Idea 34 - Mergers and acquisitions
The hostile
takeover is about as exhilarating as it gets up at head office. It's the chief
executive suite as campaign tent, complete with hurrying advisers,
councils-of-war and swift- changing tactics. For leaders who favor the military
style, this is as close as it gets to being a real general - the plan, the
strike, the capitulation and the prize. Sadly for them, the hostile bid is
becoming less fashionable, but acquisition remains a perfectly reasonable, if
usually less dramatic, strategic option for companies of all kinds.
Mergers and acquisitions - 'M&A' in investment-banker
speak - attract more public attention than anything a big company does except,
perhaps, firing half the workforce or going bust. Typically, they happen when
one company acquires all the assets and liabilities of another. Is there a
difference between a merger and an acquisition? Not very often. A true merger
is a marriage of equals in which shares are pooled in a new company, and these
are unusual. Car makers Daimler-Benz and Chrysler merged in this spirit of
equality in 1998, taking a new name- DaimlerChrysler - to reflect this. Even
so, American commentators now complain it was a de facto takeover, with German
management and know- how calling the shots - and even, it's said, now preparing
to sell Chrysler.
Unlike DaimlerChrysler, most 'mergers' are obvious takeovers
in which the separate identity of one party disappears, if not immediately,
then over time. The M-word is mere diplomacy, a face-saving veil for the
acquired. Whatever form they take, mergers are driven by one overriding motive:
to make one and one equal three. Some call it 'synergy' or 'adding value', but
it boils down to creating a business worth more than the sum of its parts.
Quite often though, it ends up as less, as we'll see later.
Up and
down, or sideways classically, there are three kinds of merger.
'Horizontal' mergers mean acquiring a company in the same industry, to grow
market share the quick way. 'Vertical' mergers involve vertical integration, by
buying a supplier or a distribution channel, and are usually about controlling
costs. Finally, in what's known in the US as a 'conglomerate' merger, a firm
buys an unrelated business as a form of diversification.
The synergies that the buyer seeks can be found in various
places. The most common is by eliminating duplications to cut costs. Simply
closing down one head office can save worthwhile sums of money. Two human
resources departments can be collapsed into one and the same goes for accounts
and finance, perhaps marketing, and research and development. This has its ugly
side, since most of the savings come from sacking people.
Though it applies to most mergers, eliminating duplication
is easiest in horizontal takeovers, where the organizations may be mirror
images of each other. That's also true of the next synergy, economies of scale
- if you are buying more, it'll be cheaper, whether sub-assemblies or
paperclips. There are sometimes tax advantages in mergers if, say, the target
has tax losses that the acquirer can put to good use.
These are generic benefits from going out and buying a
company, but they might be more specific: to acquire new technology, expand
into new product or geographic markets, or even - it has happened - to kidnap a
particular CEO. A 'reverse' takeover or merger happens when an unquoted company
wants a stock exchange listing but not the trouble and expense of an initial
public offering (IPO). It buys a listed firm, disposing of its unwanted assets
and reversing itself into the shell, like a hermit crab. WPP, one of the
world's largest advertising groups, was shopping trolley manufacturer Wire and
Plastic Products until present chairman Martin Sorrell 'reversed' his interests
into it in the mid-1980s.
Fewer than half of all mergers work. That's to say that the
failures don't add the value envisaged when the deal was done. Sometimes it's
because the strategy was misguided in the first place. More often it's because
companies make a mess of integrating the acquired business into the existing
one. As post-merger integration (PM!) specialists keep saying, it's not over
when the deal is done - it has just begun.
A common failing is the inability to knit two different
cultures into one. Staff in the acquired company is invariably fearful and
mistrustful of their new owners. They need to be reassured and respected, and
made to feel part of the new enterprise. Management should concentrate rather
more on this issue and less on the new logo. Another pitfall is to reproduce in
the new organization practices and process that didn't work very well in the
old. Perhaps most important is that the acquirer should have a vision and a
plan ready to go on day one remember the Iraq war - and that everyone in the organization should know
what it is. If PMI doesn't work, it can precipitate mass defections of the best
staff, customers, suppliers and investors.
Paying too
much one preprogrammed reason why some acquisitions don't add value
is that management paid too much in the first place. That's inclined to happen
in contested auctions for a company, when the CEO cares more about the size of
his empire than about doing the sums. Extravagant prices are more likely to be
paid when the business world is gripped by yet another fit of merger mania.
These come and go, dating back to America's 1897-1904 wave, which ended in a
stock market crash and anti-trust legislation. Most of the 1980s and the latter
half of the 1990s were years of peak M&A activity in both the US and the
UK. The 1980s spawned the corporate raider, the 'mega-merger' and a rise in
foreign takeovers. The 1990s wave, which ended when the high-tech stock market
bubble burst in 2000, was less about sheer size than about strategic
restructuring.
M&A waves are fuelled by high stock prices, which give
companies cheap currency in which to pay, and/or cheap debt, which allows them
to pay in cash instead of shares. Cheap borrowing has nourished a new breed of
acquirer - the private equity fund. Acquisition is the sum of their strategy,
which is to buy companies relatively cheaply, squeeze out the fat and sell them
on.
Reference: 50 Management Ideas You Really Need to Know
Book by Edward Russell-Walling
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