Mint

The M&A forge

By Ashish Singh, Ted Rouse and David Harding

First published on Μαρτίου 12, 2007
min read


It's hardly a surprise that Mittal Steel Co.'s move late last year to buy Mexican steelmaker Sicartsa failed to get much coverage in financial publications. Amid the torrent of mega-deals from both the corporate and private equity worlds, Sicartsa's $1.4 billion (about Rs6,160 crore) price tag seemed puny. Mittal itself had forged a massive $34 billion merger with Luxembourg's Arcelor SA only six months earlier. Flush with cash and anxious to take advantage of interest rates that are still near historic lows, corporate and private equity buyers turned 2006 into one of the most explosive years on record for both the number and size of transactions—a total deal volume of about $4 trillion. Though a $100 billion deal seemed preposterous a decade ago, it now appears to be only a matter of time. Bank of America and Spain's BBVA are rumoured to be circling Barclays, currently valued at more than $90 billion. But these periods of deal mania usually end badly for most companies and investors. Of 790 deals in the US greater than $250 million between 1995 and 2001, only three in 10 have created meaningful value for shareholders. Why do you find that in most industries, only some companies thrive doing deals while so many others stumble? Beyond Mittal in the industrial sector, witness the acquisition success of Nestle in food, Cisco in technology and the Royal Bank of Scotland in financial services, to name just a few. Our research shows that the most successful opportunists share a set of characteristics that they have developed consciously over time. The winners tend to make mergers and acquisitions central to their strategies; they study and learn from their mistakes; they nurture M&A as a core competency; and build a team to preserve institutional knowledge. They tend to focus mostly on small and medium deals, not blockbusters. And when they do pursue mega-deals, they do so only when it is both strategically and organizationally appropriate. This gets us back to Mittal. It's true that the Netherlands-based steel giant established itself as the undisputed steel industry king only when it prevailed in its protracted battle to merge with rival Arcelor. But the company's success in consolidating the steel industry has been written over years of clinching many, much smaller deals, such as the one for Sicartsa, which furthered its well-honed strategy of creating leadership positions in each market it serves. In many ways, Mittal is typical of the kind of companies that stood out as winners in an analysis we did of 1,700 public firms and more than 11,000 acquisitions in six industrialized countries over 15 years, from 1986 to 2001. Given the overall odds of success, one might assume that the most persistent buyers would be the worst performers. But we found that in the US, frequent acquirers outperformed occasional buyers by a factor of 1.7 and non-buyers by almost two to one, with similar results in Europe and Japan. Frequent acquirers succeed because they tend to be expert acquirers. Interviews with deal czars at these companies reveal that they prepare carefully to create opportunities. The deal team—and there typically is a permanent, well-supported team of experts—works from an established playbook built on years of deal learning so the company can efficiently recognize deals that fit strategically, evaluate them, seal contracts, and then successfully integrate acquired businesses. Winners also tend to have a series of checks and balances in place to kill deal fever and maintain a rational, dispassionate approach. Mittal has a thin corporate staff and a small but highly-experienced squad of M&A experts. Starting three decades ago, founder Lakshmi Mittal began consolidating the industry to take advantage of scale in raw material purchasing, manufacturing and servicing large customers. He spent the early years stringing together steel plants in low-cost countries from Kazakhstan to South Africa. He didn't launch a blockbuster until 2004 when he scooped up Ohio-based International Steel Group Inc. The Arcelor merger, then, was the culmination of a long learning curve. There's no denying that Mittal has taken on a huge amount of risk with his Arcelor foray. Some have already suggested that Mittal is exerting too much power over Arcelor in the merger. Even without such friction, integrating the two giants would be an enormous and perilous undertaking. Whether he will ultimately succeed is impossible to know. But history would suggest that a company like Mittal has a much better chance of surviving a game-changing deal than the many who wander in unprepared. www.livemint.com

It's hardly a surprise that Mittal Steel Co.'s move late last year to buy Mexican steelmaker Sicartsa failed to get much coverage in financial publications. Amid the torrent of mega-deals from both the corporate and private equity worlds, Sicartsa's $1.4 billion (about Rs6,160 crore) price tag seemed puny. Mittal itself had forged a massive $34 billion merger with Luxembourg's Arcelor SA only six months earlier.

Flush with cash and anxious to take advantage of interest rates that are still near historic lows, corporate and private equity buyers turned 2006 into one of the most explosive years on record for both the number and size of transactions—a total deal volume of about $4 trillion. Though a $100 billion deal seemed preposterous a decade ago, it now appears to be only a matter of time. Bank of America and Spain's BBVA are rumoured to be circling Barclays, currently valued at more than $90 billion. But these periods of deal mania usually end badly for most companies and investors. Of 790 deals in the US greater than $250 million between 1995 and 2001, only three in 10 have created meaningful value for shareholders.

Why do you find that in most industries, only some companies thrive doing deals while so many others stumble? Beyond Mittal in the industrial sector, witness the acquisition success of Nestle in food, Cisco in technology and the Royal Bank of Scotland in financial services, to name just a few. Our research shows that the most successful opportunists share a set of characteristics that they have developed consciously over time. The winners tend to make mergers and acquisitions central to their strategies; they study and learn from their mistakes; they nurture M&A as a core competency; and build a team to preserve institutional knowledge. They tend to focus mostly on small and medium deals, not blockbusters. And when they do pursue mega-deals, they do so only when it is both strategically and organizationally appropriate.

This gets us back to Mittal. It's true that the Netherlands-based steel giant established itself as the undisputed steel industry king only when it prevailed in its protracted battle to merge with rival Arcelor. But the company's success in consolidating the steel industry has been written over years of clinching many, much smaller deals, such as the one for Sicartsa, which furthered its well-honed strategy of creating leadership positions in each market it serves.

In many ways, Mittal is typical of the kind of companies that stood out as winners in an analysis we did of 1,700 public firms and more than 11,000 acquisitions in six industrialized countries over 15 years, from 1986 to 2001. Given the overall odds of success, one might assume that the most persistent buyers would be the worst performers. But we found that in the US, frequent acquirers outperformed occasional buyers by a factor of 1.7 and non-buyers by almost two to one, with similar results in Europe and Japan.

Frequent acquirers succeed because they tend to be expert acquirers. Interviews with deal czars at these companies reveal that they prepare carefully to create opportunities. The deal team—and there typically is a permanent, well-supported team of experts—works from an established playbook built on years of deal learning so the company can efficiently recognize deals that fit strategically, evaluate them, seal contracts, and then successfully integrate acquired businesses. Winners also tend to have a series of checks and balances in place to kill deal fever and maintain a rational, dispassionate approach.

Mittal has a thin corporate staff and a small but highly-experienced squad of M&A experts. Starting three decades ago, founder Lakshmi Mittal began consolidating the industry to take advantage of scale in raw material purchasing, manufacturing and servicing large customers. He spent the early years stringing together steel plants in low-cost countries from Kazakhstan to South Africa. He didn't launch a blockbuster until 2004 when he scooped up Ohio-based International Steel Group Inc. The Arcelor merger, then, was the culmination of a long learning curve.

There's no denying that Mittal has taken on a huge amount of risk with his Arcelor foray. Some have already suggested that Mittal is exerting too much power over Arcelor in the merger. Even without such friction, integrating the two giants would be an enormous and perilous undertaking. Whether he will ultimately succeed is impossible to know. But history would suggest that a company like Mittal has a much better chance of surviving a game-changing deal than the many who wander in unprepared.

www.livemint.com