M&A Learning

Curve Study
WW VP Meeting Presentation
Contacts: Sam Rovit
Bill Bonadio
Michael Casaburi
John Lee
Adrian Jones
May 2002
Copyright© 2001 Bain & Company, Inc.
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Deal activity is expected to increase after
recent downturn
YOY change in net announcements ($US)

100%

50

-50

-100
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

LearningCurveWWVP
2
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Everyone agrees M&A success is rare

Success rate

40%
37%
34% 33% 33%
30%
30
25%
23%
20%
20
17%

10

0 MMC C&L Sirower Bain Mitchell CFO McKinsey PA KPMG

Madison Survey

LearningCurveWWVP
3
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Over 40% of deals destroy value

Percent of deals

100%

80 >10% loss

60

40 Flat

20
>10% gain
0
12 month share performance

LearningCurveWWVP
4
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Despite the odds, 60% of senior executives
plan M&A activity

Senior executive Senior executive

responses responses
100% 100%
Not
No M&A important
80 80
plans
Neutral
60 60

40 40
Yes M&A Critical/
plans Important
20 20

0 0
M&A plans over How important is M&A
next two years? to future business?
LearningCurveWWVP
5
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 U.S. M&A advisory services totaled $27B in
2000
$20B

15

10

0
Investment Banking Accounting/ Legal

With a handful of corporate M&A

cases, we are not a player today
LearningCurveWWVP
6
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Bain can play a significant role in the M&A
process
100%
Investment Banks

80% Bain
Percent of professional time

60%

40%
Lawyers

20%

Accountant
0%
Identify Due Valuation Approach Offer & Negotiate Board Execute/ PMI
candidate Diligence deal approvals close
structure
LearningCurveWWVP
7
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 M&A can be the gateway to enduring client
relationships
For internal use only
Contact: Dan Haas
Revenue Example
100%

80

60

40

20

0
Corporate PMI Other M&A Other strategy
transactions organization
M&A work

800% return on Bain fees

LearningCurveWWVP
8
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 We have the products and experience

Strategic
Acquisition Objective Post-merger
growth
screening due diligence integration
options
 1000+ M&A  30,000+  1,500+  200+ PMI
strategy targets corp. due projects
related screened diligence
cases cases

LearningCurveWWVP
9
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Important capability for driving results
STRATEGY
Corporate/ Growth/Full Turnaround
Portfolio Strategy Potential Strategy Strategy

MERGERS & PERFORMANCE

ACQUISITIONS IMPROVEMENT
ORGANIZATION

Corporate M&A Profit Hunt

Private Equity
IT
Customer Cost & Supply
Corporate/
& Product Capital Chain
Venture Capital
Mgmt Mgmt Mgmt

Ownership

Merger Integration Core Process Redesign

CORPORATE CHANGE PROGRAMS

LearningCurveWWVP
10
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Typical I-bank material for a CEO meeting

 Client share and stock price history

 What analysts are saying

 Performance comparison across industry

 Target make-up

 Accretion/dilution

LearningCurveWWVP
11
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Typical I-bank material for a CEO meeting
 Client share and stock price history

LearningCurveWWVP
12
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Typical I-bank material for a CEO meeting
 What analysts are saying

LearningCurveWWVP
13
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Typical I-bank material for a CEO meeting
 Performance comparison across industry

LearningCurveWWVP
14
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Typical I-bank material for a CEO meeting
 Target make-up

LearningCurveWWVP
15
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Typical I-bank material for a CEO meeting
 Accretion/dilution

LearningCurveWWVP
16
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 What can we talk about?

 Classic Bain Tools

 Case Studies In Transformation

 Best Practice Case Studies

 Merger Integration Key Insights

 Bain Perspective on M&A Success

-The Dilution Myth
-The Learning Curve Effect or The Big Deal is
the Little Deal

LearningCurveWWVP
17
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Evidence does not support rejecting deals
for dilution alone
Percent of deals outperforming
sector index by more than 10%

50% 47%

40
34% 35%

30
23%
20

10

0
Dilutive Neutral Accretive All Deals

LearningCurveWWVP
18
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 The Big Deal is the Little Deal

 More than 75% of deals involve the

acquisition of small companies
- <$100 MM market cap

 Fortune 50 did 650 acquisitions between

1996-2000, two thirds were less than
$100MM

Do value creators differ in their

approach to deal-making?

LearningCurveWWVP
19
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Learning curve study

Companies Performance
Deals reviewed
considered metric
 985 US  7,764 deals  Excess
companies returns to
shareholders
over 10 years
(TSR – cost of
equity)

LearningCurveWWVP
20
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 The best companies build capabilities
through a learning curve

Tackle
big deals
Expertise

Increase activity
and institutionalize
learning

Start small

Number of transactions

LearningCurveWWVP
21
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Frequent buyers outperform

Average annual excess return

8%
7.3%
6.9%

4 3.8%

2.5%
2

0
Co's with Co's with Co's with 10 Co's with
1 to 4 deals 5 to 9 deals to 19 deals 20+ deals
(1990-2000)
LearningCurveWWVP
22
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 The Big Deal is the Little Deal

Average annual excess return

6.0%
6%
5.2%

2.4%
2

0.8%

0
0%-10% 10%-20% 20%-30% 30%+

Size of target relative to acquirer

LearningCurveWWVP
23
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Five categories of companies

Total = 985
companies
–106 companies –54 companies
Frequent
(>1 deal/yr) –Size: 5% –Size: 21%
–Deals: 31 –Deals: 21
Average deal
frequency
–351 companies –241 companies
Infrequent
(<1 deal/yr) –Size: 4% –Size: 31%
–Deals: 5 –Deals: 6

–233 cos. Small Large

(<10% of buyer’s (>10% of buyer’s
market cap) market cap)
–Deals: 0
Average deal size
LearningCurveWWVP
24
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Differential returns by deal strategy imply
an acquisition learning curve
% excess returns
Total = 985
“String of “Mountain companies
pearls” climbing”
Frequent
(>1 deal/yr) 8% 10%

Average deal
frequency
“Small bets” “Roll the dice”

Infrequent
(<1 deal/yr) 4% 2%

“Inactives”
Small Large
(<10% of buyer’s (>10% of buyer’s
1.6% market cap) market cap)

Average deal size LearningCurveWWVP

25
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Frequent acquirers more likely to earn cost
of equity (TSR>ke)
Percent of companies earning
cost of equity (TSR>ke)
100%

82
80 77
Average
67 1990-2000
61
60 57

Theoretical
40 long-run
average
20

0
Inactives Roll Small bets String Mountain
the dice of pearls climbers

LearningCurveWWVP
26
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 A mountain climber: Fidelity National did
30 small deals, steadily increasing size

Relative deal size

1.5 Chicago Title

1.0
28%
annual
0.5 excess
Granite return
Financial

0.0
90 91 92 93 94 95 96 97 98 99 00

Number of Year deal announced

undisclosed
value deals 0 2 1 2 1 2 3 4 0 0 0
LearningCurveWWVP
27
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 We examined “the tails” to verify insights

Number of companies

250

“Laggards” “High fliers”

200
- Bottom decile - Top decile
- Avg. excess - Avg. excess
150 return: -22% return: 26%

100

50

0
-60% 0% 55% 30% 40%

Average company's excess return

LearningCurveWWVP
28
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 High fliers are twice as active as laggards
but focus on deals half as big

Avg. number of deals Avg. disclosed deal size

(1990-2000) (relative to market cap)

13 30%
10.4 24%
10
20
8 Avg. Aver
Avg.
(7.
5.4 13%
5
10

0 0
Laggards High fliers Laggards High fliers

LearningCurveWWVP
29
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 High fliers much more likely than laggards
to leverage the learning curve effect

Percent of companies

70 82
100%
Mountain
climbing
80
String of pearls
60

40 Small bets

20
Roll the dice
0
Laggards High fliers

LearningCurveWWVP
30
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 We need to tailor our conversations

% excess returns • Evaluate

• Screening attractive
large deals “String of “Mountain adjacencies
• PMI support pearls” climbing”

8% 10%

“Small bets” “Roll the dice”

• Competency
building • Due Diligence
• Screening & 4% 2% • Rigorous
valuation valuation
• PMI support

“Inactives”

1.6% • Educate
• Screen small
deals LearningCurveWWVP
31
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Conclusion

 Corporate M&A is a very large market and we

have little presence

 Clients recognize that M&A is risky and are

open to ways to reduce risk

 M&A and PMI are powerful tools to create

deeper and more enduring client relationships

 We have the experience and material to be

credible in initial conversations

Our challenge is to be proactive

LearningCurveWWVP
32
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 Our assignment to the partnership

 Meet with the most senior M&A person at your

clients to discuss the role of corporate transactions
in overall strategy

 Set up one meeting with a prospect

 Draw in practice leaders from your region to be

M&A experts

LearningCurveWWVP
33
Corporate Transactions Group Toolkit
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.