Latepost Acquisition Alchemy: Creating Value From Deals
By now, it should live no undercover that I am non a fan of acquisition-driven growth. I conduct maintain argued inwards my previous posts that acquirers oftentimes pay also much, that many acquisitions are driven yesteryear CEO egos in addition to overconfidence, that M&A bankers are also conflicted to give unbiased advise, that accretive deals tin live value-destructive in addition to that the presence or damage of goodwill provides no useful information to investors.
Am I beingness also negative inwards my portrayal? Possibly. After all, at that spot are companies conduct maintain grown successfully amongst acquisitions, at to the lowest degree over some periods. In constructing a value-creating acquisition strategy, it is worth looking at what these successful acquirers portion inwards common.
Go where the odds favor you
While acquisitions inwards the aggregate, in addition to on average, conduct maintain non been proficient tidings for acquirers, at that spot are some subsets of acquisitions where acquiring companionship stockholders exercise much better.
a. Small versus Large acquisitions: Acquiring smaller companies seems to furnish much amend odds of success than mergers of equals. In the graph below, for instance, conduct maintain a await at the returns to acquirers some acquisition announcements of targets, amongst the targets classified based upon their size inwards marketplace cap terms, relative to the acquiring company. Markets are much to a greater extent than welcoming of little deals than large ones, justifiably wary of the integration costs in addition to culture clashes that mergers of equal inevitably bring.
Note that the biggest successes are amongst target firms that are small, amongst marketplace caps, less than 6% of the acquiring firm's marketplace cap in addition to returns instruct progressively worse every bit target theatre size increases.
b. Cash versus Stock: There is no consensus finding here, but looking at the figure above, paying amongst stock seems to deliver higher returns for little acquisitions, but paying amongst cash seems deliver amend returns amongst larger acquisitions. Perhaps, target companionship stockholders recognize the propensity of acquiring companies to pay amongst "overpriced' stock in addition to demand higher premiums...
c. Private versus Public targets: Acquirers who focus on buying privately owned businesses rather than world companies earn much to a greater extent than positive returns, by in addition to large because they don’t conduct maintain to pay premiums over a marketplace cost that already incorporates much of what they are paying for. In fact, looking at the figure below, the real best targets are divisions of world companies, oftentimes divested at create out basement prices yesteryear CEOs who desire to instruct rid of high profile failures. (Quick: Someone brand an offering to HP to purchase Autonomy for a dollar…. They may conduct maintain you lot upward on the offering only to instruct rid of the albatross...)
d. Cost synergies versus growth synergies: While it is proficient to live skeptical virtually promised synergies inwards acquisitions, companies seems to live much amend at delivering cost synergies than growth synergies, every bit evidenced inwards the figure below. This phenomenon may reverberate the fact that cost synergies are easier to conception for in addition to deliver than amorphous growth synergies.
Do your valuation, earlier you lot brand your offer... in addition to value all the "good" stuff
I believe that the biggest occupation amongst an acquisition based strategy remains the cost paid. If you lot pay also much for a target company, no thing how good matched that companionship may live to yours, you lot conduct maintain a bad deal. The primal to a successful acquisition strategy in addition to therefore becomes doing your homework inwards valuing non exclusively the target companionship but all of the other goodies that you lot encounter coming amongst the deal, command in addition to synergy beingness foremost. It is also critical that this valuation non live outsourced to bankers or consultants. They may live good intentioned, but it is non their coin that is beingness spent. Here is the three-step procedure for valuing an acquisition:
Each of these steps volition demand estimates in addition to forecasts, but that is truthful for whatsoever investment. In fact, I would wager that many companies pass far to a greater extent than fourth dimension making these assessments amongst little uppercase budgeting projects than they exercise amongst multi-billion dollar acquisitions. Managers volition also claim that synergy is also qualitative in addition to fuzzy to value, which would live fine if they were paying amongst qualitative dollars, but they are not. If you lot are interested, I exercise conduct maintain to a greater extent than to tell inwards my papers on the value of control in addition to the value of synergy. You tin also download the spreadsheets that I conduct maintain to value control in addition to synergy.
Get a portion of the spoils
Just because you lot conduct maintain valued command in addition to synergy inwards a merger does non hateful that you lot should offering to pay that amount every bit a premium. If you lot do, target companionship stockholders walk away amongst the spoils of your “hard” piece of work (in delivering command in addition to synergy value) in addition to your stockholders instruct nothing. Thus, a primal measuring inwards acquisition is negotiating for a fair portion of both the command in addition to synergy values. That fair portion volition depend upon how integral the acquiring companionship is to generating these additional values; the to a greater extent than of import the travel of the acquirer, the greater the portion of the premium it should demand. In fact, if bankers are truthful create out makers, this is where they should earn their fees.
Have a conception to deliver the proficient stuff
While many acquirers seem to thought getting the create out done every bit the climax of the process, it is actually the showtime of a long (and oftentimes tricky) procedure of integration. Good acquirers non exclusively conduct maintain clear plans for what they volition exercise afterward the acquisition but they also laid aside the resources (people, funds) to pose those plans into operation. When mergers work, it is almost never yesteryear accident. The KPMG surveys of global mergers over the years conduct maintain emphasized this planning in addition to post-deal integration every bit a primal factor to create out success.
Hold determination makers accountable
If you lot desire acquisitions to deliver value, you lot conduct maintain to concur everyone inwards the procedure accountable. I would start amongst the managers inwards the acquiring theatre but I would also include the bankers in addition to consultants to the acquiring company. In particular, I intend that management compensation in addition to create out fees should conduct maintain clawback provisions that are conditioned on the performance of the merged theatre (in stock prices in addition to profitability).
Be create to walk away
You conduct maintain to live willing to walk away from a deal, if it does non brand feel for you. In also many deals, the objective for the acquiring theatre becomes getting the create out done, rather than getting a proficient create out done. In add-on to staying disciplined, i.e., non going dorsum in addition to fudging the valuation numbers to brand a create out await good, at that spot is some other uncomplicated dominion that acquirers should consider following. If you lot instruct into a bidding state of war over a target firm, walk away. In fact, spell you lot may nominally live labeled the “loser” inwards the bidding war, it is far amend for your stockholders to live the loser rather than the winner, as evidenced yesteryear the figure below:
If beingness tagged a loser delivers a 65% differential render over beingness tagged a winner, every bit a stockholder, I volition conduct maintain the loser tag.
Bottom line
Creating value amongst an acquisition-based growth strategy is hard to do, but non impossible. It requires discipline, planning in addition to follow through, in addition to few companies seem to conduct maintain the capacity to deliver.
The Acquisition Series
HP's create out 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 create out or proficient deal?
Acquisition Accounting I: Accretive (Dilutive) Deals tin live bad (good) deals
Acquisition Accounting II: Goodwill, to a greater extent than plug than asset
Am I beingness also negative inwards my portrayal? Possibly. After all, at that spot are companies conduct maintain grown successfully amongst acquisitions, at to the lowest degree over some periods. In constructing a value-creating acquisition strategy, it is worth looking at what these successful acquirers portion inwards common.
Go where the odds favor you
While acquisitions inwards the aggregate, in addition to on average, conduct maintain non been proficient tidings for acquirers, at that spot are some subsets of acquisitions where acquiring companionship stockholders exercise much better.
a. Small versus Large acquisitions: Acquiring smaller companies seems to furnish much amend odds of success than mergers of equals. In the graph below, for instance, conduct maintain a await at the returns to acquirers some acquisition announcements of targets, amongst the targets classified based upon their size inwards marketplace cap terms, relative to the acquiring company. Markets are much to a greater extent than welcoming of little deals than large ones, justifiably wary of the integration costs in addition to culture clashes that mergers of equal inevitably bring.
b. Cash versus Stock: There is no consensus finding here, but looking at the figure above, paying amongst stock seems to deliver higher returns for little acquisitions, but paying amongst cash seems deliver amend returns amongst larger acquisitions. Perhaps, target companionship stockholders recognize the propensity of acquiring companies to pay amongst "overpriced' stock in addition to demand higher premiums...
c. Private versus Public targets: Acquirers who focus on buying privately owned businesses rather than world companies earn much to a greater extent than positive returns, by in addition to large because they don’t conduct maintain to pay premiums over a marketplace cost that already incorporates much of what they are paying for. In fact, looking at the figure below, the real best targets are divisions of world companies, oftentimes divested at create out basement prices yesteryear CEOs who desire to instruct rid of high profile failures. (Quick: Someone brand an offering to HP to purchase Autonomy for a dollar…. They may conduct maintain you lot upward on the offering only to instruct rid of the albatross...)
d. Cost synergies versus growth synergies: While it is proficient to live skeptical virtually promised synergies inwards acquisitions, companies seems to live much amend at delivering cost synergies than growth synergies, every bit evidenced inwards the figure below. This phenomenon may reverberate the fact that cost synergies are easier to conception for in addition to deliver than amorphous growth synergies.
Do your valuation, earlier you lot brand your offer... in addition to value all the "good" stuff
I believe that the biggest occupation amongst an acquisition based strategy remains the cost paid. If you lot pay also much for a target company, no thing how good matched that companionship may live to yours, you lot conduct maintain a bad deal. The primal to a successful acquisition strategy in addition to therefore becomes doing your homework inwards valuing non exclusively the target companionship but all of the other goodies that you lot encounter coming amongst the deal, command in addition to synergy beingness foremost. It is also critical that this valuation non live outsourced to bankers or consultants. They may live good intentioned, but it is non their coin that is beingness spent. Here is the three-step procedure for valuing an acquisition:
Step 3: Value Synergy | Value the combined theatre amongst synergy built in. This may include a. H5N1 higher growth charge per unit of measurement inwards revenues: growth synergy b. Higher operating margins, because of economies of scale c. Lower taxes, because of taxation benefits: tax synergy d. Lower cost of debt: financing synergy e. Higher debt ratio because of lower risk: debt capacity Subtract the value of the target theatre (with command premium) + value of the bidding theatre (pre-acquisition). This is the value of the synergy. |
Step 2: Control Premium | Value the companionship every bit if optimally managed. This volition commonly hateful that investment, financing in addition to dividend policy volition live altered: Investment Policy: Higher returns on projects in addition to divesting unproductive projects. Financing Policy: Choose a financing mix/ type that reduces your cost of capital Dividend Policy: Return unused cash, particularly if you lot are punished for it. Value of command = Target companionship value amongst optimal management - Status quo target companionship value from measuring 1. |
Step 1: Status Quo Value (Target firm) | Value the target companionship every bit is, amongst the existing management’s investment, financing in addition to dividend policy (even if it is optimal or efficient) |
Each of these steps volition demand estimates in addition to forecasts, but that is truthful for whatsoever investment. In fact, I would wager that many companies pass far to a greater extent than fourth dimension making these assessments amongst little uppercase budgeting projects than they exercise amongst multi-billion dollar acquisitions. Managers volition also claim that synergy is also qualitative in addition to fuzzy to value, which would live fine if they were paying amongst qualitative dollars, but they are not. If you lot are interested, I exercise conduct maintain to a greater extent than to tell inwards my papers on the value of control in addition to the value of synergy. You tin also download the spreadsheets that I conduct maintain to value control in addition to synergy.
Get a portion of the spoils
Just because you lot conduct maintain valued command in addition to synergy inwards a merger does non hateful that you lot should offering to pay that amount every bit a premium. If you lot do, target companionship stockholders walk away amongst the spoils of your “hard” piece of work (in delivering command in addition to synergy value) in addition to your stockholders instruct nothing. Thus, a primal measuring inwards acquisition is negotiating for a fair portion of both the command in addition to synergy values. That fair portion volition depend upon how integral the acquiring companionship is to generating these additional values; the to a greater extent than of import the travel of the acquirer, the greater the portion of the premium it should demand. In fact, if bankers are truthful create out makers, this is where they should earn their fees.
Have a conception to deliver the proficient stuff
While many acquirers seem to thought getting the create out done every bit the climax of the process, it is actually the showtime of a long (and oftentimes tricky) procedure of integration. Good acquirers non exclusively conduct maintain clear plans for what they volition exercise afterward the acquisition but they also laid aside the resources (people, funds) to pose those plans into operation. When mergers work, it is almost never yesteryear accident. The KPMG surveys of global mergers over the years conduct maintain emphasized this planning in addition to post-deal integration every bit a primal factor to create out success.
Hold determination makers accountable
If you lot desire acquisitions to deliver value, you lot conduct maintain to concur everyone inwards the procedure accountable. I would start amongst the managers inwards the acquiring theatre but I would also include the bankers in addition to consultants to the acquiring company. In particular, I intend that management compensation in addition to create out fees should conduct maintain clawback provisions that are conditioned on the performance of the merged theatre (in stock prices in addition to profitability).
Be create to walk away
You conduct maintain to live willing to walk away from a deal, if it does non brand feel for you. In also many deals, the objective for the acquiring theatre becomes getting the create out done, rather than getting a proficient create out done. In add-on to staying disciplined, i.e., non going dorsum in addition to fudging the valuation numbers to brand a create out await good, at that spot is some other uncomplicated dominion that acquirers should consider following. If you lot instruct into a bidding state of war over a target firm, walk away. In fact, spell you lot may nominally live labeled the “loser” inwards the bidding war, it is far amend for your stockholders to live the loser rather than the winner, as evidenced yesteryear the figure below:
Bottom line
Creating value amongst an acquisition-based growth strategy is hard to do, but non impossible. It requires discipline, planning in addition to follow through, in addition to few companies seem to conduct maintain the capacity to deliver.
The Acquisition Series
HP's create out 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 create out or proficient deal?
Acquisition Accounting I: Accretive (Dilutive) Deals tin live bad (good) deals
Acquisition Accounting II: Goodwill, to a greater extent than plug than asset
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