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Reader
Profile
Conventional wisdom by academics and consultants is that most acquisitions end up destroying value. What’s your take? I don’t believe that is true. I would agree, though, that academics and consultants tend to focus on failed transactions and probably believe that half of the transactions that get done create no value or actually destroy value. Why do you think that’s the case? Consultants and academics tend to study failures. Failures receive more publicity, are more visible, and are easier to gain information about. Failures may end up in bankruptcy, or in resales at lower prices. They’re just easier to look at. It is easier to see the warts on a failure than the halo around a success. What are the most value-enhancing kinds of M&A transactions for acquirers? Synergistic transactions. Transactions with immediate and real savings where one and one make three. You achieve synergies with businesses that are similar so that you have natural built-in, quantifiable, and even anticipatable savings and you see how the businesses are going to create additional value. A good example would be two companies that own consumer brands that are well-known and exciting and appeal to the same marketplace. In those cases, there are likely to be cost-cutting opportunities in manufacturing and distribution, and the buyer will enhance its visibility in the distribution and retail channels in which it sells its products. There are also financial acquisitions that are value-enhancing, but in those transactions you’re dealing with asset values that are greater than the buyer’s cost of acquiring the asset. And if you can fix attractive assets that just aren’t performing as well as they should, as a financial buyer you can also create or enhance value through an M&A transaction. Both kinds can build value – synergistic and financial. In corporate America these days, everything is about growth. How do you show strong growth? In a lot of businesses, showing growth is very hard without consolidation or acquisitions because it is very difficult and expensive to develop new products and new brands that will be successful and manageable. So, in order to be attractive as a public company and to obtain multiples that you want to see on your earnings and on your cash flow, you need to have growth. Growth through acquisition really means are you going to be able to add product that will enhance your revenues from existing products as well as the new products that you are acquiring. If you are a talented marketer and you are buying a brand name from somebody who is not as capable as you – for example, if you have a big distribution outlet and you buy a good brand from someone who has a smaller organization -- you should be able to achieve better revenues because you have better means of distributing the product. That’s one way to enhance your revenue stream and increase the multiple you’ll get from that very same revenue. What's the most productive role a board can play in reviewing and approving a major transaction? The first and most important is to assure itself that management has found something that is a strategic fit, that there is some purpose to the transaction beyond just becoming bigger. So a board can be helpful in making its management focus on why the fit makes strategic sense and that one and one won’t be just two, but that one and one will be two and a half or even three. A second rule for the board is to make sure that management doesn’t overpay for an asset. It’s easy to get carried away, to get excited about a product or an acquisition. The board has to be dispassionate about the deal. A good role a board can play is to specify the diligence that they expect to review from their management – on the buy side – before acquiring a company. The worst thing in the world is to acquire something because you love the concept, the idea, the attractiveness of it, and then find out after the fact that you didn’t do the due diligence necessary to discover that it really wasn’t what you thought it was. There are all sorts of warts that might be on a business that good diligence will uncover before you acquire a problem. Making sure that you are acquiring something that is in compliance with regulatory and legal requirements is very important in today’s world because legal and regulatory actions against a company can really hurt the value of a company. And I think it is also very important that a buyer have in place a real plan for integration of the new asset. Poor execution is the biggest cause for failed transactions. You really need to hit the ground running. The day you file your merger certificate you can’t start planning the integration. Integration has to be in process before you close the deal. One of the ways to really lose the value of the transaction is to allow that period of time before closing to pass without getting your plan developed and in place. You really lose a lot of time, if you wait to do that after the transaction has closed. On the day that you have a joint company you should be operating seamlessly, you should be moving forward with the game plan and the rationale for the acquisition. It is very important that in those first few months you are working to create the value that the deal was supposed to deliver from day one. How have you seen boards mishandle getting a deal done? There are two factors to that. One, mishandling getting the deal in the first place, and two, poor execution in integrating a successful transaction. In business sometimes you have to move quickly to make sure that the opportunity is achieved. Not being able to react quickly enough may cause you to miss a great opportunity. So there is a tension between becoming knowledgeable enough and moving quickly enough so that you don’t lose the opportunity. The board has to pay attention not to the little details but more to the big picture. What is it that we’re trying to accomplish? What is the strategic fit and how do we achieve it? How do we make sure that management understands this, and how do we become comfortable that management can in fact do this? The board also must insist on good due diligence and a complete integration roadmap that you have to have before you close a deal. 2005 has been a good year for M&A. What are your projections for 2006? It’s always hard in the era we live in to understand what the economy is going to be like, whether we’re going to be paying six dollars a gallon for gas, for instance. If in fact we are going to have higher and higher energy prices, it is going to be a strain on the economy. Will interest rates stay low? Will margins continue to diminish as they have over the past few years? If the answers are yes, then consolidation becomes essential. If you’re having trouble growing within, and your margins are getting smaller, you have to sell more product to make up for it. To sell more product you have to have more product to sell, so consolidation in size, critical mass, can become bigger and bigger. We’re also living in a global economy, so in order to outrun your competition you have to be wherever your customers and competition are. I think you’re going to see a very robust M&A business in 2006 – assuming no major disasters, no terrorist attacks of any magnitude – with a lot more consolidation, a lot more need for critical mass and – at the end of the day – it is usually cheaper to buy it than to build it. If you are going to commit capital, you need to be sure that that capital is going to be used in a productive way and there is going to be an appropriate return thereon. You’ve got to have confidence; you’ve got to have some degree of certainty. Without this, you are not going to see a lot of transactions. Where will the "hot spots" be for deal action? I’m going to suggest that it will be all across the board, but to be more specific, in health care and pharmaceuticals you’ll see a lot more consolidation; energy and financial services, also a lot. Retailing, real estate, and entertainment, I’m bullish on all of those areas. |
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| Dennis
J. Block is a partner in Cadwalader’s Corporate/M&A
Department. He has handled numerous mergers and acquisitions –
both hostile and friendly – on behalf of acquirers, targets, and
investment banks. Block’s practice includes the general representation, either on a continuous basis, or from time to time, of a number of large publicly held corporations, including Bear, Stearns & Co., Quaker Oats Company, Pfizer Inc., Merrill Lynch, CBS, U S WEST (now part of Qwest Communications International), General Electric, General Motors, MediaOne Group (now part of AT&T), Toys “R” Us, U.S. Industries, J. C. Penney, and Park Place Entertainment. Block has been Co-Chairman and a member of the Council of the Committee on Corporate Counsel of the Section of Litigation of the American Bar Association. From 1993 1998, Block served as a member of the Committee on Corporate Laws of the Section of Business Law of the American Bar Association and helped to draft the Corporate Directors Guidebook and portions of the Revised Model Business Corporation Act. He has co-authored The Business Judgment Rule: Fiduciary Duties of Corporate Directors (5th ed. 1998 and Supp. 2000), and Securities Law Techniques (A. Sommer ed. 1985). He is also co-author of a monthly column in the New York Law Journal, co-editor of The Corporate Counsellor’s Deskbook (5th ed. 1999), and a member of the editorial boards of several legal publications. In addition to writing, Block frequently lectures on mergers and acquisitions, the business judgment rule, corporate governance, federal securities laws, corporate litigation, the attorney-client privilege, professional responsibility, and indemnification and insurance of corporate officials. Block is a graduate of Brooklyn Law School, where he teaches Advanced Corporate Law as an Adjunct Professor. Before entering private practice, Block was a Branch Chief of Enforcement at the New York Regional Office of the Securities and Exchange Commission. Copyright © 2005 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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