M & A by Lyonsdown

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How management teams are buying up their businesses | Page 5

From Facebook and Twitter to Microsoft and Yahoo, the greatest mergers that never were | Page 6

Private equity investment is finally recovering from the crash, creating an uptick in M&A | Page 8

Making mergers work the morning after | Page 12

November 2012 | business-reporter.co.uk

MERGERS & ACQUISITIONS

Better together Like the newly bred liger, M&A activity creates some very striking beasts Distributed within the Sunday Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents Distributed within the daily Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents

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Business Reporter · November 2012

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions

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In brief

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Best of the blogs

Cover: Tom Bonson

Who? M&A Law Prof Blog What? Written by a group of law professors from UC Davis, Boston College and UCLA, the M&A Law Prof blog examines the legal side of mergers and acquisitions. Surprisingly different from our usual impression of lawyers, the M&A Law Prof bloggers tackle the stuffy legal topics in a casual yet witty way. It says: “Two interesting papers that raise the question of the true value of disclosure. The first is by Steven Davidoff and Claire Hill, Limits of Disclosure. Disclosure has been a common regulatory device since it was by Louis Brandeis (“Sunlight is said to be the best of disinfectants”, Other People’s Money). Indeed, our system of securities regulation is built upon this premise. Davidoff and Hill look at just how effective disclosure was in the run up to the financial crisis with respect to retail investors and in regulation of executive compensation.” Where? lawprofessors.typepad.com/ mergers Who? The M&A Advisor What? The M&A Advisor blog links mergers and acquisitions, financing and turnaround professionals worldwide, presenting a comprehensive view on

mergers and acquisition activity across the global markets. The online community gathers the industry’s top performers, who then offer experience-based advice. It says: “If the objective of your company is to be public and are not large enough to attract a big-time Wall Street underwriter for a traditional IPO, you need to consider the significant benefits of a direct filing with the SEC as an IPO alternative.” Where? www.maadvisor.com/profiles/ blog/list Who? Fortune’s Finance Blogs What? Edited by Dan Primack, the creator of Thomson Reuters’ successful private equity newsletter peHUB, the Fortune.com finance blog covers deals and dealmakers from Wall Street and beyond. A mandatory read for anyone wanting to stay abreast of the mergers and acquisitions markets. It says: “Corporate America’s favourite excuse bites the dust. There are lots of things I’ll be glad not to hear anymore. Campaign ads. Fourty-seven per cent. You didn’t build that. But, most of all, I’ll be glad to be rid of “uncertainty.” This single word has become the excuse emblem.” Where? finance.fortune.cnn.com

Who? DealZone What? This is a new blog from Reuters, covering M&A activity for bankers, lawyers, executives and investors. Dealzone takes an in-depth look at M&A deals based on reliable and concise data from Reuters’ world famous newswires, along with professional analysis of current trends. “Any Americans believing that their country is being bought up by the Chinese might want to pay heed to a new report from the Vale Columbia Center on Sustainable International Investment. It says that China is a minimal player in terms of foreign direct investment in the United States and that Washington should in fact be doing a lot more to get it to gear up its buying.” Where? blogs.reuters.com/reutersdealzone/ Who? Why is M&A MIA? What? This video from CNN Money focuses on the issue of the M&A market experiencing a slow year for deal making. Paul LaMonica, assistant managing editor of CNN Money, discusses whether the situation is likely to change soon. Where? www.youtube.com/ watch?v=GxZb_DwuDjY

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What’s inside?

What’s going on in the world?

How management teams are buying up their companies Page 5

BRIC countries playing their part

There were 51 deals involving UK firms acquiring targets in high growth economies – down from 72 in H2 2011 and 66 in H1 2011. There were only 16 deals involving a high growth corporate acquiring a company in the UK – a steady fall from 45 in 2011

Merger and acquisition activity has dropped off in emerging markets, falling back to 2005 levels, according to KPMG’s High Growth Markets International Acquisition Tracker. However, investment is still flowing from the Far East, where interest in M&A in developed markets appears to be growing. The volume of cross-border corporate acquisitions involving high growth markets has dropped to its lowest level since 2005, with exception to the crash of 2009, with 979 deals in the past six months compared with a low of 936 in the second half of 2005. KPMG’s global head of M&A David Simpson said: “While there may be a perception that the stagnation of the M&A market is solely a mature market issue, this is a clear demonstration that the ongoing slowdown is really starting to affect the high growth markets, too. “Both the volume and value of corporate transactions are down across the board, while overseas markets that were previously seen as highly attractive investment destinations for developed economies have lost some of their shine. “However, while confidence for many is at a new low, China and Japan are using this as an opportunity to grasp the nettle in actively pursuing outbound deals in developed markets. Brazil also continues to be a favoured acquisition target, but these represent rare bright spots in an increasingly difficult environment.”

Japanese companies were active acquirers with a sevenyear high of 65 deals

The number of Chinese companies acquiring targets in developed markets rose to 39 in H1 2012

The number of inward investment deals involving Chinese targets fell to a sevenyear low, with 75 deals in the first half of 2012, 25% down year on year

The greatest mergers that never were Page 6

Who’s getting the biggest slice of the M&A pie? Page 8

A guide to living happily ever after for post-merger companies Page 12

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On the record

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions, by Joshua Rosenbaum and Joshua Pearl Amazon, £38.50

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Leadership that’s reliant on mergers and acquisitions is dangerous leadership. John Varley, former group chief executive of Barclays Bank

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Back in the office: reading list

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A paradox exists in the world of mergers and acquisitions. Other studies that have looked at M&A deals in the past 20 years have found that deals in earlier M&A cycles destroyed, rather than created, shareholder value. Yet to grow to be an organisation operating on a global scale, it is almost impossible to do so quickly enough through organic growth alone. Mergers and acquisitions have in many ways become necessary. Interestingly, evidence is now mounting that the deals conducted in the current merger wave may be different. Across a broad range of industries throughout the world, lessons learned are being applied. Marco Boschetti, managing director UK, Towers Watson

Creating Value from Mergers and Acquisitions, by Prof Sudi Sudarsanam Amazon, £47.68

Intelligent M&A: Navigating the Mergers and Acquisitions Minefield, by Chris Brady and Scott Moeller Amazon, £13.99

In today’s uncertain market what is the best way to present our company’s assets and bring our deal to a

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Business Reporter · November 2012

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Mergers and acquisitions

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Getting to know you If companies overlook the personalities and inner workings of the vital potential partners that are set to work together, merger and acquisition deals may be doomed INDUSTRY VIEW

Leadership: it’s a meeting of minds A common deal-breaker when it comes to mergers is a lack of alignment or similarity between leaders on the two sides of the deal. It’s not about supporting the same football team. Obviously, it’s great (though not essential) if the directors like each other personally, but far more important is if they agree about how things should be done. They may have different ideas about how to manage their people, how frank they like to be with staff and shareholders, how much risk they are prepared to take and how quickly they make decisions.

Consensus matters Our research proves the success of the merger depends heavily on how much consensus there is on these issues. Two-thirds of survey respondents said that slow decisionmaking was a key barrier to effective integration. To reassure colleagues, leaders must be clear about who is responsible for decisions and about how disagreements will be handled. Equally, many leaders have a tendency to protect staff morale and customer service by delaying communication or glossing over difficult issues, such as redundancies. Yet open and honest communication is essential to help address customers’ and employees’ fears. Clarifying who the new leaders will be as quickly as possible is key to get operations running smoothly, stimulate productivity and reassure stakeholders. In Hay Group’s research, half of executives agreed that putting in place a new leadership team had unlocked significant value. Likewise, those that prioritised analysing leaders’ strengths were four times as successful in achieving their merger objectives. Just as disagreements in a marriage can lead to compromise or divorce, some differences will be worth tolerating for the good of the partnership while others will be unacceptable. The key is to recognise and investigate the areas that may cause conflict, establish what you will do to eliminate differences, decide who is responsible for what and communicate honestly.

e’ve all come across people whom on paper we have plenty in common with – maybe we like theatre trips and travelling to similar places, we both enjoy a game of tennis – yet, somehow we find them difficult to warm to. Maybe it’s their voice, their manner, or something we can’t quite put a finger on: we just find it hard to click with them. The same is true when it comes to merger partners. Two companies may have related products, complementary distribution channels and similar customers, yet they just don’t get along. It’s a sad fact that most mergers and acquisitions fail to deliver the value that shareholders were hoping for. What looked like an ideal marriage on paper turns into a disappointing relationship, fraught with missed opportunities and misunderstandings. Economies of scale fail to materialise, production arrangements significant prove tricky to combine, and points, chiefly business models are that the board impossible to blend. do not spend This is because companies enough time – like people – are about much more than hard assessing a facts or physical attributes. A cloud of intangible target’s intangible capital early in a deal. Most factors makes up the whole, including the M&A failures can be attributed to this. cultural, organisational and human elements of Two-thirds of executives believed that an the business. In fact, according to Ocean Tomo increased and earlier focus on intangible capital Research, non-monetary assets account for up to would have improved the success of their three-quarters of an organisation’s value mergers. Furthermore, more than half said – and are key predictors of the success of that failing to audit elements such as the merged entity. Yet investors governance, brand image, client valuing deals often focus only on the relationships and business culture of executives value or ‘fit’ of tangible assets, such as increased the danger of making the conducted access to new products or clients. wrong acquisition. However, only 38 cultural per cent of executives conducted analysis cultural analysis. Intangible assets Much of the ultimate success of any deal Overlooking the vital step of evaluating the hinges on the willingness and ability of intangible assets before and throughout a deal managers to look after the intangible capital. But can result in plummeting shareholder value and managers – themselves a key intangible – are not dissatisfaction on both sides. always willing to play their part. Almost half of The intangibles become particularly volatile the people surveyed had opposed the mergers during the run-up to a merger: as soon as they experienced. takeover rumours start, employees become Alongside poring over spreadsheets and financials, executives need to scrutinise the It’s a sad fact that most human dimension – whether leaders have similar approaches and whether cultures clash or mergers and acquisitions complement each other. If the top team overlooks fail to deliver the value that the aspects of the potential partners that are most vital to the firm working, deals may be doomed.

38%

shareholders were hoping for

distracted and fearful for their jobs; customers start to speculate about continuing product quality; business and training plans are put on hold. Even if the prospective merger is then abandoned, the fallout remains. Hay Group and Harris Interactive last year interviewed more than 220 senior executives worldwide with experience of large M&A transactions. The research confirmed several

Jon Dymond, left, is a director at management consultancy Hay Group Download our paper, Touching the Intangible, by visiting www.haygroup.co.uk

Grasping the intangibles Executives should take time to ask key questions about the three main strands of intangible capital – organisation, relationships and people – to align their individual and collective expectations. The organisation l Do you have shared values, customs and culture? l Are you similarly agile and energetic? l How innovative are you? l Are your organisations structured in comparable ways? l Are you willing and clear communicators? Relationships l How well do you both know your customers? l Are your customers loyal? l Where should you position your brands? l How strong are your supplier relationships and networks? l How effective is internal communication? People l Do leaders address conflicts of interest? l Is there strong team commitment? l How engaged and faithful are employees? l Are high potentials identified and rewarded? l Are costs, resources and time managed efficiently

Business Reporter · November 2012

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Mergers and acquisitions

Deal or no deal? Cash reserves hoarded during the economic crash are burning a hole in the pocket of private equity firms. If there was ever a good time to buy or sell a company, experts say that time is now By Bonnie Gardiner

“MBOs will not replace the equity markets completely – but it’s a model that has a place in the capital market” – Sachin Date

Buy or be bought? Many managers would understandably prefer the former – but to perform a successful management buy- out (MBO), businesses first need to secure the capital. That’s no mean feat in today’s economic climate. However, experts suggest that as capital begins to flow again, MBOs are now becoming a more viable option. A s t he ma rket for f i na nce disappeared during the worst of the crash in 2008-9, MBOs took a commensurate dip. Data from the Centre for Management Buy-out Research (CMBOR) reveals the value of buy-outs peaked in 2007 at £43bn. That sum fell dramatically to £18bn in 2008 and £5bn in 2009. MBO activity is holding up well this year, however, with both the value and number of deals over the past three quarters almost overtaking 2011 as a whole, when the market value had risen back to over £12bn. A healthy spread “It’s encouraging to see that values are being boosted,” says Sachin Date, private equity leader for EMEIA at Ernst & Young. “And not only by one-off mega deals, but a healthy spread of transactions across the value range.” Financing is now becoming more available throughout Europe, with debt markets growing stronger, along with easy access to private equity funds, meaning the environment for financing MBOs is becoming pretty healthy. Mark Bishop of the MBO Centre explains that buy-outs leveraged through private equity are easier now than in the past, which may come as a surprise to some buyers. The wariness of trade and financial buyers following the economic crisis left greater excess of private equity funds available.

Case study: Gary Fletcher, CEO of Forest Holidays MBO attracted quality investors Research and interview wisely

Established in 2006, Forest Holidays has self-catering cabins set in seven Forestry Commission estates across the UK. In September this year, Lloyds Development Capital (LDC) along with Lloyds Bank backed the management buy-out of the company. Forest Holidays provide short break accommodation in some of the most stunning locations in Great Britain,

compelling business plan on how to create additional value on that business. Lastly, there should be a rounded management team that is capable of executing that plan.”

Whether it’s buying up shares or it’s the result of a divestment, buy-outs usually occur via a mixture of private equity and debt. The best route to take financially however will rely on the actual business. There are different players in different markets, but most people would seek to secure equity first from a private equity player, then use that as leverage to bring the debt financing. C M B OR f i g u r e s show t he proportion of debt to equity for buy-out deals is the highest it has been since 2008, which shows an increase in the level of bank liquidity and banks’

willingness to fund good quality deals. Alternative routes There are some developing alternatives to bank financing as well, such as the bond market, which is popular in the US or credit funds that provide loans for private equity partners to do buyouts, while at the smaller end of the scale there is also asset-based lending. Further to Bishop’s recommendation for anyone waiting for the opportune conditions to buy or sell companies, now is a good time. Private equity partners that raised their funds in the boom years prior to the crisis invested

in businesses to sell for a profit five to seven years down the line. As those timeframes conclude, the overhang of capital is burning a hole in the pockets of private equity houses, allowing a strong appetite for suitable deals that may only last another two years at the most. An MBO transaction is unlikely to attract financial support unless it ticks three boxes, says Bishop. “The most important thing is that they should have a realistic prospect of being able to buy a well-priced business,” he advises. “The second is they should have a

and our customers absolutely love the product. We spend a lot of time on our service, but we’re a small, personal company so the M BO was to finance the growth of the company across the country and help it reach its full potential. We approached a few companies to discuss growth strategies for the business, we had a couple of shareholders that didn’t have a lot of capital, so we went to the market and said ‘who is willing to help is grow this brand and this fantastic opportunity?’

In the end, the MBO was very successful as our company was already successful – that attracts good quality investors; it’s a good opportunity. LDC and Lloyds B an k h e lp e d th e business and put a finding package together that allowed us to grow over the next 3-5 years. They’ve been very mature in their view of the business and supporting it over the last 6-12 months. Lloyds Bank finances the business anyway so they knew us very well;

they’ve seen us grow up and stayed with us, which was very encouraging. We’ve spent a long time building the company; we’ve learned what’s required over the past five years. We’re now in a good place to take advantage of the market and we’ve got a strong management team to back it. We’ve got a very good in-house consumption team with a development leader, and we’ve got sales, market and finance operations. My advice to any others preparing for an MBO is to look at the market as a whole because investors are not all the same. They have elements that can be attractive and not so attractive, so it’s beholden upon the company to do its homework and interview wisely. One of the things that’s helped us is the intermediaries and corporate advisors

Sectors of success In regards to sectors, while M&A is rife in manufacturing, the deals tend not be MBOs, probably because of the high level of investment required. Historically, MBO activity with Financial Institutions Groups, plus oil and gas sectors, is low despite high activity with M&A in general, while technology, telecommunications and business services are quite prolific in MBOs as a result of the cash generative nature of the services. Until the economic situation in Europe improves, the transaction markets for buy-outs are expected to stay volatile. However, the developed markets are recognising a window of opportunity for a buyer where the economy is not likely to see a new crisis, but neither is recovery going to be very rapid, so there isn’t a great benefit for a trade owner of a business to hold on to their businesses. For even in tough economic conditions, MBOs will remain an attractive option. “MBOs will not replace the equity markets completely – but it’s a model that has a place in the capital market,” says Date of Ernst & Young. “In the medium to long term, it’s a market that’s here to stay.”

Forest Holidays needed finance for its growth strategy

who have guided us along the way; they know the space and who to talk to and who not to talk to. If it were anybody else, you’ve got to expect an absolute grilling in terms of people going into detail about your company – honestly, every single detail is gone through with a fine toothcomb. Lastly, it helps to be straight and honest.

Business Reporter · November 2012

Mergers and acquisitions

an independent report from lyonsdown, distributed with the daily telegraph

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The greatest mergers that never were If these firms had their way, our high streets and services may look very different, says Dave Baxter When BAE Systems found itself on the sharp end of shareholder calls to ditch its chairman and pull a fresh business strategy out of a hat, executives must have wondered where things went so wrong. This was mid-October. Just a month earlier, officials had been in talks to merge the UK’s largest defence contractor with Franco-German aerospace giant and Airbus owner EADS to create a European powerhouse – with 220,000

employees and products ranging from fighter brand name with major contracts in Britain and jets to nuclear submarines. the USA, EADS has a bigger focus on commercial Plans for the £28 billion deal took traders aircraft and aerospace technology. by surprise, but the commercial appeal But on October 10 – London’s Takeover was clear. Panel’s deadline for the companies to £28bn announce their intentions – the deal The join-up would have created cost of BAE an organisation with combined sales was declared dead, ending the prospect and EADS of £60 billion, as well as giving EADS of a company able to overshadow deal a foothold in the American market and America’s Boeing. getting BAE back into civil aviation at a It was a clash of personalities that time when major conf licts in Iraq and finally scuppered the merger – but not between Afghanistan were winding down and defence the company bosses. budgets were being squeezed. Britain’s government has a “golden share” And the risk of professional overlap between in BAE, giving it the right to veto any deal it the two seemed minimal: while BAE is a defence deems against UK public interest, and EADS

– which was formed by a consortium of manufacturers from France, Germany and Spain in the 1990s – is partly owned by the French and German governments. Arguments between these three stakeholders over issues such as where the company would be based and the size of French and German share holdings led to disputes which proved impossible to resolve. But the deal also ran into another form of resistance: Invesco Perpetual, which holds more than 13 per cent of BAE and counts as its largest shareholder, very publicly criticised the logic behind the merger and aired fears about its impact on BAE’s position within US defence – an intervention which will only have damaged the chances of a successful merger.

Business Reporter · November 2012

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Mergers and acquisitions

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accounting businesses after the Securities and Exchange Commission raised concerns over a potential conflict of interest, and HP was looking to bolster its technology arsenal. HP made the offer in September but abandoned the deal after disappointing performances in its stock price and earnings. But PwC got its wish when, less than a year later, IBM took the consulting business for $3.5 billion (£2.1bn).

EMI and Warner Music The year 2000 saw music labels Warner Music and EMI attempt a $20 billion (£12bn) join-up, but the timing was flawed. As Facebook and Twitter the two wrangled with EU regulators on the A social media powerhouse was issue, AOL and Time Warner proposed an even hinted at in late 2008 when Facebook began bigger merger, valued at a whopping $135 negotiations with the ultimate aim of acquiring billion (£84bn). microblogging site, Twitter. It is believed the Warner-EMI deal was given Ongoing discussions and an offer of up so Time Warner could get its wish. EMI $500 billion (£311bn) in stock and cash by gave the deal another go in 2003 when it tried Facebook may have set the twittersphere to buy Warner Music, but lost out to an alight, but hopes were dashed by investor group which would later take disagreements over Facebook ’s as Warner Music Group. $500bn it public valuation. This led to another attempt, offered by Since then the companies have beginning in 2006, when a resilient Facebook to moved on, with Facebook’s public EMI offered $4.6 billion (£2.8bn) for buy Twitter flotation and rapid expansion by both the label. Warner Music Group not firms – but with news about talks of a only rejected the bid but put in its own $4.6 billion bid for EMI. merger between the two, the ultimate social This back-and-forth was put to a stop later media giant could still be a possibility. in the year when an EU legal ruling on a possible Hewlett-Packard and Sony-BMG marriage damaged hopes Warner PricewaterhouseCoopers Music Group and EMI would be able to get Former Hewlett-Packard chief executive Carly regulatory approval. Fiorina may have turned heads with the IT WMG finally approached EMI with a cash firm’s $25 billion (£15bn) takeover of computer offer in 2007, but this was rejected and EMI firm Compaq, but this was wasn’t her first step eventually found itself in the hands of private equity fund Terra Firma. into the world of M&A. In 2000 she attempted a deal almost Comcast and Disney as grand in scope: the $18 billion (£ 11 b n) a c q u i s i t i o n o f Cable giant Comcast caused PricewaterhouseCooper’s shockwaves in 2004 with an unexpected bid m a n a g e m e n t a n d I T to take control of Disney via a proposed $54 consulting arm. billion (£33bn) stock-swap. But this bold move quickly lost momentum PwC had been keen to separate its when Disney threw out the bid, causing its stock consulting and to rise as Comcast’s dropped – reducing the cable firm’s bargaining power. The bid was made in February, only for Comcast CEO Brian Roberts to withdraw it in May. General Motors and Chrysler As the car-making industry looked set to become one of the big losers of the 2008 crash with falling sales and a prohibitive amount of debt, GM, Chrysler and Chrysler’s owner Cerberus Capital Management hoped to consolidate its operations. These discussions became public knowledge in October but trailed off a month later when GM announced a $4.2 billion (£2.6bn) quarterly loss and feared it could run out of cash. Microsoft and Yahoo Microsoft hoped to unsettle Google when it made a surprise hostile $44.6 billion (£27.7bn) bid for Yahoo in February 2008. Four months of wrangling ensued as Yahoo CEO Jerry Yang did his utmost to fight off the bid, and in May Microsoft withdrew after an improved offer of $47.5 billion (£29.6bn). Any talk of a takeover was replaced by discussions about a more limited partnership – but Microsoft boss Steve Ballmer said he was calling these off shortly after. Since then, Ballmer has talked of his desire for some form of Microsoft-Yahoo deal and the companies have even worked together on the Bing search engine.

Ingredients for success The opportunities during the economic downturn are ready for the taking. But don’t overlook the essentials INDUSTRY VIEW

he most common reaction to a recession is to tighten belts and safeguard cash reserves. This is something we saw very clearly when the recession first hit the headlines in 2008. Many companies in the electronic content management sector initially sat on their hands regarding acquisitions. However, once the initial adjustment had taken place, we saw activity rising slowly year-by-year. The reality is that business must continue in spite of the downturn. Acquisitions and mergers are a highly important element of ensuring a company’s growth, especially during a recession. However, for some organisations, plans for acquisitions are often placed on hold until the economy picks up. But what many companies don’t recognise is that a recession yields tremendous opportunities. While some companies keep a tight hold on their cash, opportunities are overlooked that can provide a huge competitive advantage in the market place. Companies that take positive action and don’t suffer from ‘inactivity paralysis’ during a recession will pull ahead of their competition and gain a much larger market share for when the economy bounces back.

Size matters

Setting aims and tracking them Create a set of SMART acquisition objectives – be specific; make them measurable, agreed upon within your management team, realistic and within a timeframe. p Have an M&A strategy that fits with your business plan – Common sense you would assume? Having any sort of M&A strategy is not so common. p Have a true and clear view of your competition – Don’t overstate your strengths with an overly optimistic view of the world. p Acquire with the insurance of knowledge and experience – Ensure you have sufficient data and expertise. p Don’t suffer from keyhole vision – Ensure a clear global view of your market with a wide range of possibilities so you get the ‘right fit’.

their competitors behind, but what must not be overlooked are the essential ingredients for success. Begin with the end in mind – I hope Stephen Covey would excuse me for plagiarising his book, The Seven Habits of Highly Effective People. Know your acquisition outcome from the start. What Mark Edwards should an acquisition achieve for your business? Creating a strong M&A growth strategy can alter the course of your business and can facilitate business success because historically, market leaders often emerge like a phoenix from the flames, after tough economic times.

However, it has been shown that during a recession, it is important to focus on a larger number of smaller deals rather than on a single, larger, game-changing acquisition. Companies that implemented this strategy during previous recessions experienced the most success. The reasons for this success are: l It spreads risk l Smaller companies are often more innovative and agile and able to provide unique differentiation l Specific resources/assets can be acquired without taking on a lot of surplus baggage which could take time and cost to cut away l The ability to quickly gain faster moving vertical or niche expertise and thus gain an advantage in the market place. It is often more expensive and much slower to grow a company organically rather than to acquire an established business. For those willing to take action and take some calculated risks in their acquisitions, the payoffs are huge. The untapped growth opportunities available during this economic downturn give companies the chance to leave

Mark Edwards is CEO of Document Boss mark@document boss.com www.document boss.com

co mp anie s

This illustrates two key issues coming into play for mergers and acquisitions. One is the classic problem of when key players in a deal – often the company boards, but in this case Europe’s political heavyweights – cannot agree on the terms of the marriage, and it falls at the first hurdle. But another barrier is the possibility of emboldened shareholders being ready to vocally oppose a deal if they have reservations. But BAE/EADS is not the only recent merger to experience trouble – it joins a long list of high-profile match-ups that ultimately never were.

Inn ov ati on Safer, smaller de als a

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Business Reporter · November 2012

Mergers and acquisitions

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Fasten your seatbelts Welcome to the fast-paced, topsy-turvy world of mergers and acquisitions. Just scream if you want to go faster... By Dave Baxter What do Ivan Glasenberg, Tony Blair and Vladimir Putin have in common? The answer: they have all made the business pages through involvement with two of this year’s most newsworthy mega-mergers. But while the $55bn (£34bn) tie-up between Rosneft and BP and wranglings over a GlencoreXstrata marriage – including Tony Blair’s last-minute mediation for a reported fee of around $1 million – show the glamour at the top end of M&A, recent UK activity has given numbercrunchers less to shout about. Predictably enough, the crash of 2008 has caused both M&A volume and the total value of deals to tumble from a 2007 peak – but even though the figures have recovered slightly since then, analysts worry they are unlikely to reach the heights of their former glory. And there are different winners and losers in the sectors most active for M&A, as well as new trends in how firms fund deals. There’s a possible comeback for both bank-funded debt and private equity, offering hope for those keen

on financing potential tie-ups, while sectors such as banks, retail and utilities show high levels of M&A activity, too. M&A volume for the first three quarters of the year peaked in 2007, when the tail-end of an economic boom saw 5,311 deals made at a total value of £193m, according to analysis firm Zephus. Following the crash, the volume of deals fell to 4,001 for the first three quarters of 2008, recovering slightly to 4,816 in 2009 before plummeting again to 3,972 in 2010. The numbers have improved slightly since: the first three quarters of 2011 involved 4,393 M&A deals, worth £88.3m. And this has made a small jump to 4,594 deals, at a value of £87.9m, for the first three quarters of this year. But these figures are dwarfed by the value of deals in the first three quarters of 2009 and 2010 – £146.8m and £103.2m respectively. Stability setting in Information services firm Experian broadly agrees that a stability of sorts has set in – over the last 12 months it recorded 3,798 deals compared to 3,838 for the preceding 12 months. So figures are steady, but some fear the robust

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M&A deals – volume and value Value first 3 Q of year

Number of deals

Deal value (mil GBP)

2012

297

16.02

2011

287

8.9

2010

359

13.7

2009

233

3.8

2008

463

20.6

2007

553

52.2

Private equity deals – volume and value Value first 3 Q of year

Number of deals

Deal value (mil GBP)

2012

4,594

87.9

2011

4,393

88.3

2010

3,972

103.2

2009

4,816

146.8

2008

4,001

141.5

2007

5,311

193

Source: Zephyr published by Bvd

Hottest M&A sectors in last 12 months

Wholesale retail and trade: £6.1m Banking sector £9.2m Gas, metals and electricity £10.3m M&A market of the past is dead. Zephus MD Lisa Wright says: “The problem that we have is we are nearly five years on from the financial crisis. “The UK is still struggling to get back to levels of M&A activity pre financial crisis with the euro and the double dip recession.” Hot sectors in M&A by value for the last 12 months include wholesale retail and trade (£6.1m), banks (£9.2m) and gas, metals and electricity (£10.3m).

The driving force behind these differs; retail finds itself in the teeth of a prolonged downturn, with chains such as JJB being snapped up after going bust, and banks, which are also suffering, may either fail or consolidate with others. Theories of profit But the reasons behind a run on utilities are more mysterious. With UK energy companies making headlines

because of alleged record profits – in October 2011, regulator Ofgem accused the utilities of increasing their profit per dual-fuel customer from £15 to £125 – the explanation that failing companies are being taken over doesn’t quite fit the bill. Other theories centre around the increased clout – and ambition – of the emerging markets. As Rosneft’s high-profile acquisition of TNK-BP suggests, there is an appetite for emerging markets to secure their energy supply. But not all figures match this logic – Wright says utility deals over the past year have predominantly involved UK companies rather than foreign interests, and argues domestic firms could be grabbing up market share before competitors from abroad get the chance. When it comes to the funding available for M&A, two possibilities stand out: the potential return of bank-funded debt and the tentative hope of a private equity comeback. Experian records a notable lift in the number of M&A deals for the past 12 months, compared to the previous 12-month period: a 15.4 per cent rise from 254 deals to 293. Wendy Driver, business development manager at Experian, says: “It could be a sign that business owners are feeling more confident and going and asking for funding – that could be seen as a positive trend.” Uncertain future A bigger issue is the future for private equity – which remains uncertain. Private equity M&A died a death in the financial crash – its value fell from £52.2m for the first three quarters of 2007 to a miserable £3.8m for 2009, according to Zephus. Figures from the last two years suggest a comeback on this front – private equity M&A value for the first three quarters nearly doubled from £8.9m for 2011 to £16m for this year. But these figures say more about the size of deals than the actual level of activity, because the number of private equity deals in the first three quarters of 2011 was 287, and this has only increased by 10 – to 297 – for 2012. So private equity volume seems to be plateauing (at a low level compared to the 553 deals in the first three quarters of 2007) rather than rebounding. But appetite could increase when private equity firms have to release funds they have raised but not spent since the crash.

A done deal GDF Suez and International Power

One of the big deals of the year came when French company GDF Suez agreed to take over UK electricity producer International Power for around £6.4 billion. GDF Suez scooped up the last 30 per cent of the company it didn’t already own for 418p a share, after an earlier offer of 390p was rejected by the UK company’s independent directors. With a number of projects in emerging economies such as Brazil and Indonesia, International Power made an attractive prospect – GDF Suez told investors the deal would increase its the share of fast-growing markets in its net income from 23 per cent to 30 per cent.

Cisco Systems and NDS Group

Cisco Systems, the world’s largest provider of computer network equipment, agreed to buy video software specialist NDS Group for around $5 billion (£3.1bn) in spring. NDS is a name behind the technology used to deliver video securely to set-top boxes for televisions, and has customers including British Sky Broadcasting. In a deal approved by both company boards, Cisco agreed to pay around $5 billion for NDS, which included taking on around $1 billion of debt.

Iceland Foods

Frozen food retailer Iceland met its maker earlier this year when a management buyout saw one of its original founders take control. Along with the chain’s senior management, Malcolm Walker, who established the company in 1970 with just £60 of capital, took full control of the company in a £1.5 billion deal financed by banks HSBC, RBS, Nomura, Credit Suisse and Deutsche Bank. The team already owned 23 per cent, and saw the opportunity to reclaim the rest when liquidators for two failed Icelandic banks sought to sell their holdings in the chain.

The long W pause

why, where and how deals are currently being done – and in the prognosis for what lies ahead. ith global M&A results The narrative in which I have for the third quarter become most interested is why now in hand, we are M&A is the slowest financial awash in statistics and analysis service sector to return to from media outlets, economists, pre-financial crisis strength and academics and industry what effect this M&A professionals. sluggishness may have on our Not surprisingly, M&A activity industry and the economy. experienced a free-fall from Post crisis, high yield both the previous quarter markets rebounded and the year prior. quickly and capital Globally, deal volumes markets largely fell to their lowest level recovered, but M&A since 2005, declining 8 markets have waned in per cent from the second comparison. Yet despite quarter. The total value David Fergusson some of the most of transactions also advantageous conditions for deal declined, hitting its secondmaking that we have seen in lowest level since mid-2010. decades – low interest rates, deep But M&A professionals know capital pools and stagnant best that the statistics are just the valuations – the M&A industry’s headline. The real story lies in

INDUSTRY VIEW

New research gives insight to the diminished M&A market in a stuttering global economy

recovery is experiencing a protracted ‘long pause’. We recently commissioned M&A stalwart Marshall Sonenshine, chairman and managing partner of New York investment bank Sonenshine Partners and adjunct professor of finance and economics at Columbia University, to study the relationships between global finance, macroeconomic and

geopolitical trends, corporate strategy by industry, and the resulting effect of all on M&A. Sonenshine’s analysis of global economic uncertainty, related business strategies, and the subject of confidence and conviction are reported in The M&A Advisor’s latest M&A Market Monitor paper, The Long Pause – M&A In A Time of Uncertainty. This whitepaper is the most insightful assessment to date of a diminished M&A market in a low growth global economy, and is available exclusively now to readers of the Business Reporter’s 2012 Global M&A Report. David Fergusson is the senior managing director of The M&A Advisor Download your copy at: www. datasite.com/thelongpause

Business Reporter · November 2012

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Mergers and acquisitions

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Getting your money’s worth Driving value from divestments is challenging. However, investing in planning limits value leakage for both seller and buyer INDUSTRY VIEW

he recent increase in divestment focus is driven primarily by a need to optimise value from core assets as a strategy, to raise cash generating higher value for shareholders and to raise capital funding in-organic M&A growth. These are typically key seller objectives when divesting assets. From a buyer’s perspective, integrating a carved-out entity into their existing business provides immediate access to established brands, new markets, sales channels and, most importantly, an opportunity to create value through synergies. Standalone divestments are also attractive to buyers (primarily to financial buyers) as they look to quickly establish the standalone business, optimise cash flows and enhance the growth opportunities and exit. However, not all divestments are risk-free and ensuring optimal value creation is often challenging for both the seller and the buyer. In the October 2012 Ernst & Young

Capital Confidence Barometer research, a sample of UK executives revealed their recent experiences of divestments and their view on how the process can be managed better: l 29% said – better communications with employees, customers and suppliers l 18% said – better understanding of potential synergies for each bidder l 17% said – earlier identification and mobilisation of key managers and employees.

Comprehensive plan The most critical aspect of any divestment is planning linked to value creation. Sellers must consider all the operational, IT, financial, legal, contractual and tax implications so they can establish an effective standalone business and respond to the buyers’ questions during the due diligence process. Proper planning will benefit a speedier and more earnings-enhancing sale. Buyers must also have a strong focus on transition planning. Having a clear transition plan can

Forging ahead in the new economic landscape. We can help you navigate it.

help limit value leakage, which can mean the success or failure of the acquisition. This common objective to achieve orderly separation through proper planning normally ensures that the deal works financially and operationally for both parties.

Strong leadership Establishing a strong project leadership team to drive the divestment objectives is also very important. The seller should assemble an aligned senior leadership team responsible for setting the divestment objectives and the ultimate delivery of the carve-out entity, including management of any ‘stranded costs’ as a result of the divestment. Additionally, working with the M&A team in the pre-deal phase, this team would anticipate the potential buyers’ questions and needs, structure the transaction and consider the buyers’ operational and functional requirements, from signing to

We know that in today’s world, you face unprecedented challenges and responsibilities. At Ernst & Young, we can help you take a forward looking perspective to critically evaluate the options and risks. Find out how our teams can help you find a resolution at www.capitalinsights.info

See More | Vision

Divestment drivers Main reasons for corporate carve-outs (October 2012)

78% 33% 22% 22% 6%

Focus on core assets Enhance shareholder value Fund inorganic/M&A growth plans Raise cash to compensate for underperformance of aggregate business Shedding underperforming business unit Source: EY Capital Confidence Barometer Autumn 2012

standalone or fully integrated strategic buyers determine the basis position. for transaction pricing through The buyer leadership team’s their understanding and evaluation main objective is to establish of the synergy benefits. control over the divestment as soon as practicable and to avoid relying Key communication on the seller in the Transitional Timely and appropriate Services Agreement (TSA) communication is essential discussions. The team also ensures to an effective carve-out process. clarity of the plan, establishes a Early on, sellers must determine view of the one-off costs in whom to involve and when. setting up the stand-alone At first, the exploratory or fully integrated team should be small. But business and identifies as the likelihood of moving and anticipates the forward increases, the execution risks. group needs to expand to Hence, mobilisation of include functional expertise the leadership team with in IT, human resources, Michel Driessen the right incentive in place accounting, tax and other to retain them through to delivery of essential disciplines. the divestment becomes critical. Sellers must pre-empt potential issues with proactive, clear and concise communications Synergy benefits that address major stakeholder For a corporate strategic buyer often concerns, for example, customers, the main value driver for acquiring suppliers, trade unions and a divested entity is the synergy shareholders. Conveying the benefits – both from a revenue messages in a positive, wellenhancements and cost savings structured and properly vetted perspective. The focus here would manner will reduce countless be to integrate the carved-out assets concerns. into an existing operating structure For the buyer, communicating and focus on the delivery of the strategy to key staff early is synergy opportunities. However, important to ensure they retain the there are risks of not fully achieving talent to deliver the integration. the synergy benefits through As the transition progresses, under-estimating the costs to mobilising the right people with deliver or not fully understanding the right skills for the right-sized the execution risks. integrated business becomes the Buyers should be mindful of focus. Uncertainty over their risks covering financing (such as future roles increases the risk of post M&A activity funding may be losing key employees during the more challenging), integration transition process. execution, legal (such as In summary, a comprehensive competition commission ruling) plan, dedicated leadership team, and market risks. Finally, the ability clear governance structure, clarity to track the achieved synergy on synergies and communication benefits compared to the plan is key are key to driving value from a to ensuring the investment thesis complex divestment for both the can be proven to their shareholders buyer and the seller. and financial investors. Sellers on the other hand can Michel Driessen is lead partner of benefit from understanding the Operational Transaction Services potential synergies from each of 0207 951 2000 their key bidders to help in their www.ey.com pricing negotiations. Typically the

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A hive of activity Manufacturing

Oil and gas

Technology

Retail/consumer products

Legal services

Volume of activity

As the leading M&A sector throughout the UK and Europe, manufacuring has covered over 30 per cent of M&A deals. The high volume of deals can be attributed to three broad scales of the sector, with the inclusion of sub-sectors such as chemicals, metals and aerospace. Ross James, M&A manufacturing partner at Deloitte, says the sector has been relatively resilient, remaining at the top of the M&A heart charts, with 696 deals so far this year, following 1,008 in 2011.

Last year there were 1,300 M& A transactions in the oil and gas sector globally, equal to about four deals per day. There were about 70 transactions surrounding the North Sea last year, as well as 393 on a European scale. Virtually every transaction in the oil and gas sector is cross-border, with many buying into projects in different parts of the world. There has also been some activity in this sector within the Aberdeen market.

Technology, telecommunications and media has been responsible for 505 deals so far this year, following from 684 deals in 2011 and 611 in 2010. Simon Pearson, head of technology M&A with Ernst & Young says the market has been very efficient: "The wave of next-generation innovators coming along has heavily picked up, so the volume of venture capital invested and the volume of businesses coming into the space is one of the best I’ve seen."

The retail space has also been quite busy compared to the past, with M&A starting from a distress point of view. Deloitte research shows that there were 23 deals in the 12 months to May 31 this year, with flagship assets attracting valuation premium. “There’s a fundamental shift as there was nothing for a few years in the food or drink side,” says David McCorquodale, corporate finance partner and head of retail at KPMG.

According to David Snell, head of PWC’s Professional Partnerships Advisory Group, the UK has seen unprecedented levels of M&A in the legal sector this year. A PWC survey showed that last year 17 per cent of law firms anticipated M&A of some description, which has risen to 50 per cent this year, demonstrating a large strategic shift. Reasons for the sudden influx include financial pressure, intense competition, and the introduction of Affinitive Business Structures (ABS).

Key reasons/strategy

An unstable economy means that deals are being carried out as part of a larger defensive strategy to make the business more sustainable. Businesses are working to optimise their portfolios, consolidating when they are over capacity and need some cash, or they are trying to do deals to reduce exposure to risky commodity prices. There’s also been a large amount of inbound M&A deals in areas such as Japan and the US investing heavily in Europe.

Jon Clark, head of oil and gas M&A with Ernst & Young explains that there are two areas of transactions for this sector. “One is people investing into the UK, the other area, which is very exciting, is the UK capital markets and the role that plays on the global stage, with 120 oil and gas companies listed in London.” The sector is active in deploying capital from UK companies to foreign countries. However, energy minister John Hayes MP is encouraging more investment inbound.

The main drivers are fueled by a desire to gather new assets and commodities, and the speed at which these change means acquisition, rather than original development, is not possible. Such changes include new data analysis infrastructures or the swift transfer from online to mobile devices. “If you haven’t got the product it could take you years to develop something, so you’re better off buying otherwise the market will pass you by,” says Pearson.

Along with international expansion into high growth markets, the food and retail M&A activity has mostly been driven by consolidation or a break up of various businesses driven by quite a high debt mountain, explains McCorquodale of KPMGs. “The supply chains are being squeezed by large grocers and we have a lot of food inflation, so the supply chain of the major processes need to improve and that drives consolidation to the sector,” he says.

There’s a significant consolidation around mid-tier UK firms as a mainly defensive strategy in response to market pressure. ABS has spurred greater interest in more M&A, with financiers particularly interested in what Snell describes as “commodities businesses” to legal services – conveyance and personal injury. International expansion has been a key factor, driven by the demand of clients to have an international focus, particularly in the emerging markets.

Sector forecast

As economic recovery becomes more evident, the strategy of deals is likely to become more aggressive. “Years ago, manufacturing M&A would’ve been more about executional political strategy, rather than defensive strategy,” insists James of Deloitte. “As things get better from an economic perspective, the volumes of M&A will continue to rise, but the reasons for M&A will change to become less defensive and more around positive strategy execution.”

McCorquodale of KPMG notes: “It’s a very different and often cyclical sector compared to other parts of the economy.” In addition, smaller companies with development projects and a stream of capital will also add to the continuation of strong M&A activity. “I think the trends that we were seeing this year will continue into next year. You’ve got huge capital flows; some people have got capital and some people need it so that’s going to drive more M&A,” says Clark.

Pearson of Ernst & Young expects that next year technology will still be a hot M&A sector, with volumes going up, but values potentially going down. High volumes of inbound M&A is almost back to the high levels of 2005-2006, but there’s not much left to sell. “There’s a fantastic level of innovation going on in the UK,” he says. “I think we’ll see lots of activity around mobile payments and mobile advertising. They will be the two hottest areas next year.”

Consumer M&A research conducted by Deloitte in July this year, titled Rising to the Challenge, shows that consumer product companies will probably continue to face the challenge of passing-through price increases against a background of significant price-led retail competition. In some sub-sectors the ongoing pressure for greater economies of scale is likely to bring about greater consolidation.

Snell of PWC predicts that with greater consolidation and divestment, high streets will see a significant reduction in the number of firms, forecasting around 50 or 60 disappearing over the next 2-3 years. "We will see a significant period of consolidation and a significant reduction in the number of firms, as well as the emergence of a small number of global super firms with international reach," he says.

Major deals

Which M&A sectors are thriving and which are diving?

l US business Colfax won the £1.5bn deal

l BP has been very active, more on the divestment side as they reshape their portfolio following the Gulf of Mexico incident, announcing their Texas refinery sale to Marathon Petroleum Corp for £2.5bn. l Shell lost out on the bidding for Cove Energy to Thai rival PTT, which offered £1.21 bn.

l Google has made six acquisitions this year, Cisco has made seven. l Meanwhile, EMC Corp has made 16 acquisitions in three years, whereas IBM has acquired more than 70 companies since 2003. l Pearson of Ernst & Young expects the top 30-40 per cent valued companies will remain active for many years.

l High-street retailers including Peacocks and JJB were involved in pre-pack administrations to effectively drive store reduction programs. l Supermarket giant Morrisons purchased online baby products supplier Kiddicare for £70m, which was a deal driven by a strategy for greater online momentum. l Premier Foods has sold off brands such as Hartley's jam, Sun-Pat peanut butter and Gale honey to US firm Hain Celestial for £170m cash and £30m in shares.

l Large-scale mergers include the UK's

for UK Engineering Company Charter. l UK corporate Anglo-American and French corporate Lafarge started a joint venture around cement and construction, aiming to create a business with £1.8bn in sales and annual cost savings of at least £60m. l UK company Melrose spent £1.27bn to buy German company Elster Group, which makes gas, electricity and water meters.

Herbert Smith merging with Australian firm Freehill to create a global partnership for an undisclosed amount. l There’s been a fair amount of merger activity within the UK, with England's Pinsent Masons and Edinburgh law firm McGrigor Donald merging to create a £280m practice with 2,500 staff. l Anderson Fyfe in Glasgow merged with TLT in Bristol in a deal worth £47m.

A tailored approach The days of easy deals are over. True M&A success comes with hard work, attention to detail, and more care over clients INDUSTRY VIEW

“B

espoke M&A is the way to get things done in this market,” says Robert Donaldson, Baker Tilly’s head of M&A and private equity. The boom was easy. Advisers won clients by over promising and relying on the euphoria and appetite of banks to ‘get them out of jail’. Bankers, investors, advisors and entrepreneurs grew up seeing M&A as an easy path to success. But current market conditions require a different approach. More work, more care, more creativity and more finesse. As poor macroeconomic conditions continue, the eurozone crisis deepens and

anaemic growth depresses public markets. The days of ‘easy’ transactions are over. To complete a deal requires a different approach.

Negotiation:

The highest quality sales material:

Get it over the line:

The Information Memorandum is the shop window. Selling a business is the same as selling anything else. Packaging and presentation are critical. Take time to get the messaging and the look right.

Some transactions fail because discipline and focus are lost once the deal is agreed. Getting through due diligence and documentation is as critical as the earlier stages.

Negotiation is about persuasion, not confrontation. Construct a solution where both sides feel like winners.

Approach buyers cautiously: A wide auction isn’t necessarily the best route. Quality research and a focused approach by senior people is key.

A controlled process: Courting businesses is an exercise in seduction. Buyers need to feel special.

With the need for a bespoke approach, the tide is moving away from larger advisers to firms where partners are not just sales machines, but will roll up their sleeves and lead negotiations. But the climate isn’t all gloomy.

Donaldson says: “There are reasons to feel positive. Corporate cash levels in the UK are at multi-decade highs. The climate for deals is surprisingly resilient with international appetite from European buyers keen to diversify out of the eurozone, and with US and cash-rich buyers from surging BRIC economies.” As the Dalai Lama once said: “Choose to be optimistic, it feels better.” Rob Donaldson is head of M&A and private equity at Baker Tilly 07968 067 644 robert.donaldson@bakertilly.co.uk

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Heed the high-profile horror stories of times past and focus on culture, leadership and integration to ensure your merger marriage stays strong

Making mergers live happily ever By Bonnie Gardiner

the importance of what comes next, with an eye for beneficial synergies but ignoring risks. Alex Gaunt, partner in Ernst & Young’s operational transaction services team, says it’s important to fully develop an operating model before leaping into integration. “Once you know what your model is, that will drive a lot of your decision making,” says Gaunt. “Too often people don’t identify what the real synergies are that they need to drive out of a business.” Designing and implementing a plan early on promotes suitable leadership, a stronger alignment of the merger rationale throughout the company, and a maintained focus on dayto-day operations. Synergy aims and sources need to be established upfront for quick and long-term wins, while tracking and reporting progress means hiccups can be resolved swiftly.

When Daimler-Benz struck a deal to acquire fellow automotive manufacturer Chrysler, it ended up costing around $110bn (£68bn) in losses within the first three years – more than double the deal’s initial value price of $47bn (£29bn). Vodafone’s acquisition of Mannesmann also left shareholders cringing with excessive losses – twice the initial value price of $150bn ($93.5bn). These companies, which both declined to comment, are by no means minor players, with good heads for business and the funds to boot – so what went wrong? Companies are good at buying businesses, but actually merging them is another matter. It is notoriously difficult to integrate companies, with risk of culture clashes, unsuitable leadership and improper preparation leading to derailed Considering culture strategies, wasted money and detachment of key The culture of two organisations is often very stakeholders. However, any company can be different and not appreciated as such until a merged; it’s just a matter of having the clash of values and methods becomes $110 right tools. apparent. Gaining a clear vision of los t bn in the combined organisations and Chr Daiml ysle er-B rme enz Forward planning the steps you will take in r ge r / order to achieve that With the excitement of vision will prevent mak ing a deal, most companies underestimate larger problems later.

“You might have one organisation that rewards people for taking risks, and you might have another that is very averse to risk taking, and you want to move one organisation to the other’s point of view,” explains Giles Archibald, EMEA leader of M&A and private equity at Mercer. “That takes a lot of work; you need to be very clear about what it is you want to achieve.” Real in-depth cultural assessment must be undertaken so you know what you’re dealing with. Alan Stevens, managing director of Vector Consultants, insists that this cannot be done by surveys alone, there needs to be focus groups, training and on-site observation. “During a merger I worked on, one of the real status symbols of managers within one company was the amount of plant pots they could have in their office,” says Stevens. “In an open office environment people use symbols to provide status. No survey in the world would ever pick up how many pot plants were there, or their importance.” Appropriate leadership Clear leadership in post-merger integration can mean greater success, but the individuals or groups that should take responsibility for that phase is unclear. The appointment of an Integration Director is vital to any programme. This person should

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Case Study: OneCommunications OneCommunications is the result of a six-way merger of internet providers across North America. One year after the deal, leaders were forced to call in third-party help due to growing levels of internal conflict. Stevens, who worked on the merger with Vector Consultants, said the problem was moving forward too quickly, with people facing a loss who had invested decades of emotional credit into a business. Carefully managing the disengagement of the people from their old organisation meant troubled employees were able to leave their baggage behind. “When something dies, every culture in the world has a funeral,” he explains. “It’s deeply ingrained in the psyche that you have to have a process of letting go before you move on – the same thing happens in M&A.”

be drawn from within the company, though Archibald warns that leaders should be chosen for being the best for the job, rather than to strike a balance between the two organisations. Taking independent advice from outside agencies can allow for an unbiased selection of leaders while offering helpful guidance for long-term strategy and demonstrating a thorough approach. Soft integration Mergers will increase uncertaint y for employees, so integration without a planned communication strategy will translate as lack of direction, confused priorities and slow reaction times to deal with things that are very real in employees’ worlds. “People will be wondering: ‘have I got the job?’ or ‘what’s in it for me?’ They can understand

the logic of the merger, but they want to know how it affects them,” says Stevens of Vector. With great potential for redundancies in an M& A situation, attention must not be monopolised. Though it will be hard for the members of staff being made redundant, Mark Bouch, managing director of Leading Change, believes focus should not be removed from the people that survive. “Often it’s the people who are going to lose out that are better treated,” he explains. “However, management rarely invest the same amount of effort in building engagement and relationships with those they intend to keep.”

Checklist for success l Develop a clear plan for accomplishing synergies, including hard and soft integration – monitor progress to ensure better understanding of issues and swifter resolutions. l Carr y out appropriate due diligence on financials, technology, and of course cultural assessment – be thorough, with focus groups and on-site observation. Appoint management team including full time Integration Director – appropriate and unbiased leadership assessment ensures the best person for the job.

Hard integration An acquiring company will often try and lay its IT infrastructure, general systems and procedures on to the acquired organisation without understanding what that really means on a day-to-day basis. Bouch says this is difficult, not least because people grow attached to what they’re used to. “They may not see the advantages of adopting new ways, so there’s a natural resistance to change,” he says. “As management, your challenge is to overcome that reluctance. The longer you put this off, the more difficult it will be.” Without planning in advance for a smooth switchover, such as new systems training and encouragement, you could face a culture clash and incur costs and disruptions for business. The morning after If organisations of any scale carry on perceiving M&A as merely business transactions, the integration process will be marred long before the contracts are signed. But strategy is all about perspective, once you know what to take

l Hard integration – organise training for personnel adapting to new systems and procedures, be enthusiastic, work to overcome any reluctance to change. l Soft integration – be sensitive towards social and cultural clashes which may occur – communicate, investigate, allow time to adapt. l If there’s a spanner in the works that you can’t identify, help is available from independent outside agencies who deal with strategy assessment.

into account, it’s just a matter of expanding. While there will still be challenges unique to each situation, by simply acknowledging and understanding the integration risks the day you make the deal, you can ensure there are no regrets the morning after.

Helping East meet West Understanding the differences between Asian and western markets during merger deals can avoid a culture clash INDUSTRY VIEW

ight now Asia is the leading market in the world, with people and businesses all vying to be a part of that growth engine. But whether you want to join somewhere like China to be a part of the growing consumer market or whether you want to invest in foreign assets to improve efficiency, M&A in Asian companies means the issue of culture clash becomes doubly challenging. Imagine if you chose a marriage partner purely for hair colour, height, or city of origin. Chances are it wouldn’t really work out in the long-term, if at all. Dustin Seale, partner and managing director EMEA of culture-shaping consulting firm Senn Delaney warns that the failure of many cross-border mergers into Asia can be attributed to an integration

strategy with similarly shallow considerations. “If you look at acquisitions, the depth of the connection often stops at the superficial, whereas in any relationship it’s actually the operating system, the history, the thinking, the culture behind it, that either makes it work or not,” he says. “Understanding these things requires much more depth.”

Acquisition principles With the excitement around Asia, it’s also concerning that organisations buying into the marketplace often abandon their acquisition principles. The same acquisition principles that have guided you in the past will work in Asia, with the addition of examining culture more carefully. But abandoning your principles at the outset is never advised. “Any company, when first looking into a cross-border merger within

Asia, needs to know its own principles and not break them, because that is going to guide your success,” insists Seale. Be clear about where you can be flexible and where you cannot. Standards around respect, formality and decisionmaking are also very different in Asian cultures. Communication issues arise even with the best English speakers and translators, so you cannot rely on all the same techniques to engage with people. Be assured that making the acquisition a success will require you as the acquirer to be 50 per cent more effective in terms of communication and engagement. “You have to approach culture

integration from a principles standpoint,” says Seale. “There are human principles that exist everywhere in the world – I don’t know of a culture in the world where they say ‘listening’ or ‘working together collaboratively’ or ‘being accountable for results’ is a bad idea.”

Behaviour integration However, Seale advises that principles and behaviour are two different things, with acquiring companies often entering into integration with western behavioural statements, which will make perfect sense to the rest of the western world, but

when translated are actually quite confusing or even disrespectful in an Asian context. But this is a challenge that can be overcome if you address culture at a principles level. “If you have a principle of accountability, and you allow for expression of accountability through the local culture, people can make sense of it in their own context,” says Seale. “It requires a disciplined integration process, but approached this way, acquisitions in Asia can meet and even exceed pre-deal expectations.” 020 7647 6060 www.senndelaney.com

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions

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Oil the T wheels of deals

INDUSTRY VIEW

The right software could speed up costly and inefficient due diligence processes

he fast paced world of M&A places tough demands on companies who need to store, manage and share critical due diligence information. M&A transactions involve wading through large volumes of documents, coupled with costly, non-secure and lengthy delivery of information to potential buyers. In order to get through the due diligence process smoothly, a Virtual Data Room (VDR) solution is an incredibly helpful tool. A VDR enables technology to streamline the due diligence process, and accelerate time-to-market with online document sharing and communication capabilities. A leading provider of VDR solutions is Merrill DataSite. Merrill DataSite were the first company to introduce the technology to the M&A market, providing a secure online data room that makes it easy for buyers to access documents, accurately search data, and pose questions to the seller instantaneously. “We’ve had more time to work on product development, listen to what our clients want and respond to their needs,” says DataSite director, Mike Hinchliffe. “We

have built the fastest, feature-rich system that is the most secure, with the most detailed reports, sophisticated search functionality and the simplest mechanism to securely upload documents.” Data available around M&A over the past 12 months paints a very gloomy picture, with a reduction in M&A volumes of around 20 per cent, whereas the

volume of M&A projects Merrill DataSite has been involved with is up around 10 per cent; a figure which Hinchliffe believes is cause for optimism. “This suggests a lot of people are initiating M&A deals, but those deals are taking longer to do and many are not being completed. But what we can say with some certainty is that there is more confidence in the market than the published data might suggest, with lots of work in progress set to close in the first half of next year.” A DataSite VDR can greatly speed up due diligence and the overall M&A deal process, allowing clients and their advisers to keep track of who is looking at what information with effective reporting tools – all with stronger transparency and reducing costs associated with traditional methods. “We’re there to provide the technology and service that allow our

Hinchliffe: there will be an uptick of closed M&A deals next year

clients to run their sales or acquisition processes more quickly. This is of clear economic benefit to our clients, as well as their advisers, who are able to execute more deals,” says Hinchliffe. “If current trends continue as we see them, then there will be a meaningful uptick of closed M&A deals as we move into the first half of next year.” Merrill DataSite is able to service deals in any part of the globe, giving it a solid market position as a service business. The company has been a trusted provider of secure information services to FTSE 100 and Fortune 500 companies and to financial and legal industries for over 40 years, working on over 25,000 M&A deals of all sizes and in all sectors over the last eight years. www.datasite.com info@datasite.com

Tackling culture clash A more emotional, mindful approach is needed for gaining real buy-in and synergy during the M&A process INDUSTRY VIEW

rganisational culture, by its nature, is incredibly difficult to change. We all like the feeling of stable familiarity, and it is human nature to resist changing our habits and behaviours when change is thrust upon us. Strategy can be, and often is, changed very easily. So, in M&A, why do acquiring companies tend to mould culture around strategy, and not the other way around? Mergers and acquisitions are a key part of many organisations’ strategies. Unfortunately up to one third of mergers fail within five years, and 80 percent never live up to their full potential. Culture clash is the key culprit.

Blind spot “Most people we’ve worked with have done a very good job of looking at the strategy of the combined entity, the financial reasons for putting it together and how they’re going to gain the results,” says Dustin Seale, partner

part of the equation, and you cannot change and managing director of the EMEA region of fear with logic,” says Seale. “It is our primal culture-shaping consultancy firm Senn brain that deals with fear. The decision and Delaney. “But 8 times out of 10 they’ve only assumptions we make, the behaviour we given a cursory thought to how to bring display when coming from fear, are a two cultures together; it’s mostly often survival mode. This is very different the blind spot in terms of integration.” One-third to the higher order brain, our logical Acknowledging that culture clash of mergers brain.”Leaders must articulate and is a real challenge is important, but fail within five years engage with different stakeholders acting to methodically address the about M&A goals and vision, but to cultural integration at a human level gain real buy-in and stability from staff, a is critical to M&A success. Developing an more mindful approach is required. approach for tackling this takes a different way of thinking, notes Seale. No matter how strong your strategy, any Logical and emotional newly merged organisation – whether it is the Yet, notes Seale, most companies approach acquirer or the acquired company – will be this with little success. “They go tell impacted by pervasive fear and uncertainty. employees that there’s a brighter future, “In M&A, the first thing to recognise is that that we’re a bigger, stronger company fear is going together, and we value you all. This is a to be a great communications platform,

but it only addresses the logical part of the brain, not the emotional part.” So, how do you address the human side of M&A to avoid culture clash? Senn Delaney, as the first firm in the world to focus exclusively on transforming cultures, has guided major merger integrations, helping companies involved with M&A to bring two or more cultures together by a process that initially

Leaders must articulate and engage with different stakeholders about M&A goals and vision includes ‘unfreezing’ – melting away old habits and patterns of thinking – and then aligning people to a unified set of defined values and guiding behaviors, starting with the executive leadership team. “The only way to unfreeze, because we’re all pretty hard-wired in our ways, is to have an experience that creates insight deep enough to break the old thinking,” says Seale. “This addresses the emotional part of the brain, which is the source of the real buy-in you need to deliver on the pre-merger promises.” 020 7647 6060 www.senndelaney.com

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the daily telegraph

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What are the obstacles to a successful M&A, and how can they be overcome? INDUSTRY VIEW Lisa Wright is head of M&A products at Bureau van Dijk Don’t make any assumptions and remain unbiased. A deal can look like a great opportunity, excellent value and present potential for a good return on investment, but you should still make sure you’ve done your research, considered all the options and keep questioning the validity. Are there alternative companies that compare favourably to your initial idea? Good, independent intelligence will empower your decision-making and provide a good benchmarking analysis. And it should always be evaluated impartially. Is it genuinely a good buy? A good strategic fit? The best option? All too many deals fail to return shareholder value because initial enthusiasm prevailed over intelligence and analysis. www.bvdinfo.com

Carlos Keener is founding partner of Beyond the Deal Too much focus still rests on doing the deal itself rather than delivering its benefits. A traditional view of M&A ‘pre’ and ‘post’ really doesn’t help, as stubbornly-low success rates confirm. A better approach to M&A, alongside established tools and good practice, focuses on what leaders do – and how they behave – from start to finish. Process: A structured acquisition process that drives a broad, informed and objective connection between deal objectives, target assessment and post-deal. Team: Those accountable for the business involved alongside deal-makers upfront. This includes their direct responsibility for design – not just delivery – of the new business post-close. Focus: Dedicated resources with clear accountability to plan, manage and deliver integration alongside day-to-day business. Without this, deal benefits take longer, elevate risk, and distract management.

Nick Alford, is partner at Kingston Smith Consulting LLP M&A failure is primarily down to poor strategic decisions. Why are you really doing this deal? Are you only focused on cost synergies, not revenue synergies? Second, poor communication is to blame. Stakeholder support lost through rumours and speculation, or “corporate guerillas” who are openly supportive but covertly destroying value by agitating against the deal. Finally, lack of independent and comprehensive due diligence performed by an experienced third party. Acquirers who cut short this process live to regret it. Does your implementation strategy take into account the target company architecture and people? Have you assessed the capabilities of any third parties providing services to the target? Does the entity or their third parties comply with the relevant regulations in each jurisdiction? The answer is often “no” but only comes to light after the event.

Dunstin Seale is partner and managing director of Senn Delaney EMEA The biggest obstacle to successful M&A is a culture clash. Up to two-thirds of M&A efforts don’t live up to expectations – and culture is the main culprit. Either the acquiring company’s culture rejects the “foreign” body, or the acquired company’s culture rejects its new owner. This rejection is mostly subconscious but it systematically destroys value. Given the overwhelming evidence, it’s astounding how most acquirers give little attention to culture integration. The effort will need as much, or more, energy as any other key element of the integration if it is to align the two organisations. This starts with the executive board and must reach the front line of the organisation. The GSK merger, which we worked on, highlights the positive benefits of getting cultural integration right from the start. www.senndelaney.com

Beverly Solinger is acquisition and integration director at Global Change Leaders The biggest obstacles include weak business fundamentals, incomplete due diligence, poorly planned and executed integration, and executives lacking experience in M&A. The business must be clear on the rationale for the acquisition – whether that’s geographic expansion, new market/product entry or consolidation. Once understood, a thorough due diligence – conducted by a team who understands the business and market – will enable development of a realistic financial pro forma. Success of the integration is dependent on the early appointment of a credible integration leader, backed by a team of high performers with senior level ownership and participation in rigorous reviews. While most companies focus on the negotiation process, it is the quality of the integration and the involvement of the leadership team that will result in a successful M&A.

www.kscllp.co.uk www.beyondthedeal.com

www.globalchangeleaders.com

Business Reporter · November 2012

Mergers and acquisitions

an independent report from lyonsdown, distributed with the daily telegraph

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‘It’s the golden age’

If you’re offered an opportunity to buy a good business at the right price, grab it with both hands. Doing such deals will soon get a lot harder, argues Mark Bishop, partner at The Management Buy-Out Centre and author of The Future of Private Equity: Beyond the Mega Buyout. P r ivate equ it y f i r m s a re currently sitting on about $1 trillion of uninvested capital, most of it raised in the three years before the global financial crisis struck in the Timing has never been better second half of 2008. This record is available to back managers for management buy-outs and sum i n buy- outs a nd buy-i ns of buy-ins, says Mark Bishop established, profitable companies. So if you’re offered a chance to buy a sound business and need the finance to do so, there’s plenty of it out there. Trouble is, this situation won’t last forever. When private equity firms raise money from Mark Bishop is an author and a investors – mostly North partner in The Manag ement BuyAmerican pension funds, O ut Centre LL P, which university endowments ac ts for man agements in securing priv and sovereign wealth ate equity backing for M funds from Asia and the BOs and M BIs. Middle East – they do so on the basis that they will take up to five years to put the money to work, and a further five to harvest those investments. Many funds can extend one or both of these five-year periods by up to two years. If money isn’t invested in the first five to seven years, the commitments from investors fall

If you’re offered the chance to buy a sound business, finance is available

away. And it’s starting to happen, with unused capital from 2005 now largely out of the market and some of 2006’s money falling away where the manager either doesn’t have or hasn’t exercised a right to extend. So the message to management out there is clear: if you’re tempted to do a buy-out or buy-in, don’t wait too long. Pays to be prompt There’s another reason why it pays to act promptly. One of the reasons why the UK economy has taken so long to recover from the crash is that companies have been hoarding

money, fearful of further recession or of a banking crisis caused by an unplanned collapse of the eurozone. This tendency means they are c u r rent ly reluc t a nt to buy businesses, depressing prices and making it easier for private equitybacked managements to win auctions. Of course, once such fears diminish, this cash will be released into the economy, potentially leading to swifter growth than many anticipate – which should be good for companies’ profits. And, of course, once corporates go on the acquisition trail, it will be a great time for private equity-backed businesses to exit. My firm acts for management teams in raising the funds for such transactions. We’re often asked what to look for in a great management buy-out (MBO) or buy-in (MBI) target. I suggest the following: l Value: We can secure funding for transactions for businesses worth from £3m to £1bn-plus (£10m

The message to managements is clear: if you’re tempted to do a buy-out or buy-in, don’t wait too long.

$1tn

Amount of uninvested capital that private equity firms are sitting on

to £200m is the ‘sweet spot’). l Jurisdiction: The UK is easiest, but we can help with transactions in most developed and the more established emerging markets. The ‘Club Med’ eurozone countries are tough, due to currency concerns. l Sector: Good businesses in most sectors are backable, though capital-intensive and high-volatility industries such as commodities can be a challenge. l Performance: Growth companies are attractive, but turnarounds and under-managed businesses can also be funded if priced realistically. l M a n a g e me nt: T he most important factor – can the MBO or MBI team demonstrate a track record of enhancing equity value in the same or a closely related business? And does it have a compelling strategy for doing so again with this company? Mark is offering readers free initial evaluations of proposed MBOs and MBIs. Email mark.bishop@mbocentre.com