19 November 2008
Failure is an option: an investor
s guide to M&A
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Perhaps the most egregious evidence of corporate management delusion can be found in therealm of M&A. A quite outstanding 93% of managers think the M&A
adds value, butobjective measures show only around 30% of deals actually add value. So scepticism shouldbe the default option for investors when it comes to M&A deals. However, several factors limitthe degree of value destruction investors may face. The ‘perfect’ deal from an investor’sperspective is a cheap private firm with good governance as a target, with an acquirermotivated by increasing focus and cost-cutting synergies, financed by cash at a time of lowM&A activity.
The mismatch between corporate managers
view of their M&A success and theobjective measure is truly mind-blowing. Some 93% of managers think their M&A addsvalue, whereas the data shows that less than one in three deals actually do. Either corporatemanagers simply don
t conduct post-deal analysis, or they ignore the results. Witness thedelusional statement of DaimlerChrysler
s CEO concerning the disastrous deal, that themerger was
an absolutely perfect strategy
The two most common rationales for M&A deals are to
take advantage of synergies
. Unfortunately both of these motives can be a source of major problems forcorporates. A survey by KPMG found that only 30% of firms conducted a robust analysis ofthe expected synergies! Investors should then be especially wary of deals based on
, as apparently nearly 70% of mergers fail to achieve the expected levelof revenue synergies.
The dream deal from an investor
s perspective is a cheap firm with good governance as atarget, with an acquirer motivated by increasing focus and cost-cutting synergies. Themanagers of the firm would be paid based on operational performance. The deal would becash financed and occur at a time of generally cheap markets and low M&A activity levels.
In contrast the deal from hell would involve an expensive public firm with poorgovernance as the target. The acquirer would be motivated by empire buildingdiversification, effectively addicted to repeated M&A. The rationale would be based on a
of revenue synergies. Such a deal would be financed purely via stock, and themanagers would receive a completion bonus. This deal would also occur when the marketwas generally expensive and the M&A was the flavour of the month.