who does a $4 billion goodness deal. There are 3 implications that follow.

When a large bargain surfaces, bankers draw upward to live part of that deal, willing to demeanour nearly whatever cost to larn involved.
The bigger the deal, the worse the advice yous are probable to get; the conflict of involvement that nosotros mentioned before gets magnified every bit the bargain gets larger.
Individual bankers volition live judged on their capacity to larn deals done in addition to non on the character of their bargain advice or valuation expertise. Thus, it is non surprising that the biggest stars inwards the M&A firmament are the dealmakers. In fact, it is interesting that Perella Weinberg is listed every bit i of HP”s advisors on the Autonomy deal. Joe Perella, co-founder of the theatre has a long history inwards the acquisition trouble concern that goes dorsum nearly iv decades to his seat every bit co-head of M&A at First Boston inwards the 1970s. He left the firm, amongst the other co-hear of the First Boston M&A team, (Bid 'em up) Bruce Wasserstein, to create Wasserstein Perella, a atomic number 82 musician inwards the roughly of the biggest acquisitions of the 1980s. He returned to caput M&A at Morgan Stanley for a few years before leaving i time again to constitute Perella Weinberg. Through all the years, it seems to me that the singular science that he possesses is non his capacity to value target companies but that he tin larn whatever bargain done.

So what tin nosotros utilization to alter this focus on bargain making? We utilization stimulate got to start out past times changing the means nosotros compensate bankers inwards deals but nosotros likewise stimulate got to follow upward on deals. I would similar to encounter roughly entity generate bargain tables that rails the largest deals from 5 years agone in addition to study how much those deals stimulate got made (or lost) for stockholders inwards the acquiring firms. It would live interesting to encounter the listing of the exceed 10 bankers inwards damage of value creating in addition to value destructive deals.

Compensation: The 3rd constituent that contributes to the deterioration of bargain advice is the means inwards which the bargain advisors larn compensated for their services. In most deals, the bargain advisors larn paid for getting the bargain done in addition to at that topographic point is no accountability for bargain performance. Neither Perella Weinberg nor Barclay’s Capital volition stimulate got to render whatever of the advisory fees that they received for the HP/Autonomy deal, fifty-fifty though the advice that was offered was atrocious. I retrieve that at that topographic point is a solution, fifty-fifty inside the existing system. Rather than necktie the entire fee to getting the bargain done, a meaning portion should live contingent on post-merger performance. Thus, if the acquiring firm’s stock cost or profitability fails to rhythm out the peer group’s stock cost surgical operation or profitability inwards the years (two, 3 or five) that follow, the bankers volition either non larn a large portion of their fee or live forced to render a proportion of the fees that they stimulate got already been paid. Bankers volition complain that this puts them at the mercy of macroeconomic shifts in addition to mismanagement of the post-merger integration, but those are variables that they should live considering when assessing whether a bargain should larn done.

In closing, though, acquiring firms are quick to blame bankers for bad advice. As I noted inwards my final post, I retrieve that the ultimate blame has to prevarication amongst the exceed managers of the acquiring firms. No acquirer is always forced to utilization an acquisition at the incorrect cost in addition to if they chose to utilization so, they should live held responsible.

The Acquisition Series
HP's bargain from hell: The mark-it-up in addition to write-it-down 2 step
Acquisition Archives: Winners in addition to Losers
Acquisition Hubris: Over confident CEOs in addition to Compliant Boards
Acquisition Advice: Big bargain or goodness deal?
Acquisition Accounting I: Accretive (Dilutive) Deals tin live bad (good) deals
Acquisition Accounting II: Goodwill, to a greater extent than plug than asset

Acquisition Alchemy: Creating value from deals