Bangkok Post

This deal season, avoid post-merger missteps

As cash-flush Thai companies pursue M&A opportunities, savvy acquirers will work to prevent post-merger integration missteps.

By Suvir Varma, John Sequeira and Sharad Apte

First published on abril 07, 2010
min read


Boosted by a recovering economy, many Thai companies are emerging from the downturn in an enviable position. They are cash-rich. Even at the downturn's height, the companies on the Stock Exchange of Thailand index were sitting on 920 billion baht. With cash in hand, Thai companies are in a strong position as they scout for merger and acquisition opportunities in the still turbulent global economy. Take state-owned PTT Exploration and Production (PTTEP). Its strategy is to snap up well-priced acquisitions to fuel growth. In December of 2008, PTTEP bought Coogee Resources Limited, an Australian oil and gas project developer, for 5.5 billion baht, giving PTTEP a platform for expansion in Australia. And last year, its parent company PTT, Thailand's largest integrated energy conglomerate, entered the coal mining business when it bought a 60% interest in a subsidiary of Straits Resources Limited. Deals done during turbulent periods often turn out well. Our analysis of 24,000-plus transactions between 1996 and 2006 shows that acquisitions completed during or just after the 2001-02 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 was true regardless of industry or deal size. Meanwhile, many companies also are getting better at M&As. In 1995, about 50% of US mergers underperformed their industry index. Ten years later, the figure was about 30%. We think the experience gained by frequent acquirers and the increasing use of cash instead of stock to finance deals encourages better due diligence and more realistic prices. But even in the best of times, many strategically sound deals fail to live up to expectations. Often, the fault lies in post-merger integration missteps. Many acquirers forfeit large amounts of value because of three major stumbles: 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 shows there are no well-defined integration priorities, leading to missed targets. Understanding whether deals are to boost "scope" or "scale" is vital. Scope deals require fostering some capabilities of the acquired company and integrating where it matters most. In contrast, scale deals focus on combining two similar companies for maximum efficiency. When it comes to people issues, many companies delay organisational and leadership decisions. In the interim, key personnel may be hired away by rivals. Experienced acquirers earn a reputation for retaining the best people by creating opportunities for them. For example, PTTEP retained the existing management team at Coogee Resources, now PTTEP Australasia. Poor performance in the core business occurs when integration soaks up too much energy or drags on, distracting managers from the core business. Typically, at least 90% of the organisation should be focused on its core, with clear targets and incentives. Veteran acquirers have the best track record for avoiding these missteps. Consider US-based Danaher Corporation, once a tiny industrial tools maker that has grown into an industrial conglomerate. Using a repeatable M&A model, Danaher purchased diverse industrial businesses at reasonable prices and consistently boosted earnings and cash flow through operating improvements. Even before closing the deal, Danaher's M&A model maps all the processes based on key financial metrics. Despite the downturn in 2009, Danaher continued to make acquisitions totaling $1.1 billion. Our studies show that frequent acquirers like Danaher consistently outperform infrequent acquirers by getting the integration process right and making it a core competency. If you had invested $1 in each group, the returns from the frequent-acquirer group would be 25% greater than the infrequent group over a 20-year period. Meanwhile, Bain research has found that as cross-border deals increase, their rate of success is similar to domestic deals, but integration typically is more complex. Among the unique challenges: tailoring the integration thesis to each region's circumstances, quickly tackling cultural differences, accounting for geographically dispersed operations and stakeholders as well as complex legal and regulatory frameworks that can derail integration. As cash-flush Thai companies pursue M&A opportunities, savvy acquirers will work to prevent post-merger integration missteps. That's the best way to ensure smart acquisitions live up to their potential. Suvir Varma, head of Bain & Company's Private Equity practice in Asia, is based in Singapore. John Sequeira, head of Bain's Mergers & Acquisitions practice in Asia, is based in Hong Kong. Sharad Apte is a Bain partner based in Bangkok.

Boosted by a recovering economy, many Thai companies are emerging from the downturn in an enviable position. They are cash-rich. Even at the downturn's height, the companies on the Stock Exchange of Thailand index were sitting on 920 billion baht. With cash in hand, Thai companies are in a strong position as they scout for merger and acquisition opportunities in the still turbulent global economy.

Take state-owned PTT Exploration and Production (PTTEP). Its strategy is to snap up well-priced acquisitions to fuel growth. In December of 2008, PTTEP bought Coogee Resources Limited, an Australian oil and gas project developer, for 5.5 billion baht, giving PTTEP a platform for expansion in Australia. And last year, its parent company PTT, Thailand's largest integrated energy conglomerate, entered the coal mining business when it bought a 60% interest in a subsidiary of Straits Resources Limited.

Deals done during turbulent periods often turn out well. Our analysis of 24,000-plus transactions between 1996 and 2006 shows that acquisitions completed during or just after the 2001-02 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 was true regardless of industry or deal size. Meanwhile, many companies also are getting better at M&As. In 1995, about 50% of US mergers underperformed their industry index. Ten years later, the figure was about 30%. We think the experience gained by frequent acquirers and the increasing use of cash instead of stock to finance deals encourages better due diligence and more realistic prices.

But even in the best of times, many strategically sound deals fail to live up to expectations. Often, the fault lies in post-merger integration missteps. Many acquirers forfeit large amounts of value because of three major stumbles: 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 shows there are no well-defined integration priorities, leading to missed targets. Understanding whether deals are to boost "scope" or "scale" is vital. Scope deals require fostering some capabilities of the acquired company and integrating where it matters most. In contrast, scale deals focus on combining two similar companies for maximum efficiency.

When it comes to people issues, many companies delay organisational and leadership decisions. In the interim, key personnel may be hired away by rivals. Experienced acquirers earn a reputation for retaining the best people by creating opportunities for them. For example, PTTEP retained the existing management team at Coogee Resources, now PTTEP Australasia.

Poor performance in the core business occurs when integration soaks up too much energy or drags on, distracting managers from the core business. Typically, at least 90% of the organisation should be focused on its core, with clear targets and incentives.

Veteran acquirers have the best track record for avoiding these missteps. Consider US-based Danaher Corporation, once a tiny industrial tools maker that has grown into an industrial conglomerate. Using a repeatable M&A model, Danaher purchased diverse industrial businesses at reasonable prices and consistently boosted earnings and cash flow through operating improvements. Even before closing the deal, Danaher's M&A model maps all the processes based on key financial metrics. Despite the downturn in 2009, Danaher continued to make acquisitions totaling $1.1 billion.

Our studies show that frequent acquirers like Danaher consistently outperform infrequent acquirers by getting the integration process right and making it a core competency. If you had invested $1 in each group, the returns from the frequent-acquirer group would be 25% greater than the infrequent group over a 20-year period.

Meanwhile, Bain research has found that as cross-border deals increase, their rate of success is similar to domestic deals, but integration typically is more complex. Among the unique challenges: tailoring the integration thesis to each region's circumstances, quickly tackling cultural differences, accounting for geographically dispersed operations and stakeholders as well as complex legal and regulatory frameworks that can derail integration.

As cash-flush Thai companies pursue M&A opportunities, savvy acquirers will work to prevent post-merger integration missteps. That's the best way to ensure smart acquisitions live up to their potential.

Suvir Varma, head of Bain & Company's Private Equity practice in Asia, is based in Singapore. John Sequeira, head of Bain's Mergers & Acquisitions practice in Asia, is based in Hong Kong. Sharad Apte is a Bain partner based in Bangkok.