October 27 2009 - A survey by international corporate and litigation firm Paul, Weiss, Rifkind, Wharton & Garrison LLP (www.paulweiss.com) analyzed selected U.S. strategic mergers during the credit crisis.
The study reviewed the top 25 strategic transactions announced in each of the 12-month periods from August 1, 2007 - July 31, 2008 and August 1, 2008 -July 31, 2009. The following key characteristics were identified:
- Certainty was paramount. Many deal makers sought to define respective rights and obligations as clearly as possible 'in the face of various contingencies'. The analysts cited use of reverse termination fees to address failure of a financing commitment as an example.
- Strategic transactions borrowed pages from the private equity playbook. Some surveyed transactions included terms, such as financing outs and reverse termination fees, that had been more typically associated with private equity transactions in the past. However, the analysts found that none of the surveyed transactions included 'go-shop' provisions.
- Cash remained king in large transactions. Cash-only transactions dominated the survey even though experts thought that the credit crisis would lead to acquirors favoring stock as consideration.
- Fixed exchange ratios dominated stock transactions. When stock was all or part of the consideration, the merger participants almost always chose fixed, rather than floating, exchange ratios.
- Hostile approaches were only seen in a small number of completed transactions. The survey found that only four of the 50 transactions surveyed haf been initially rejected by the target company's board of directors after offers were made public.
- Tender offer activity increased. Over the two-year period, tender offers almost doubled as a percentage of transactions surveyed.
- Broken transactions were rare. As of July 31, 2009, all but four of transactions surveyed had been completed. The analysts described this as 'an impressive result considering the spate of private equity transactions terminated during the survey period'.
- Absenece of mergers-of-equals. Not one of transactions surveyed were labeled as 'mergers-of-equals' by the participants. And none contained all of the attributes typical of such mergers, for example a 'no-premium' offer price for the target's shares.
Mergers And Acquisitions Failing To Achieve Value
Many deals fail to create expected value, according to a survey by Accenture and the Economist Intelligence Unit conducted in March 2006. The survey of 420 corporate executives from the United States, Germany, the United Kingdom, Sweden, Norway and Finland also found that over half of recent deals in which respondents had been involved were cross-border transactions.
Less than half (45%) of respondents thought that their most recent M&As achieved expected cost-saving synergies, while even fewer (30%) said they had been able to successfuly integrate IT systems in their most recent cross-border deal. Also, almost a half (49%) said their deals did not achieve expected revenue synergies.
"Missing synergy goals by even a small percentage can mean losing hundreds of millions of dollars of shareholder value," said Art Bert, a senior executive in Accenture's Strategy practice. "The most successful deals are approached with a comprehensive integration plan, with core team continuity through most of the transaction life cycle, from target identification, valuation, due diligence, deal execution, pre close planning, and post-closing integration."
58% of executives involved in a recent deal said their company's latest acquisition was a cross-border transaction. Around one half of respondents to the survey expected businesses in their industries to make cross-border acquisitions over the next 5 years. The following reasons were given:
- To guarantee profitability (55%)
- To hit strategic corporate targets (49%)
- Just to survive (26%)
Almost three-quarters (70%+) of senior executives considered that the identification and execution of cross-border M&As was more difficult than domestic transactions.
According to Art Bert:
"There is a growing body of evidence that most large transactions fail to create shareholder value for acquirers. But what makes M&A so alluring is the less common, successfully executed deal that allows an acquirer to create shareholder value far beyond what its peers and competitors can achieve. This is why we see most high-performing companies undertaking a disproportionate number of deals relative to their industry peers."
Almost a third (31%) of respondents attributed 20% or more of their businesses' companies' total revenue growth over the previous three years to acquisitions and 83% thought that at least some growth came from deals. Similar responses were given for anticipated revenue over the next three years with 30% expecting M&As to fuel growth of 20% or more and 88% expecting at least some growth from acquisitions.
"M&A remains a vital strategic tool for corporate executives worldwide," Bert said. "Yet management teams must not be misled into thinking that deal closing is a prize, in and of itself. "Rather, evaluating and integrating an acquired business in a manner that delivers a superior return on investment, demonstrating that a transaction is really the best use of shareholders' money, is what sets a good deal apart from a bad one."
Respondents identified the following as some of the critical factors for M&A success:
- Orchestrating and executing the integration process (56% for domestic and 47% for cross-border deals)
- Conducting due diligence (42% for domestic and 43% for cross-border deals)
- Achieving an optimal price for a deal (20% for domestic and 19% for cross-border deals)
Most corporate executives thought that their firms were successful at retaining valuable employees from both the target business (72%) and the acquiring company (77%). Similarly, most also agreed or strongly agreed that their transactions did not have a negative impact on customers of the target business (67%) or the acquirer (73%).
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