The Financial Times

How to avoid the infamous M&A scrap heap

Focus mostly on small and medium deals, not blockbusters.

By Till Vestring and Phil Leung

Published on February 12, 2007
min read


The year 2006 set a record, with global merger and acquisition activity reaching historic highs. Deals last year reached $3,800bn ( ?2,900bn, £1,900bn), beating the previous record of $3,400bn set in 2000. The activity also showed that mega-deals—those totalling more than $10bn—are back. The surge is fuelled by profitable companies with large amounts of cash, as well as private equity investors who need to put to work money flooding into their funds. Asia's emerging markets are prime targets. In the final two months of 2006 alone, there was a meaty list of deals and potential deals. SSL International, maker of Durex condoms and Dr. Scholl's footwear, announced plans for Asian acquisitions to boost already strong Asian earnings. In South Korea, Shinhan Financial offered $9.3bn for a majority interest in LG Card, while Kumho Asiana chose to buy Daewoo Engineering and Construction for $6.9bn. In Malaysia, Synergy Drive Sdn Bhd proposed merging Sime Darby Bhd and seven other companies to form the world's largest palm oil plantation company. But before celebrating an Asian marriage, investors should remember nearly all studies have shown that only three in 10 big deals create meaningful value for shareholders. Half of those deals destroy value. With merger mania sweeping the globe, how can investors avoid landing into the infamous M&A scrap heap? Four criteria can help determine the likelihood of a winner. Stay close to the core business. Our research underscores the value of using deals to bolster a company's core business. Deals that grow a company's scale by adding similar products or customers have a higher probability of success. Deals that expand a company's scope by adding new customers, products, markets, or channels often disappoint. Recent Asian M&A activity shows a trend toward scale deals, in part because of the allure of emerging markets. For example, Vodafone, the world's largest mobile phone group, has signalled interest in expanding into China and India. For Vodafone, the emerging market strategy appears to be paying off. Investments in Egypt, Romania, South Africa and Turkey are producing strong growth, helping to offset sluggish revenues in Europe. Ask and answer the big questions in due diligence. Too often, due diligence is little more than an "audit," collecting reams of data but failing to help executives decide whether to consummate the deal. Companies can take a tip from private equity investors who are due-diligence pros. They take a critical outsider's view and do not take for granted anything about future prospects. Instead, they answer the big questions by building a view from the ground up, getting the information they need first-hand from customers, suppliers and competitors. Commonwealth Bank of Australia could have made a serious blunder when it decided to enter the Chinese banking market. The temptation was to acquire a stake in one of China's Big Four banks or National Joint Stock banks. Instead of being seduced by the lure of big market banking, CBA targeted cheaper equity stakes in small, city-based commercial banks, aiming to gain a controlling interest at a price that minimised risks. Due diligence verified that smaller banks were a better fit with its acquisition strategy. Integrate quickly where it matters. Top acquirers focus on the handful of integration activities that can make or break a deal. Scale deals require extensive integration but acquirers need to be sure to home in first on areas that will achieve the largest cost savings or revenue gains. Scope deals such as Citigroup's purchase of China's Guangdong Development Bank need more selective integration, especially in areas where operations overlap. In all cases, it is critical to move quickly. World-class acquirers expect problems, typically in accounting, distribution and customer service, and they set up early-warning systems to detect them. As soon as they hit potholes, they tackle them, with the pros distinguishing between predictable glitches and serious difficulties that could threaten the entire deal. During the last round of mega-deals in the late 1990s, the heralded marriage of Kellogg and Keebler almost went off track. But management exercised the discipline needed to make mid-course corrections, ultimately delivering the promised value to shareholders. As mega-deals heat up in Asia, experienced acquirers who grow their core business, do their homework, integrate quickly, and have the discipline and flexibility to fix inevitable problems will be rewarded with outsized returns—instead of outsized headaches. Till Vestring is a partner in Bain & Company's south-east Asia practice, based in Singapore. Phil Leung is a partner in Bain's greater China practice, based in Shanghai

The year 2006 set a record, with global merger and acquisition activity reaching historic highs. Deals last year reached $3,800bn ( ?2,900bn, £1,900bn), beating the previous record of $3,400bn set in 2000. The activity also showed that mega-deals—those totalling more than $10bn—are back. The surge is fuelled by profitable companies with large amounts of cash, as well as private equity investors who need to put to work money flooding into their funds.

Asia's emerging markets are prime targets. In the final two months of 2006 alone, there was a meaty list of deals and potential deals. SSL International, maker of Durex condoms and Dr. Scholl's footwear, announced plans for Asian acquisitions to boost already strong Asian earnings. In South Korea, Shinhan Financial offered $9.3bn for a majority interest in LG Card, while Kumho Asiana chose to buy Daewoo Engineering and Construction for $6.9bn. In Malaysia, Synergy Drive Sdn Bhd proposed merging Sime Darby Bhd and seven other companies to form the world's largest palm oil plantation company.

But before celebrating an Asian marriage, investors should remember nearly all studies have shown that only three in 10 big deals create meaningful value for shareholders. Half of those deals destroy value.

With merger mania sweeping the globe, how can investors avoid landing into the infamous M&A scrap heap? Four criteria can help determine the likelihood of a winner.

Stay close to the core business. Our research underscores the value of using deals to bolster a company's core business. Deals that grow a company's scale by adding similar products or customers have a higher probability of success. Deals that expand a company's scope by adding new customers, products, markets, or channels often disappoint.

Recent Asian M&A activity shows a trend toward scale deals, in part because of the allure of emerging markets. For example, Vodafone, the world's largest mobile phone group, has signalled interest in expanding into China and India. For Vodafone, the emerging market strategy appears to be paying off. Investments in Egypt, Romania, South Africa and Turkey are producing strong growth, helping to offset sluggish revenues in Europe.

Ask and answer the big questions in due diligence. Too often, due diligence is little more than an "audit," collecting reams of data but failing to help executives decide whether to consummate the deal. Companies can take a tip from private equity investors who are due-diligence pros. They take a critical outsider's view and do not take for granted anything about future prospects. Instead, they answer the big questions by building a view from the ground up, getting the information they need first-hand from customers, suppliers and competitors.

Commonwealth Bank of Australia could have made a serious blunder when it decided to enter the Chinese banking market. The temptation was to acquire a stake in one of China's Big Four banks or National Joint Stock banks. Instead of being seduced by the lure of big market banking, CBA targeted cheaper equity stakes in small, city-based commercial banks, aiming to gain a controlling interest at a price that minimised risks. Due diligence verified that smaller banks were a better fit with its acquisition strategy.

Integrate quickly where it matters. Top acquirers focus on the handful of integration activities that can make or break a deal. Scale deals require extensive integration but acquirers need to be sure to home in first on areas that will achieve the largest cost savings or revenue gains. Scope deals such as Citigroup's purchase of China's Guangdong Development Bank need more selective integration, especially in areas where operations overlap. In all cases, it is critical to move quickly.

World-class acquirers expect problems, typically in accounting, distribution and customer service, and they set up early-warning systems to detect them. As soon as they hit potholes, they tackle them, with the pros distinguishing between predictable glitches and serious difficulties that could threaten the entire deal. During the last round of mega-deals in the late 1990s, the heralded marriage of Kellogg and Keebler almost went off track. But management exercised the discipline needed to make mid-course corrections, ultimately delivering the promised value to shareholders.

As mega-deals heat up in Asia, experienced acquirers who grow their core business, do their homework, integrate quickly, and have the discipline and flexibility to fix inevitable problems will be rewarded with outsized returns—instead of outsized headaches.

Till Vestring is a partner in Bain & Company's south-east Asia practice, based in Singapore. Phil Leung is a partner in Bain's greater China practice, based in Shanghai