M & A lies

17
8/8/2019 M & A lies http://slidepdf.com/reader/full/m-a-lies 1/17 Straight Talk Book No. 9 M&A Lies (And why they’re sometimes true)

Transcript of M & A lies

Page 1: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 1/17

Straight Talk Book No. 9

M&A Lies

(And why they’re sometimes true)

Page 2: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 2/17

Straight Talk Book No. 9

M&A Lies

(And why they’re sometimes true)

Everyone is entitled to their own opinion,but not their own facts.

Daniel Patrick Moynihan

Page 3: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 3/17

Truth. Or consequences.

Deals have always been an important part obusiness. Mergers. Stock swaps. Spin-os. You

name it. Acquisitions can be a ast way toexpand. And divestitures can ree up cash (andtime) so you can ocus on what matters most.

So why is it that so many deals—nearly hal,according to some studies1—ail to deliver the

expected value?

It could be because too many companies stillshoot rom the hip, relying on conventionalwisdom and back-o-the-envelope guesses

instead o hard-nosed analysis and disciplDeal guys get carried away, expectations

over-hyped, and the next thing you knowyou’re caught up in something that has nochance o ending happily ever ater.

M&A Lies takes a hard look at howcompanies approach transactions today.

What you’ll learn is that some things thatsound totally outrageous can turn out to true. And things that seem like sure bets cbe dangerously wrong. The big trick is tounderstand which are which.

Page 4: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 4/17

Scoring

0–10

11–20

21–36

37+

Good luck.

You’re on the way, but deal-makingisn’t really on your radar.

You’re positioned to win.

We wouldn’t want to be biddingagainst you.

Score:

Tell the truth

We never shoot rom the hip.

We know about all o the opportunitieswe should.

Our deal pipeline is clear and well managed.

Merger integration is not an aterthoughtor us.

We’re good at nancial modeling—and wedo it routinely in M&A.

Our business leaders are hands-on when itcomes to M&A.

Tax is at the table when we’re vettingopportunities.

We keep most o the people we want tokeep when we do a deal.

We have businesses we should consider

selling.

Take this short quiz. “1” means strongly disagree, “5” means strongly agree.

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

DISAGREE AGREE

5

Good enough is good enough

Mergers and acquisitions have become acommon way or companies to meet their

growth objectives. This is a undamentalshit, not a passing ad.

Achieving excellence in M&A starts with anhonest sel-appraisal o your currentcapabilities. And according to a recent global

study, many companies are ar morecondent than they should be. In the study,companies that achieved their stated mergerobjectives more than 75% o the time wereclassied as “high achievers.” Those that mettheir objectives less than 25% o the time

were called “low achievers.”2 

Given their poor track record, you’d think achievers would be gun-shy about doing

more deals. But you’d be wrong. They’realmost as likely as high achievers to do moacquisitions.

To beat the odds, companies need to imptheir capabilities in every phase o the M&

process, rom pipeline management and dexecution to integration and ongoingoperations. The goal is to make M&A astecient, and repeatable—and to managerisk eectively.

As deals be come an increasingly importanpart o corporate strategy, a “good enougapproach to M&A probably isn’t.

What to doTake the quiz to see where you stand in terms

o M&A discipline.

M&A Lie No. 1

Page 5: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 5/17

7

Smart companies don’t do dumb deals

No one does a bad deal on purpose. Yet theyhappen all the time. Why is that?

Many companies start out with a clearrationale or any particular transaction. Butsomewhere along the way, the deal takes ona lie o its own—and can keep movingorward even when it doesn’t make sense.

There are plenty o excuses or this seeminglyinexplicable behavior—and all o them can betrue. Corporate development people who arerewarded or doing deals. Investment bankers

who get paid only i the deal closes.Company leadership that has painted itse

into a corner by telling the board the deal strategic imperative.

Whatever the reason, it’s easy or smartpeople to ignore the danger signs and getsucked into a bad deal.

Although nobody throws a big party whedeal is killed, in some cases it’s absolutelyright thing to do. Sometimes the best deaone that doesn’t get done.

What to do

Write down the ve most compelling reasonsor doing your next deal. I the reasons change,pull the plug.

M&A Lie No. 2

Page 6: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 6/17

8 9

Top-notch M&A capabilities are crucial at allimes. According to a recent study, companieshat pile onto the deal bandwagon when the

economy is on a roll tend to do poorly atM&A. Early movers and other contrarians

enjoy the lion’s share o the rewards.3

Good deals are usually a unction o strategyand execution—not the economy. But that’snot to say companies should ignore broadeconomic conditions. Especially since there’s

ess margin or error during lean times.

Typical deal analyses examine a wide range odetails about operations and nances, butoten take a airly static view o the overallbusiness environment. That’s a mistake.

For example, a tight credit market cansignicantly increase the cost o a highlyleveraged deal, making it hard to achieve theexpected ROI. Similarly, a drop-o incustomer demand can make it harder to

sustain revenues while wrestling with thechallenges o merger integration.

No one can predict the uture. But that doesn’tmean you should ignore it. At a minimum,consider a ull range o scenarios and how to

manage risk in dierent situations. Theprinciples o Strategic Flexibility can help youmake choices that improve the likelihood ogetting the desired results across multiplescenarios while reducing cost and risk.4

Good deals are hard to come by. And the bestare oten ones you don’t hear about until theyshow up in the news.

To make sure you’re not missing goodopportunities, you need a strong deal fow.

That means spreading the word that you’re inthe market and prepared to act. It also meanslooking beyond traditional targets.

Conventional wisdom presumes yourcorporate development olks are plugged in

with the investment banks, law rms, andother intermediaries. But it takes more thanthat. You need a position on the “A” list when

a deal arises—even when it’s not an obviotarget. To do that, you must cultivateinfuencers, just as you cultivate your verybest customers.

A good pipeline has to match your busine

strategy. Your P&L owners—the peopleultimately responsible or implementingstrategy—should be involved every step oway in assessing and building your pipelin

I deals are central to your strategy, you ne

lots o irons in the re. Building a healthypipeline can take years, and maintaining itrequires ongoing attention.

 You’re on top o all the deals that matterM&A matters only during a boom

What to doUse scenario planning to develop options.

nclude a range o economic assumptions.

What to do

Take a look at the list o deals in your pipeline.

You have a pipeline, right? What have youdone this week to push the most important

deals ahead?

M&A Lie No. 3 M&A Lie No. 4

Page 7: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 7/17

Acquisitions are the glamorous side o M&A.

But divestitures can be just as important,especially in tough times. Unortunately, toomany CEOs want to sell as quickly as possibleso they can ocus on their core business. Theywant to dump underperormers quickly. Aterall, businesses that don’t t the strategy

anymore are simply distractions.

But divestitures are not just acquisitions ineverse. They’re actually much more dicult.

To achieve high value:

Develop a top-to-bottom view o how the•

business will operate the day the deal closes.By thinking about business continuity, you

signal to buyers that you’re looking out or

their best interests. This will help you get apremium price.

Know what you’re selling. What products•

are involved? Which people will be goingwith the business? What property andequipment will be handed over? Buyers

will eventually ask these questions, so beprepared by making tough decisions early.

Handle a divestiture well, and you’ll looksmart. You’ll speed up the process, you won’t

leave money on the table, and you’ll avoidsaddling yoursel with new obligations such astransition services agreements and pensions.

10

What to do

Know exactly what you’re selling.

 Acquisitions are the only deals that create value

M&A Lie No. 5

Page 8: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 8/17

12 13

What to do

Don’t sign anything until you see a detailedintegration plan and reconcile “cost to

achieve” with ROI.

What to do

Double-check the critical assumptions in yourdeal model—assumptions that could blow

hings up i they’re wrong.

Numbers don’t lieDon’t worry about integration

until the deal is done

There’s no question that numbers matter inevery aspect o deal-making. Just be careul

how you use them. They don’t always tell thewhole story—and they can be easily ramedo justiy almost any conclusion.

n the old days, companies would determinea target’s value by slapping a standard

multiple on EBITDA. But in today’s ultra-competitive market, that traditional approachust isn’t good enough.

Most companies are pretty good at assessingplain-vanilla deals involving mature

companies with stable earnings. However,more and more deals don’t t that mold. In

some segments, such as lie sciences, wheretargets oten have yet to deliver even a penny

o revenue, traditional approaches tovaluation are nearly worthless. That’s whereadvanced approaches or assessing value andrisk come into play—things like Monte Carlosimulation, decision analysis, and real options.

A good model can add clarity to aninvestment decision and help you make amore compelling oer. It can also serve as thestarting point or planning integration.

But remember, a nancial model is only as

useul as the insight it provides. Complexityor the sake o complexity is a waste o time.

Deal-making is hard, but integration is evenharder. I you’re not careul, it can drag on

months ater the transaction closes—makingit tough to capture the expected value. That’sbecause integration covers a huge range oareas: products, customers, compensation,sales, perormance measurement, IT systems,

acilities, branding, and more. I things can gowrong, they will.

To increase your chances o achieving desiredresults, make integration assessment astandard part o due diligence and buildintegration risk into your nancial model. Find

out what will happen i your expectedbenets all short by 20%.

Beore you sign a deal, have your integrationteam assess the due diligence estimates and

commit to the costs and savings. When the closes, make sure everyone understands exawhere the benets are supposed to come rHold your team accountable or delivering atracking those benets—and know how yo

communicate them on the Street.

While all o this might sound obvious,estimates o benets are oten purposelywithheld rom integration teams to orcethem to come up with an “unbiased”perspective. That’s a ormula or disaster.

M&A Lie No. 6 M&A Lie No. 7

Page 9: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 9/17

This one looks clean. Just kick the tires.

14

What to do

you haven’t ound at least one signicantproblem, you haven’t looked hard enough.

Focus on the deal-breakers.

Some companies subscribe to the idea thatpublic companies don’t require due diligence.

Others cut so many corners that they end upwith a bad deal. “Don’t worry,” they say,“we’ll x it on the back end.”

And then there are companies that do justhe opposite. They get so bogged down in

he details that they lose out to competitorswith a higher tolerance or risk, or a dierentapproach or managing it.

To nd a happy medium, let value be yourguide. Focus on areas that have the greatest

mpact on value (your nancial model canshow you where). Also, look or deal-

breakers—hidden risks that are likely to havea material impact on your decision. Dig deep,

yes, but don’t get lost in the weeds.

The traditional approach to due diligencerevolves around nance and taxes. However,operational due diligence—looking into areassuch as supply chain, technology, and

people—is also important, especially orcompanies with a broad ootprint.

Some say that operational issues are justdetails that will work themselves out. But moreoten than not, these details represent the

dierence between realizing and not realizingtargeted results ater a deal closes.

M&A Lie No. 8

Page 10: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 10/17

17

It’s all about price

What to doCreate a list o “must haves” so you know where

to hold the line in negotiations.

In theory, an acquisition is an auction thatshould be awarded to the highest bidder. But

in reality, deals rarely come down to priceunless you’re lousy at making deals. Andwhile it’s true that many deal-makersunderstand what it takes to get a good dealdone, it’s also worth reviewing the basics—

those principles that most executives alreadyknow, but sometimes ignore.

Build good relationships with important•

decision-makers and infuencers, includingowners, managers, and investment bankers.You have a right to ask tough questions,

but trying to come across as a hard-nosednegotiator oten backres.

Understand each party’s real needs instead•

o assuming that money is all that matters.Sellers may be more interested in closinga deal quickly than in securing top dollar.Create a compelling oer instead o just

throwing money at the problem.

Think careully about your own needs to•

and structure the deal accordingly. I you

looking to grow your brand or expand innew region, make sure those specic goare refected in the terms.

Creative deal-making can help close the•

gap when buyers and sellers don’t see e

to eye. Keep in mind, however, that thescreative trade-os may complicate matt

ater the deal closes.

It’s okay to pay a premium on a specic•

opportunity, as long as you know exactl

how it contributes to your overall strategand have a realistic nancial plan to makup the dierence downstream.

M&A Lie No. 9

I’ll pay any price aslong as you agree to

my terms.

Page 11: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 11/17

18 19

It’ll be great or our people, tooCustomers will love it

What to do

Don’t orget to listen as much as you talk.

What to do

Keep your people inormed about dealswhenever possible. I they don’t know what’s

happening, neither will your customers.

Companies always talk about the big benetscustomers will get rom a planned merger.

And sometimes they actually believe theirown hype. But in the heat o battle, thingsdon’t always work out as planned. All toooten, customers are put on the back burneras merging organizations wrestle with

operational issues that seem more pressing.

One study shows that neglecting customerssues can reduce revenue by as much as 50%n the our years ollowing a merger.5 But itdoesn’t have to be that way. The same studyshows that a customer-oriented approach to

merger integration can yield double-digitmprovements in revenue and margin growth.

Some things to consider:

Put customers at the center o your•

planning. Rationalize products andprocesses around customer requirements,not internal considerations. Establish a“virtual war room” as the central point orresolving customer issues.

Keep in touch. Talk to customers early•

and oten, even i you don’t have all the

answers. Use online surveys, ocus groups,suggestion boxes, and more—whatever ittakes to stay connected.

Establish consistent prices. Savvy•

customers will take advantage o pricinginconsistencies resulting rom a merger,cutting into revenue and margins. Otherswill get rustrated and leave.

Minimize operational changes. Focus on•

activities that will ensure your customers a

smooth Day One. Ater that, you can makeall the improvements you want.

Yeah, right.

When employees hear about a merger or

divestiture, they naturally assume the worst.Instead o working, they spend their timespreading rumors and wondering whetherthe company is going to lay them o—ordouble their workload.

One problem is the sense o secrecy thatsurrounds many deals. Executives don’t wantto make a premature announcement thatcould derail things or create a distraction.Another problem is pace. People involved in

deals eel as i they don’t have time tocommunicate. Beore you know it, this sile

treatment becomes a bad habit.

The only way to stop the rumor mill and gpeople on board with a deal is to replacegossip with a compelling vision and hardacts. Although things might make perec

sense to you, don’t assume that everyone in the company shares your vision. Know counts—both inside the company andout—and help critical talent understand wthe deal means or them.

M&A Lie No. 10 M&A Lie No. 11

Page 12: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 12/17

20

Tax? We’ll gure it out later

What to doDrop the term “pre-tax dollars” rom your

vocabulary. Pre-tax dollars don’t count.

When a deal is in play, most companies treatax as an aterthought.

Big mistake. There is no such thing as apre-tax dollar, especially when it comes tomergers and acquisitions.

Most opportunities or creating value through

a merger or divestiture involve taxes. And asyou know, tax can take a big cut out o everydollar. I you’re not ocused on those numbers,you’re missing an important piece o the puzzle.

How much overhead will a deal really eliminate?How will additional production capacity drive

opportunities in new jurisdictions? What willyou gain rom a combined sales orce? Howwill you drive new revenues and reduce costs?

Where should new people be located? Whereshould headcount be cut?

Without a clear understanding o tax, youcan’t accurately answer any o these questions.You won’t know how to create the combinedstructure to achieve the benets you want.And you won’t be able to move money and

deploy cash the way you need to—includingcovering the debt service associated with thedeal. The workability o cross-border deals, inparticular, can hinge on international tax,especially when the transaction requiresdeploying or repatriating cash.

All that said, i tax considerations are the onlymotivation or a particular deal, you probablyshouldn’t do it.

M&A Lie No. 12

Page 13: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 13/17

23

International deals are like domestic deals,except you have to fy more

What to do

Cancel your team’s international fight

reservations—unless they’re going to meetwith local specialists living in the country you’ll

be operating in.

Virtually every major transaction these dayshas an international dimension—customers,

suppliers, investors, operations, or someother key component. Adding oreignoperations into the mix can create extra layerso complexity around governance, risk, andcompliance. Here’s just a sampling o the new

wrinkles you have to watch out or:

The Foreign Corrupt Practices Act oten•

conficts with local business practices,making it hard to get things done.

Inormation in some markets may be o•

questionable quality, which means youmight have to get creative in nding actsand conducting primary research.

People issues such as labor practices,•

pensions, and culture can upend integra

plans i you’re not careul.

Some contracts may not be enorceable •

other jurisdictions.

You may need a phased closing because•

o special requirements in dierent

 jurisdictions.

Tackling these types o issues requires locaexperience and knowledge, not requent fmiles. You’ll need knowledgeable people the ground in all jurisdictions—people whknow your business, your industry, yourgoals, and your objectives.

M&A Lie No. 13

Page 14: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 14/17

24 25

What to do

Read this book again.

One way or another, every major transactionwill end up on the CEO’s desk. But that

doesn’t mean the CEO should carry the wholeburden o the deal alone.

Work together. Keep in touch with yourboard. They share your risk, and they mayeven have insight to oer. Make sure

you—and they—understand the reasons ordoing every deal (see M&A Lie No. 2).

Engage your entire leadership team. T hat’show you get control o all the parts and

pieces. Leave the wrong person out—andyou’ll leave a stone unturned. It might not bean important stone. But then again, it might.

Eective acquirers have deal-making down toa science—with a touch o art thrown in or

good measure. That’s where it gets personal.

We’ve given you a lot to think about—and plenty o areas where you can take specic actionHere’s a summary o the “What to do’s.”

1 Take the M&A readiness quiz on page 4.

2 Write down the ve most compelling

reasons or doing your next deal. I thereasons change, pull the plug.

3 Use scenario planning to develop options.Include a range o economic assumptions.

4 Take a look at the list o deals in your

pipeline. What have you done this week topush the most important ones ahead?

5 I divesting, know exactly what you’reselling.

6 Double-check the critical assumptions in

your deal model— assumptions that couldblow things up i they’re wrong.

7 Don’t sign anything until you see adetailed integration plan and reconcile“cost to achieve” with ROI.

8 I you haven’t ound at least onesignicant problem, you haven’t lookehard enough. Focus on the deal-break

9 Create a list o “must haves” so you knwhere to hold the line in negotiations.

10 Keep your people inormed aboutdeals whenever possible. I they don’tknow what’s happening, neither will

your customers.

11 Listen as much as you talk.

12 Drop the term “pre-tax dollars” rom yvocabulary. Pre-tax dollars don’t count

13 Cancel your team’s international fightreservations—unless they’re going tomeet with local specialists living in thecountry you’ll be operating in.

14 Read this book again.

It’s not personal  What to do

M&A Lie No. 14

Page 15: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 15/17

2726

Whether your goal is to conquer yourndustry, diversiy your business, or just get

back to basics, you’re likely to be involved indeals. M&A is here to stay. You might as well

get good at it.

The truth?

1 “The Big Deals: Promises Unullled,” Chicago Tribune, March 2001.

2 Deloitte Research and EIU study. “Strategic Acquisitions Amid Business Uncertainty: Charting a Courfor Your Company’s M&A,” November 2007.

3 Gerry McNamara, Jerayr Haleblian, and Bernadine Johnson Dykes. “The Perormance Implications o

Participating in an Acquisition Wave,” Academy of Management Journal Vol. 51, No. 1 (2008).

4 Michael E. Raynor. The Strategy Paradox (New York: Currency Doubleday, 2007).

5 Deloitte Consulting study. “M&A—Sales and Marketing Effectiveness Evaluation,” April 2006.

Page 16: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 16/17

About this book

M&A Lies (And why they’re sometimes true) is the ninth in a series o books dedicated tohelping companies improve perormance. To request additional copies o this book or to orderprevious editions, go to deloitte.com/straighttalk.

Talk to us

We look orward to hearing rom you and learning what you think about the ideas presentedn this book. Please contact us at M&[email protected].

This publication contains general inormation only and is based on the experiences and research o Deloitte practitiDeloitte is not, by means o this publication, rendering business, fnancial, investment, or other proessional advice services. This publication is not a substitute or such proessional advice or services, nor should it be used as a basis oany decision or action that may aect your business. Beore making any decision or taking any action that may aecyour business, you should consult a qualifed proessional advisor. Deloitte, its afliates, and related entities shall noresponsible or any loss sustained by any person who relies on this publication.

About Deloitte

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about detailed description o the legal structure o Deloitte LLP and its subsidiaries.

Page 17: M & A lies

8/8/2019 M & A lies

http://slidepdf.com/reader/full/m-a-lies 17/17

Copyright © 2008 Deloitte Development LLC. All rights reserved.