M&a
 

I was a finance major in college. As such, I've always paid attention to mergers and acquisitions. After 20 years, I've come to the following conclusions:

1) There are no real "mergers of equals". One company is always devouring the other. It's not always obvious based on the financing. AOL didn't buy TimeWarner, TimeWarner devoured AOL.

2) Merging a problematic company into a larger company just infects the host. Compaq couldn't fix DEC's problems. HP couldn't fix Compaq's problems (that it acquired from DEC).

3) Most mergers are done for very short-term reasons. Acquiring a competitor gives you their customers....until they start to leave. It also may disguise bigger financial issues in your own company that the public doesn't figure out until after the current batch of executives are gone. It also eliminates competition. All of these are temporary at best. Take a look at the banking industry for an example.

4) The merging of two large, national or international industry-leaders is almost always a bad idea. Ultimately, stockholders suffer, employees suffer, customers suffer. Merging two large regional players into a national player is about the biggest type of merger that can work out. The truth is, most large organizations have their own culture, processes, software, etc.. Time/Costs of integrating them is ALWAYS underestimated by management.

5) The only people that really make out in a large merger are the managers of the acquiring company. The managers of the acquired company are the next tier. They get their golden parachutes but that usually doesn't compare to the bonuses paid to the remaining management. Meanwhile, everyone is so focused on the merger, that products suffer, customers suffer, employees (that aren't outright laid off) suffer. Eventually the stock suffers, the managers are fired, and the subsequent management has to launch a crazy reorg to hide the systemic problems the merger created.

6) Companies that grow mostly through acquisitions are usually bad companies. Banks, Computer Associates, and Comcast come to mind. They all hide fleeing customers by acquiring competitors. They all have underlying unethical (and often illegal) behavior. They grow by attempting to capture the market share of competitors and not by attracting new customers. This can persist for decades. At least for Comcast, it seems the jig is up.

We have done a few over the years and I agree with a lot of what you say. I have seen successful mergers when the market is fragmented with lots of small players and the combination of a few can create scope and scale. I've been involved with mergers where you are really just buying the technology and as long as you can hold on to the brains long enough to absorb their knowledge you are going to be OK. I've also seen your #4 and again you are right. Its super tough to change cultures of two similar sized companies so they operate as one. There is never a merger of equals so the resentment lingers until you can cut out the malcontents. M&A is tough to get right.

I worked 13 years for a fast growing company that was acquired by Tyco International.

What a disaster.

It was good for me in the long run - I am much happier where I am.

Lots of generalizations in the OP, though anecdotally often true.

My company has been bought and sold twice in my 13 years here, and we have bought and sold a number of businesses. Sometimes we created lots of value for our shareholder and sometimes not. On balance its been a net positive.

In our industry, consolidation to achieve economies of scale represents one of the best strategies available to counter the secular trends we face which are declining margins from our customers, and increasing costs due to technology and regulatory compliance. As an operationally leveraged business, scale and volume are how we preserve our bottom line margin and its generally not possible to grow our market share organically - thus we often look to inorganic growth strategies.

Full disclosure: I am the CFO of the company, and I did not get filthy rich off any of the M&A activities of our firm - If I did I wouldn't be working anymore :D

my objection to mergers is it will almost always reduce competition
result in less not more choice for consumers

and limit the ability of investors to invest in a single good product line

Absolutely correct. I was trying to show that they often benefit very few people.

Another related problem is they concentrate our economic "eggs" in relatively few "baskets". When there are only a handful of players in an industry and they all do something stupid, it poses risks not just to consumers but to our whole economic system. Think mortgage-backed securities,the banking industry, and the whole "too big to fail" bailout fiasco.

And then there are corporate raiders who have no intention of making an acquisition work for anyone but the investors.

Not sure I completely agree with the "reduce competition" comment above. Much of our M&A activity involves expanding our product portfolio to reach a more diverse market and increase our value to large customers. I never considered acquisition of suppliers and competitors a good strategy. Those usually fail or have limited value.

I think that would be the point of capitalism - to benefit the owners of the capital. Now these days those who own equity in the form of 401Ks, 529s, etc can also benefit from M&A activity but by far those who gain the most are the sellers of the business and the bankers doing the deal.

Another trick is they buy an undervalued company and start discreetly selling off it's assets, then sell the company at a small "loss."

I did diagnostic and biotech M&A for 25 years. This statement always cracks me up ^^^.

Who are "investors"? They are people who want to put money to work in order to make a positive return. If a "corporate raider" (I assume you're talking about investment bankers or private equity) puts together an acquisition that does not work, then nobody makes money. Money or stock was used to fund the acquisition. If the clients bail, the employees bail, goodwill deteriorates, or the service deteriorates, then the acquired businesses does not maintain the margins needed to pay back the investors. Any investment banker (Oh yeah..."corporate raider") who puts bad deals together just to collect his fees would be out of business in a hurry. Besides, they all have money on the back-end in earn-outs, restricted equity, subordinate shares, etc. Everybody involved in an M&A deal wants the deal to be successful. As the OP states, sometimes clashes in corporate culture or arrogance of the acquirer can result in bad deals, but its never the intention.

90% of acquisition valuations are based on a multiple of EBITDA (or EPS if the company is public). If a company has zero or negative EBITDA, then the only value is to a strategic buyer who can acquire the business on a accretive basis and eliminate redundant or duplicitous expenses (usually people). "Dilutive" deals rarely happen, unless the strategic buyer has some product offering or service that is guaranteed to grow the sales of the acquired client list.

Sometimes the deals, once integrated, are only in incremental impact on the acquire's P&L, and the acquirer can loose 40%-50% of the business and the deals still drop profit to the bottom line. These deals get the bad rap, as most the jobs are and infrastructure are eliminated Examples of these are when a $10BB LabCorp (LH Holding - NYSE) buys a $25MM local diagnostic laboratory and in one day after closing the deal, the entire acquired facility is shuttered. The increase in volume at LabCorp isn't even a blip on the screen. LabCorp doesn't care if 30% of the clients quit.

I guess wdfifteen could have a point in the deals where a company is failing, and the assets, real estate, intellectual property, or individual operating units, are worth more individually that the company is as a whole. In most of these cases, the business is struggling so badly that it's not likely to survive anyway.

Legion: I went through 3 acquisitions, and you are absolutely 100% correct.

One of them was Computer asso...ciates... My first thought was "they're gonna go to jail". Sure enough the #2 did about ayear after I left ;-)

Your #2 didn't go to jail because of the merger of the two companies. Your #2 went to jail because he was a crook and did something illegal.

I know... I was echoeing the point CA was a "bad company" since it was quoted ("Companies that grow mostly through acquisitions are usually bad companies. Banks, Computer Associates, and Comcast come to mind.")...

He went to jail for their accounting practices... When they introduced us to those "delayed and gradual accounting of software sales" we all thought "this cannot be legal", and we were just software people, not accountants... Sure enough, it wasn't ;-)

I understand.

Regarding growth through acquisition: In the USA, Growth through tradition sales (sales reps, advertising, etc) is slow and VERY expensive. Good sales people are expensive, plus add 25-30% fringe benefits, company car, etc. Say a sales rep making $80K per year brings in a $5K per month account with a $20 percent profit margin. If he get's a $40K base salary and company car AND 10% commission on the account, that account would have to stick around a long time before the sales rep paid for himself on that account. It is often much cheaper...and faster...for a large company to buy a small company's client list through an asset sale...even if the integration results in a 30% attrition (of clients).

As a counter-point, I will say that IBM has been very successful at growth through acquisition. I know that when IBM buys a company, their software will be well-integrated with IBM's other offerings and continue to function and be improved.

Exactly! Also, Tyco, GE, McKesson...All companies who invest in and grow their acquired companies.

I think a lot of people watch Pretty Woman, grab the phrase "corporate raider", and rant negatively about something they actually know very little about (unique to this forum?:rolleyes:). I'm sympathetic to those middle managers and below who have been victims of post-acq layoffs, but industry consolidation is a natural part of a free market economy.

Excellent OP. I couldn't agree more. I wish I had to time to write a detailed reply.

In my personal experience, OP is correct.

Or put together a fund to buy an undervalued company, leverage its assets to pay back the fund investors and pay huge transaction fees to the fund organizers, then cut what's left of the company, its employees, and the customers it supplied loose to die on their own. A decently run manufacturing company maintains reserves in order to make equipment repairs and upgrades without going into debt. Some wise guy comes along and says, "Hey, this company has a lot of cash. Let's buy it, pocket the cash and leverage what's left. F ck the employees and the industry. We'll blame the company's failure on NAFTA or China or something." But that's capitalism. :rolleyes:
There is an interesting case study of just how this is done. It's in a book entitled "Glass House."