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Acquiring the right fit
For a merger/acquisition to create value, the target
company should have a strategic fit with the acquirer.
In 1991, total transactions in Mergers and Acquisition amounted
to only $US 71.2 billion. By 1999, the total deal value increased
to $US 1.42 trillion. M&As, have begun to show an upward
trend in 2001 as well, which means that companies are still
doing deals, despite the fact that more than 50% of deals do
not create value. However, not all M&A deals are failures.
When competent managers take the right decisions and implement
appropriate processes, the deal can be made profitable.
In any M&A activity there are usually two critical issues
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- Integration
- Strategic fit
A lot has been said about post-merger integration. Let us see
how the strategic fit affects the value of the deal.
Search for a strategic fit
The prime motive behind any deal must correspond with the company's
overall objective. The decision should not be based on the whims
and fancies of top management but should be a strategically
sound decision.. Complications in M&As arise when there
is more than one bidder. Industry experts say that in cases
where multiple bidders exist, it is always the winner who loses.
He may win the negotiations, but he loses the value. The manager
should thus identify the negative impact on his company, in
case the deal is finalised. He should then look for alternative
ways to resolve this situation. The "strategic fit"
process involves the following steps -
Strategic fit refers to the extent to which the target company's
goals, including financial, cultural, marketing and production
goals, fit into the parent company's overall operating objectives.
Acquiring companies should always ensure that maximum value
is created for the stakeholders. For any particular deal, if
the value of the target company's assets is more for the company
than any other potential acquirers, it suggests that a unique
synergy can be derived from this deal. Synergy should be unique
to the acquiring company, because otherwise, any competitor
can copy that synergy.
Value comes from…
- Buying a company below its fair market value
- Buying a company at fair value and increasing the value
through better management abilities
- Buying a company at fair market value and increasing value
through synergies. This is achieved through a strategic fit.
The top management usually assumes that it can create value
based on the first two options. However, this is a mistaken
notion, as it is not always possible to find good bargains or
manage the acquired company better than the previous management
did. It is always the strategic fit that creates value and the
synergy.
Synergies
Value from the strategic fit can be derived by leveraging on
wider scope, increased scale and reduced capital costs. An increase
in scope signifies adding more products and services to existing
lines. Increased scale means capitalising on economies of scale.
If any other company can create these advantages, then a common
synergy exists. However, when other companies cannot imitate
synergies, they are referred to as unique synergies. Such synergies
justify the premium paid by the acquiring company for the acquisition.
Ideally, compensation paid by the acquiring company should be
equal to the market capitalisation of the target company and
synergies realised by the combined entity. If the acquirer pays
more than this amount, then the merged entity fails to create
the value. Thus, synergies must be identified properly and calculated
with great care.
Conclusion
Before negotiating, companies should evaluate various alternative
scenarios by doing a sensitivity analysis. Companies should
also focus on key value drivers that are sensitive to the acquisition
process. Once the drivers are identified, implementation become
easier, as the transition team can allocate resources accordingly.
Drivers can be further broken down into metrics, such as an
increase in revenue or a decrease in costs. This helps measure
the performance of the acquisition deal, which is very important.
Related reading:
Mergers and Acquisitions: The Impact of Strategic Fit: Tan E.:
January 24th 2001
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