M&A Strategy SeriesM&A Strategy SeriesWinning in M&A: How to becomean advantaged acquirerMergers and acquisitions (M&A) continueto be a favored corporate development toolof executive teams, as evidenced by lastyear’s record-setting level of deal-making.By the end of 2015, companies had spentsome 3.8 trillion on M&A—the highestamount ever—according to data compiledby Bloomberg1. And while M&A may notcontinue at this pace, the trend seems farfrom abating. Many companies intend tocontinue combining for numerous strategicreasons, including expanding in existingmarkets and gaining scale efficiencies,according to a recent Deloitte CFO Signals survey (see sidebar, “Reasons to deal”).22015’s M&A volume indicates that we maybe in the sixth “merger wave” so far in thelast century, which are concentrations ofaccelerating M&A activity.3 While time willtell if we have crested the wave, this typeof heated pace can trigger buyer mistakes.Moreover, premiums that acquirers agreeto pay over the target’s pre-bid share pricetend to escalate as competition intensifies.Amid such deal exuberance, it may benefitcompanies to not only become an acquirer,but to become an advantaged acquirer.Several factors that have been drivingM&A for the last few years—low interestrates, accessible and inexpensive financing,healthy balance sheets, and a U.S. economythat’s growing at less than four percentannually—remain intact.4 Winning andcreating value in this environment mayrequire something more: a set of detailedaction steps to help companies proactivelyidentify and transact strategic deals ratherthan reactively pursue disparate, ad hocopportunities. This article examines somecommon buyer mistakes during mergerwaves and suggests ways that companiescan potentially avoid them by becomingadvantaged acquirers.
M&A Strategy Series Winning in M&A: How to become an advantaged acquirerMerger wave challengesMerger waves happen when deal volumesincrease dramatically, crest, and then fall.The first such period began in the 1920sand ended with the Great Depression.Subsequent waves occurred in the 1960sand in each decade since the 1980s. Whilethe reasons behind these merger wavesvary, there are several common mistakesthat acquiring companies often makeduring them.The first mistake is having an undefinedgrowth strategy or one that does notclearly consider the role that M&A willplay in that growth. These can both pushcompanies into being reactive buyers.The potentialbenefits of being anadvantaged acquirer D evelop a better pipeline ofpriority targets as part of thecompany’s M&A strategy. S ave tremendous resources bynot focusing on inappropriatedeals. B e less driven by someone else’s(e.g., competitor) timing and rushto close. U nderstand which auctions aremost important and whichshould be avoided. R aise diligence and integrationissues before valuation andnegotiation begin. U se landscape education processto reassess growth pathways andalternative transactions. B uild credibility with the boardand efficiently move targetsthrough the pipeline.Source: Mark L. Sirower, Becoming a PreparedAcquirer, Corporate Dealmaker, June, 20062Some companies unwittingly outsourcetheir growth strategy to investmentbankers. As a result, they end up reactingto available deals those intermediariespresent instead of proactively identifyingviable candidates that support theirstrategic goals. While that deal-makingprocess is fairly common in the generalM&A landscape, it tends to be magnifiedduring merger waves. This is primarilybecause more inexperienced acquirersenter the arena making capital investmentsthey weren’t making before, andexperienced players expand their riskprofiles in the search for attractive targets.Overpaying is another mistake thatoften happens as deal volume escalates.Academics Peter Clark and Roger Millsargue that there are four distinct phasesin merger waves, as reflected in assets’purchase prices.5 Bid premiums in phaseone have averaged just 10-18 percentduring merger waves since 1980; premiumsrise to 20-35 percent in phase two, reachbeyond 50 percent in phase three, andmay surpass 100 percent in phase four.This final phase is where many ill-advisedand costly deals are struck, often leaving alegacy of broken promises and lost value.6The third challenge is a lack of options.Amid continued market volatility, there isconcern that the US economy may not bethe driver of corporate growth that manyhad hoped. In such an environment—and often at the urging of activistshareholders—companies may turn toM&A in an effort to increase shareholdervalue simply because they believe theyhave no other choice. Also, becausedeal-making has become so common incertain industries (consumer products,technology, and health care to name a few),various stakeholders, including investorsand company boards, may favor M&A overorganic growth.Characteristics of the advantagedacquirerA large percentage of M&A transactionsdo not deliver the value promised at thetime of the deal.7 Acquiring companiesthat avoid this fate—particularly duringmerger waves—tend to have a disciplinedprocess that enables them to identifyvalue-creating targets and avoid thelikely underperformers. They then have acompetitive edge and deliver shareholdervalue. The tenets of this process typicallyinclude the following:1. Self-assessment. A company’sexecutive team members should assessthe organization’s strengths, weaknesses,and opportunities for growth, both inrevenue and value. These opportunitiesinclude choosing the most attractivecustomer segments and geographies,serving customers in ways competitorscannot replicate, and understanding thecapabilities and market access requiredto achieve those goals. Essentially, acompany should develop an M&A strategyto complement strengths and backfillweaknesses. A company that hasn’t gonethrough that process will likely trap itselfinto being a reactive acquirer, workingbackward from the deal into a strategy.2. Identified priority pathways.Advantaged acquirers which haveconducted a careful assessment know whattheir M&A priorities are. In other words,they know if M&A is going to comprise 10percent of their growth, 20 percent, ormore. As part of the process, they likelyhave identified priority pathways at thebusiness-unit (BU) level that addressnew products or solutions they will bringto market at prices that will add valuefor customers. Corporate-level growthexpectations can be de-averaged to theBU level and used to highlight gaps andprioritize the role of M&A across thoseunits. Without that prioritization, you canlikely expect to face a reactive politicalprocess, with various business executiveschampioning their favorite deals versuspotential deals that are in the best interestof the BU or the company.3. Competitor signaling. It’s importantto look at competitors’ strategic intent.Much can be learned from examiningcompetitors’ M&A deals over the last
M&A Strategy Series Winning in M&A: How to become an advantaged acquirerseveral years in terms of geographies,capabilities, size, product or serviceofferings, and targeted customer segments.Call it competitor signaling, where pastbehavior will often foreshadow whichacquisition targets may be next on theirpriority lists. Armed with that information,an advantaged acquirer can oftendetermine if a deal it is considering does ordoes not make sense, or whether to beginpreparing for a battle on a priority deal.Reasons to deal: Why will CFOs pursue M&A?The case for 2016In Deloitte’s Q4 2015 CFO Signals report, some 63 percent of CFOs indicated thatthey expect to pursue M&A deals in 2016. Among them, however, there isconsiderable diversity of purpose; sometimes reflecting industry differences butoften reflecting company-specific factors: M &A deals serve multiple purposes: CFOs selected an average number of 2.6purposes for M&A, indicating significant breadth in expected outcomes. Just17 percent of CFOs selected only one purpose (most often to diversify theircustomer base or to obtain bargain-priced assets), and 29 percent selectedjust two purposes (expanding and diversifying their customer base ordiversifying their customer base and pursuing scale efficiencies).4. Strategic screening. Once theyidentify the universe of opportunities,advantaged acquirers will strategicallyscreen them. While M&A strategy helps todevelop prioritized pathways for growth,target screening filters those pathways togenerate portfolios of priority candidates.These filters may include everything fromsize, geography, and customer segments,to technology and talent. The filters areimportant strategic choices that canhelp senior executives and the boardunderstand why a particular prioritytarget was identified. As one Fortune 100executive told us, “The more you look, themore you find; the more you look, the moreyou learn; and the more you look, the moreyou test your strategies.”5. Disciplined execution. Advantagedacquirers consider integration to be anessential element of target identificationand prioritization. For example, if thepotential for culture issues or distributiongaps exist, acquirers should factor theminto the screening process. It can beextremely difficult to analyze synergypotential or conduct a detailed valuationwithout evaluating such integration risksand determining if the right resourcesand talent are available to integrate theacquisition effectively. H eavy growth focus: About 54 percent of CFOs selected expanding in existingmarkets, and 51 percent selected diversifying into new markets (27 percentselected both). Overall, 80 percent of respondents selected at least one ofthese growth purposes. Those who didn’t select growth tended to pick acombination of pursuing synergies and scale efficiencies, with a significantnumber selecting obtaining bargain-priced assets. H eavy scale efficiency focus: Sixty percent of CFOs selected pursuing scaleefficiencies; only one percent solely selected this purpose. Among CFOs notciting scale efficiency, 40 percent chose pursuing synergies, half chose growthin current markets, and 54 percent chose growth in new markets. V ertical integration and consolidation synergies: About half of CFOs selectedpursuing synergies. More than 80 percent of these CFOs also chose a growthpurpose, selecting expansion in existing markets (which suggests possiblevertical integration strategies) or pursuit of scale efficiencies (which suggestspossible consolidation strategies). B argain-priced assets often an add-on benefit: Thirty percent of CFOsselected obtaining bargain-priced assets, and almost all of those also chose atleast two other purposes—implying bargain-priced assets are often asecondary (or even tertiary) benefit of M&A deals.What will be the purpose of your M&A deals for 2016?Percentage of CFOs selecting each purpose (N 70)*Pursue scale efficienciesExpand customer base in existing markets (current geographies and products/services)Diversify customer base via new markets (new geographies and/or products/services)Pursue synergiesObtain bargain-priced assetsRespond to investors’ demand for revenue growth0%25%50%75%*Results are only for the 63% of CFOs who expect M&A deals in 2016.Source: CFO Signals, Q4 2015, January 2016, US CFO Program, Deloitte LLP.3100%
M&A Strategy Series Winning in M&A: How to become an advantaged acquirerExecutive teams bring discipline andpatienceIn our experience, advantaged acquirersuse the above process to develop a watchlist of opportunities that they continuallyrefresh. They also tend to close just a smallfraction of the potential deals on thatlist. As long-term successful acquirers,they regularly talk to and negotiate withcompanies but only pull the trigger ondeals that fit their overall strategy. Theirsenior executives typically bring bothdiscipline and patience to the process.Specifically, executive teams act asstewards by determining whether a specificdeal fits the company’s agreed growthstrategy and operating plans. They do so bysticking to their defined rationale and notbecoming overly enamored of a particulartarget so that its acquisition could harmthe company. Executive teams can helpbring discipline to the M&A process byassembling the right people in financeand accounting, technology, operations,strategy, and human resources to makesure that acquired assets are integratedproperly. Finally, they can demonstratepatience by having strategic alternativesin case anything goes awry. Along theway, these executive teams are guided byseveral common questions:Are we looking at the right deals?An advantaged acquirer knows thepotential targets most important to thecompany. They understand the universeof opportunities and avoid being in aposition where an investment bankeror seller proposes a deal they haven’talready considered.Leveling the playing field:Tips for mid-sized companiesM&A deals typically fall into the hands of serial acquirers. These are largecompanies who understand how to strike deals, know how to translate them intoshareholder value and, thus, have greater success winning bids. Companies withscale can seemingly afford to take larger risks and pay higher prices. Given thislandscape, it can be challenging for mid-size companies to prevail in the M&Aauction process. They often face unique challenges, including limited M&Aexperience/skill sets, constrained access to capital, and potential internalresistance from boards unwilling to approve high valuations or take on perceivedrisk. Even though mid-sized organizations typically appear outgunned, they maysignificantly improve their odds of winning by following the first principle of anadvantaged acquirer: self-assessment. They can also do the following: P repare to make smarter and bigger bets. Being crystal clear about whichtargets are absolute “must-haves” may enable a mid-size buyer to engage in anexclusive deal, avoiding the auction process altogether. If the target does callfor an auction, defining the unique value proposition for these