 "The best deals are driven by strategy, not opportunity: Robert F Bruner")
Too many mergers done on an opportunistic basis are failures in the long run as there should be a strong strategic rationale for the deal, Robert F Bruner tells Sonali Chowdhury
It is said avoiding risk during a merger can conflict with realising the full value at stake in the merger. To what extent can a company reduce this risk? Do you think buying a company during a downturn is a wise option?
Managing risks during mergers and acquisitions is very crucial. The best deals are driven by strategy and not driven by opportunism because there are risks associated with the organisation's ability to integrate well, with financing and with evaluation. All good risk management begins with careful planning and then it extends into due diligence about the partner firm. It also depends on very good prophecies of post-merger integration. There are many examples of deals, which were good in concept but flawed in execution and it is in the execution part that risks are managed, frauds are avoided and dreadful outcomes are prevented.
It is important to understand if there is a timing argument to deals. There is a cycle in business with peaks and troughs which is associated with hot and cold markets. A hot market is characterised by frenzy to do deals, high prices, many buyers and deals getting done, while a cold market is just the opposite where prices are relatively low, fewer buyers and fewer transactions. It turns out the best time to do deals is when markets are relatively cold. I would say this was a deal from heaven. Warren Buffet bought a natural gas pipeline company from Enron in the US when the stock market was relatively low in early 2000s. The virtue of the pipeline company is that they don't depend on the prices of what they are carrying but depends a lot on the steady volume, while the volume for natural gas in US is robust. It's a very stable and predictable business so Buffet paid relatively little money and it proved to be a bonanza. There is a psychological phenomenon called deal frenzy - urge to buy at any price. You can still do good deals in a hot market but there are certain challenges because there would be competing bidders which will drive prices up but when markets are cold interest rates may be lower, there are fewer bidders. They are the incubators for more profitable deals.
Which corporate mergers would you consider to be the most successful?
I'll nominate a purchase by NationsBank of a bank in Texas in the late 1980s, which created immense value for NationsBank and fundamentally changed the structure of the banking industry in the US. NationsBank went on to acquire several banks - today, it survives as the Bank of America. This deal illustrates many important drivers. First it illustrates the economic benefits of horizontal acquisitions - the acquisitions of competitors in the same industry. These benefits arise from economies of scale and improvements in efficiency. And sometimes, benefits arise from monopolistic behaviour such as setting extractive prices-in this case, that didn't happen.
Second, this deal illustrates the power of government to re-shape an industry. The US government relaxed its strict control and allowed this deal to create a huge banking organisation that covered many states. It was the tipping point, beyond which several banks sought to establish a national footprint.
What are the biggest challenges and common pitfalls organisations face when it comes to integration, especially if the acquirer comes from an emerging market?
If the acquirer is from an emerging market then challenges would be significantly cultural - challenges of blending cultures from two different countries into forming a coherent culture for the company. What we know about the top performing companies in the world is that they have a very strong internal culture based on common values, beliefs and practices. So, for instance, the attempted merger of Volvo and Renault in 1993 was never even consummated with shareholders of Volvo resisting the move because valued employees threatened to exit as they feared being taken over.
Even financing could be a related problem and it is an immense challenge in communicating to the markets about why you are doing the deal because ultimately you need to persuade the creditor about the deal. Even gaining government approvals sometimes could be a challenge for emerging companies. The acquirer from the emerging economy needs to be very well advised by experts in the country or region of the target company, about the problems of competing bidders in the domestic market of the target company.
What should investors look for when they do their due diligence to ascertain fit with a potential target?
Investors should look for three things if the deal has to make strategic sense. First, is there a strong strategic rationale for the deal? Too many deals done on an opportunistic basis are failures in the long run. Second investors should ask, does this deal make organisational sense, and can we envision a new surviving organisation that will be stronger as a result of the combination of these two preceding organisations? By this I mean looking at the leadership of the two organisations and the way the two companies will be organised after the deal. Finally, you should focus on whether the deal will actually create economic value - a matter of forecasting the benefits, synergies, estimating the present value of those benefits and comparing these to the purchase price of the company.
It is said avoiding risk during a merger can conflict with realising the full value at stake in the merger. To what extent can a company reduce this risk? Do you think buying a company during a downturn is a wise option?
Managing risks during mergers and acquisitions is very crucial. The best deals are driven by strategy and not driven by opportunism because there are risks associated with the organisation's ability to integrate well, with financing and with evaluation. All good risk management begins with careful planning and then it extends into due diligence about the partner firm. It also depends on very good prophecies of post-merger integration. There are many examples of deals, which were good in concept but flawed in execution and it is in the execution part that risks are managed, frauds are avoided and dreadful outcomes are prevented.
Also Read
One of the worst deals in the history of M&As was the combination of AOL and Time Warner in the 2000s, which was a very large deal. The problem was, AOL was dependent on aging technology and dial-up telephone connectivity rather than a direct connection to the internet, while Time Warner was suffering a decline in the circulation rate of its magazines. This deal is an example of companies which didn't practice due diligence and failed to succeed in the post-merger integration, with the deal destroying the value for investors. M&As are very complicated transactions that require deep and careful analysis and thoughtful execution.
It is important to understand if there is a timing argument to deals. There is a cycle in business with peaks and troughs which is associated with hot and cold markets. A hot market is characterised by frenzy to do deals, high prices, many buyers and deals getting done, while a cold market is just the opposite where prices are relatively low, fewer buyers and fewer transactions. It turns out the best time to do deals is when markets are relatively cold. I would say this was a deal from heaven. Warren Buffet bought a natural gas pipeline company from Enron in the US when the stock market was relatively low in early 2000s. The virtue of the pipeline company is that they don't depend on the prices of what they are carrying but depends a lot on the steady volume, while the volume for natural gas in US is robust. It's a very stable and predictable business so Buffet paid relatively little money and it proved to be a bonanza. There is a psychological phenomenon called deal frenzy - urge to buy at any price. You can still do good deals in a hot market but there are certain challenges because there would be competing bidders which will drive prices up but when markets are cold interest rates may be lower, there are fewer bidders. They are the incubators for more profitable deals.
Which corporate mergers would you consider to be the most successful?
I'll nominate a purchase by NationsBank of a bank in Texas in the late 1980s, which created immense value for NationsBank and fundamentally changed the structure of the banking industry in the US. NationsBank went on to acquire several banks - today, it survives as the Bank of America. This deal illustrates many important drivers. First it illustrates the economic benefits of horizontal acquisitions - the acquisitions of competitors in the same industry. These benefits arise from economies of scale and improvements in efficiency. And sometimes, benefits arise from monopolistic behaviour such as setting extractive prices-in this case, that didn't happen.
Second, this deal illustrates the power of government to re-shape an industry. The US government relaxed its strict control and allowed this deal to create a huge banking organisation that covered many states. It was the tipping point, beyond which several banks sought to establish a national footprint.
What are the biggest challenges and common pitfalls organisations face when it comes to integration, especially if the acquirer comes from an emerging market?
If the acquirer is from an emerging market then challenges would be significantly cultural - challenges of blending cultures from two different countries into forming a coherent culture for the company. What we know about the top performing companies in the world is that they have a very strong internal culture based on common values, beliefs and practices. So, for instance, the attempted merger of Volvo and Renault in 1993 was never even consummated with shareholders of Volvo resisting the move because valued employees threatened to exit as they feared being taken over.
Even financing could be a related problem and it is an immense challenge in communicating to the markets about why you are doing the deal because ultimately you need to persuade the creditor about the deal. Even gaining government approvals sometimes could be a challenge for emerging companies. The acquirer from the emerging economy needs to be very well advised by experts in the country or region of the target company, about the problems of competing bidders in the domestic market of the target company.
What should investors look for when they do their due diligence to ascertain fit with a potential target?
Investors should look for three things if the deal has to make strategic sense. First, is there a strong strategic rationale for the deal? Too many deals done on an opportunistic basis are failures in the long run. Second investors should ask, does this deal make organisational sense, and can we envision a new surviving organisation that will be stronger as a result of the combination of these two preceding organisations? By this I mean looking at the leadership of the two organisations and the way the two companies will be organised after the deal. Finally, you should focus on whether the deal will actually create economic value - a matter of forecasting the benefits, synergies, estimating the present value of those benefits and comparing these to the purchase price of the company.
| M&A SPECIALIST |
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