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M&A: The timing is right

Amid the financial fallout of the global recession, one surprising outcome is that many companies...

글 John Sequeira, Simon Henderson and Ted Rouse

First published on 1월 29, 2010
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Amid the financial fallout of the global recession, one surprising outcome is that many companies are now sitting on a lot of cash. In Australia alone, cash on the books of ASX 200 companies rose by 9.5 percent last year to a total of $254 billion. Although capital markets remain tight, this cash horde provides a solid foundation for mergers and acquisitions. And history tells us that deals done during recessionary or turbulent periods can turn out particularly well. Our analysis of 24,000-plus transactions between 1996 and 2006 shows that acquisitions completed during or just after the 2001-2002 recession generated almost triple the excess returns of acquisitions made during the preceding boom years. "Excess returns" refers to shareholder returns from four weeks before to four weeks after the deal, compared with peers. This held true regardless of industry or deal size. Meanwhile, many companies are also getting better at M&A. In 1995, about 50 percent of U.S. mergers underperformed their industry index. Ten years later, the figure was about 30 percent. As a market leader in Australia in post merger integration support, we link this mostly to the experience gained by frequent acquirers, along with the increasing use of cash - instead of stock - to finance deals, a practice that seems to encourage better due diligence and more-realistic prices. But even in the best of times for M&A, many deals that are strategically sound fail to live up to expectations. Too often, the fault lies in post-merger integration missteps. Many, if not most, acquirers in Australia and elsewhere forfeit large amounts of value as they stumble over three broad areas of post-merger integration: missed targets, loss of key people and poor performance in the core business. Let's examine each: The failure to define a deal's payoffs-and risks-in crystal-clear terms is more than an oversight. It shows there are no clear priorities for integration, leading to missed targets. Avoiding such a misstep is a major consideration for deals like the pending AXA Asia-Pacific and AMP merger, as it was for computer hardware companies buying services businesses. In 2008, it was Hewlett-Packard buying EDS. More recently, Dell acquired Perot Systems, and Xerox made a bold move for ACS that will more than double its workforce. Understanding whether deals are to boost "scope" or "scale" is vital. While AXA Asia Pacific and AMP is largely a scale deal designed to expand a core business, these computer hardware company mergers all are "scope" deals aimed at helping the companies move up the value chain into more profitable lines of business. Scope deals (whether pure scope, or a mixture of scope and scale) require a different approach to integration than scale deals, with the aim of fostering some of the capabilities of the acquired company and integrating where it matters most, rather than combining two similar companies for maximum efficiency. When it comes to people issues, many companies wait too long on organizational and leadership decisions. Consider what happened when GE Capital agreed to buy Heller Financial in 2001. Paying a 49 percent premium over Heller's shares, GE Capital let it be known that it would need to reduce Heller's workforce by some 35 percent to make the deal viable. Key personnel didn't wait to find out who would survive. Several helped Merrill Lynch create a rival firm. One of the benefits of being experienced in M&A is that you earn a reputation for creating opportunities for individuals, which keeps the best people interested in staying put until they hear what's in it for them. Poor performance in the base business frequently occurs when integration soaks up too much energy or drags on, distracting managers from the core business. As a rule of thumb, at least 90 percent of the organization should be focused on the base business, and these people should have clear targets and incentives to keep those businesses humming. As a side personnel benefit, the few rising stars assigned to manage integration details can absorb priceless experience and grooming for future promotions. When it comes to post-merger integration, experienced acquirers have the best track record for avoiding these missteps. Consider Danaher Corp., once a tiny industrial tools maker. Danaher has purchased diverse industrial businesses at reasonable prices and consistently boosted their earnings and cash flow through operating improvements. Today, it is an industrial conglomerate, with sales of $2.75 billion in the last quarter. A dedicated team moves from facility to facility to revamp the manufacturing processes. Often beginning before the close of the deal - and tailored to the original deal thesis based on key financial metrics - Danaher's repeatable M&A model maps all the processes and frequently alters the acquired company's plant layout to a more-efficient cellular assembly process. Despite economic headwinds in 2009, Danaher continued to acquire, recently signing deals to purchase the life-sciences portions of MDS and Life Technologies for a total of $1.1 billion. Our studies show that frequent acquirers like Danaher consistently outperform infrequent acquirers - as well as companies that do no deals. If you had invested $1 in each group, the returns from the frequent-acquirer group would be 25 percent greater than the infrequent group over a 20-year period. Over the last 15 years, a number of companies, including Cisco Systems, Cardinal Health, Olam International and ITW, have shown that you can substantially beat the odds if you get the integration process right and make it a core competency. Meanwhile, the steady rise of cross-border deals has shed light on a set of unique integration issues. Bain research has found cross-border deals carry a similar rate of success to domestic deals, but integration typically is more complex. Among the unique challenges: the need to tailor the integration thesis to each region's circumstances, to quickly tackle actual and perceived cultural differences, to account for geographically dispersed operations and stakeholders as well as complex legal and regulatory frameworks that can derail the integration. As M&A opportunities for cash-flush companies emerge, savvy acquirers will look beyond deals to avoid post-merger integration missteps. That's the best way to ensure smart acquisitions live up to their potential. John Sequeira is a partner with Bain & Company, based in Hong Kong, and leads the firm's Asia-Pacific M&A practice. Ted Rouse is the co-leader of the Bain global M&A practice, based in Boston. Simon Henderson is a partner with Bain in Australia, and heads up Transaction Services across both M&A and Private Equity.

Amid the financial fallout of the global recession, one surprising outcome is that many companies are now sitting on a lot of cash. In Australia alone, cash on the books of ASX 200 companies rose by 9.5 percent last year to a total of $254 billion. Although capital markets remain tight, this cash horde provides a solid foundation for mergers and acquisitions.

And history tells us that deals done during recessionary or turbulent periods can turn out particularly well. Our analysis of 24,000-plus transactions between 1996 and 2006 shows that acquisitions completed during or just after the 2001-2002 recession generated almost triple the excess returns of acquisitions made during the preceding boom years. "Excess returns" refers to shareholder returns from four weeks before to four weeks after the deal, compared with peers. This held true regardless of industry or deal size. Meanwhile, many companies are also getting better at M&A. In 1995, about 50 percent of U.S. mergers underperformed their industry index. Ten years later, the figure was about 30 percent. As a market leader in Australia in post merger integration support, we link this mostly to the experience gained by frequent acquirers, along with the increasing use of cash - instead of stock - to finance deals, a practice that seems to encourage better due diligence and more-realistic prices.

But even in the best of times for M&A, many deals that are strategically sound fail to live up to expectations. Too often, the fault lies in post-merger integration missteps. Many, if not most, acquirers in Australia and elsewhere forfeit large amounts of value as they stumble over three broad areas of post-merger integration: missed targets, loss of key people and poor performance in the core business. Let's examine each:

The failure to define a deal's payoffs-and risks-in crystal-clear terms is more than an oversight. It shows there are no clear priorities for integration, leading to missed targets. Avoiding such a misstep is a major consideration for deals like the pending AXA Asia-Pacific and AMP merger, as it was for computer hardware companies buying services businesses. In 2008, it was Hewlett-Packard buying EDS. More recently, Dell acquired Perot Systems, and Xerox made a bold move for ACS that will more than double its workforce. Understanding whether deals are to boost "scope" or "scale" is vital. While AXA Asia Pacific and AMP is largely a scale deal designed to expand a core business, these computer hardware company mergers all are "scope" deals aimed at helping the companies move up the value chain into more profitable lines of business. Scope deals (whether pure scope, or a mixture of scope and scale) require a different approach to integration than scale deals, with the aim of fostering some of the capabilities of the acquired company and integrating where it matters most, rather than combining two similar companies for maximum efficiency.

When it comes to people issues, many companies wait too long on organizational and leadership decisions. Consider what happened when GE Capital agreed to buy Heller Financial in 2001. Paying a 49 percent premium over Heller's shares, GE Capital let it be known that it would need to reduce Heller's workforce by some 35 percent to make the deal viable. Key personnel didn't wait to find out who would survive. Several helped Merrill Lynch create a rival firm. One of the benefits of being experienced in M&A is that you earn a reputation for creating opportunities for individuals, which keeps the best people interested in staying put until they hear what's in it for them.

Poor performance in the base business frequently occurs when integration soaks up too much energy or drags on, distracting managers from the core business. As a rule of thumb, at least 90 percent of the organization should be focused on the base business, and these people should have clear targets and incentives to keep those businesses humming. As a side personnel benefit, the few rising stars assigned to manage integration details can absorb priceless experience and grooming for future promotions.

When it comes to post-merger integration, experienced acquirers have the best track record for avoiding these missteps. Consider Danaher Corp., once a tiny industrial tools maker. Danaher has purchased diverse industrial businesses at reasonable prices and consistently boosted their earnings and cash flow through operating improvements. Today, it is an industrial conglomerate, with sales of $2.75 billion in the last quarter. A dedicated team moves from facility to facility to revamp the manufacturing processes. Often beginning before the close of the deal - and tailored to the original deal thesis based on key financial metrics - Danaher's repeatable M&A model maps all the processes and frequently alters the acquired company's plant layout to a more-efficient cellular assembly process. Despite economic headwinds in 2009, Danaher continued to acquire, recently signing deals to purchase the life-sciences portions of MDS and Life Technologies for a total of $1.1 billion.

Our studies show that frequent acquirers like Danaher consistently outperform infrequent acquirers - as well as companies that do no deals. If you had invested $1 in each group, the returns from the frequent-acquirer group would be 25 percent greater than the infrequent group over a 20-year period.

Over the last 15 years, a number of companies, including Cisco Systems, Cardinal Health, Olam International and ITW, have shown that you can substantially beat the odds if you get the integration process right and make it a core competency.

Meanwhile, the steady rise of cross-border deals has shed light on a set of unique integration issues. Bain research has found cross-border deals carry a similar rate of success to domestic deals, but integration typically is more complex. Among the unique challenges: the need to tailor the integration thesis to each region's circumstances, to quickly tackle actual and perceived cultural differences, to account for geographically dispersed operations and stakeholders as well as complex legal and regulatory frameworks that can derail the integration.

As M&A opportunities for cash-flush companies emerge, savvy acquirers will look beyond deals to avoid post-merger integration missteps. That's the best way to ensure smart acquisitions live up to their potential.

John Sequeira is a partner with Bain & Company, based in Hong Kong, and leads the firm's Asia-Pacific M&A practice. Ted Rouse is the co-leader of the Bain global M&A practice, based in Boston. Simon Henderson is a partner with Bain in Australia, and heads up Transaction Services across both M&A and Private Equity.