M&A can pay off, but it ain’t no guarantee.
Originally published by the Wall Street Journal
A martinwolf summary
M&A success rates are improving. While a 2011 Harvard Business Review article found that 70-90% of M&A deals fail, more recent research suggests the success rate is closer to 50/50. Smaller deals outperform bigger bets. Companies that do frequent smaller M&A deals tend to outperform those that make bigger bets. The reason: These companies can hone their ability to identify targets, integrate those businesses, and reap the intended financial benefits.
According to Ben Dummett (author of the article), companies should carefully weigh the risks and rewards of making acquisitions. M&A can help companies boost sales and profit faster than would otherwise be possible, but there’s also the risk that the projected financial benefits don’t cover the often-hefty premium paid for a target.
A few thoughts:
The reason transactions were historically 70-90 percent is because buyers don’t understand what they’re buying, according to Marty Wolf. It’s complicated for domestic transactions, and even more complicated for cross-border deals.
Buyers are generally negotiating with the owner/operator of the business. What most people don’t understand is that you’re actually having two discussions simultaneously: one is a valuation discussion and the other is a compensation discussion. Most companies don’t sell for 100% cash at closing and have the owners leave day one.
On one hand, the seller wants to pound the table and say, “I’m going to do great next year,” with the goal of maximizing their earn-out or their enterprise value. On the other hand, it locks them into performance levels that may be difficult to achieve, so it’s contradictory.
If you’re Exxon buying Pioneer for $60 billion and you’re talking to Scott Scheffield — the billionaire who doesn’t operate the company, but is the most senior executive in the company and has his money tied up in stock, not current income — he assigns a team of people to go sort those things out to develop a workable price. He looks at the deal through a very different lens, Marty added.
The second point is particularly relevant on cross-border transactions where everything is different. The rules are different. The accounting is different. The tax is different. And even the language may be different.
martinwolf worked for an international buyer whose target was a large integrator. When we communicated that the owner lived on a nut farm, our client thought he was in a mental institution – but he was on a working farm that produced nuts. Just think about the consequences of a similar miscommunication when it comes to deal terms.
SUMMARY: Whether there will be language issues, cultural issues, regulatory, tax, operating issues, et al — all impact the overall performance of a deal.
This is not an argument to hire a buy-side advisor for the sake of hiring a banker. You hire an advisor to run a disciplined process, to remain objective, to identify opportunities, explore choices, alternatives, and then to help facilitate the best possible outcome. A transaction that closes, that works as planned, and that clears the seller’s price threshold.
It may not be considered the “best deal,” but it ends up being the best outcome.