Put it All on Red

The cost of a proper integration process is sometimes off-putting to executives. The problem is that – like many professional services – the ROI is pretty squishy.

That’s just a stupid excuse, in the very humble opinion of The Merger Verger.

The integration effort needs to start soon, ramp up big and go long. That all costs money. Sometimes Big Money. Estimates in the range of 10% of deal value are fairly common.

Executive: “Ten percent? Are you kidding?”

Verger: “No. Face the facts.”

The facts are that well over half of all deals fail to achieve their intended results and many actually destroy shareholder value. Failure percentages range as high as 70-90%. That’s horrible.

So look the old Verger in the eye and tell him that you’re willing to invest 100 cents on the dollar for a deal with a 70-90% likelihood of failure but not 110 cents on a deal that might actually work?

roulette_wheelA thorough, effective integration process is an insurance policy … insurance against decades of past failures. That’s the problem: how do you measure the ROI on an insurance policy where the payoff is not measurable at the outset?

You don’t. But you’re corporate executives; it’s your job to make decisions on imperfect information.

That said, there are some proxies to consider:

  1. Try this out for a measuring stick. Go home and tell your wife that you’re going to cancel all your life insurance policies because the returns are just too hard to assess positively. She’ll kill you. What’s your return on that?
  2. Take a look at the cost of your car insurance as a percentage of your purchase price. It can be 25% or more. Not only that but you hope you’ll never use it! Sure makes paying 10% for something that you will actually use and benefit from seem like a bargain.

Recommendation:

If you are not willing to fund a thorough integration process, go to the nearest casino and put the deal’s purchase price on red. Your chances of a positive return are higher.

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A Galaxy of Acquired Brands

Entering the new year, The Merger Verger is watching one particular transaction that has good strategic intent and sensible (bordering on downright modest) synergy goals written between the lines of the announcement hyperbole: Newell Rubbermaid’s (NWL.N) purchase of Jarden Corporation (JAH.N) for cash and stock.

Each of these companies has an enormous stable of consumer brands (on which more below); together the list is mind boggling. And company each has grown over the years through acquisitions. It is tempting to quibble (or even judge harshly) that Jarden acquired more like a financial buyer (using acquisitions to build critical mass) whereas Newell Rubbermaid acquired more like a strategic buyer. But that would be splitting hairs.

NR-J strategic rationale

Both companies know how to do deals. And both companies know how to integrate them into a larger whole. So the deal could have gone either way. In fact, Jarden founder Martin Franklin said, “If we had the multiple and we had the market cap, we’d be the buyer.” But from an integration perspective, The Merger Verger sees it as good news that the “strategic” buyer has come out the winner. (It’s also good news that no one is bandying about that hideous old saw “merger of equals.”) All tolled, the chances of this deal achieving its strategic intent would seem good.

newell-brands-logo-slider_article_full

 

The number of consumer brands represented by the combined entity in this deal (to be rechristened “Newell Brands”) is way too big to list but it is very impressive indeed. The key names are listed in the deal press announcement, available by clicking here.

A Loss of the Real Kind

Sad news over the weekend. Longtime acquisition advisor and fellow New Jerseyan, Phil Clement, died in a private plane crash. Phil was the founder and head of Cathedral Consulting, an acquisition consulting firm, and was highly alert to the issues of integration. He and The Merger Verger had been trying to get together last week for a relaxed sitdown near the beach but an emergency on my end precluded that. And then the crash swept everything away.

We will miss Phil’s energy, his deep deal experience and his confident willingness to bring others’ integration expertise to the benefit of Cathedral’s clients.

Good life, Phil. Relax. We’ll take it from here.

St._Patrick's_Cathedral_(New_York)_1

For more info on Phil and Cathedral click here: Cathedral Consulting Group, LLC

What Can We Learn – 1?

Star date: Z-Ω ↵12-4Q. The year of the Okra

OK, with all the news clips and amazing photos of the space robot landing two days ago on comet 67P/Churyumov-Gerasimenko, The Merger Verger is prompted to ask, “Is there any lesson for us, back here on Planet Integration?”

Let’s start with the basic facts.

Ariane5 proposedA consortium of scientists and engineers has landed a smart box the size of a small dumpster on a rock the size of Manhattan. No biggie so far but God is in the details. The rock is 300 million miles away; it took ten years for the crafty little dumpster to get there. Plus the rock is moving at 40,000 miles per hour, which is fast even on the Jersey Turnpike. And there’s no EZ on / EZ off on this highway; the drivers didn’t even know whether the comet’s surface was paved or unpaved. Other unknowns abounded, the details of which you can read anywhere.

Importantly (and not widely publicized in all the fanfare), an aborted takeoff ten years ago necessitated a change of comet to 67P from 46P, which may not seem like a big thing but was.

Stay with me here: 67P is bigger than 46P. Good, right? Easier to hit from 300 million miles away. Wrong! Bigger means more mass which means more gravity which means faster landing which means greater risk of damage to the scientific equipment. (Merde)

And now, two days into the good part, we find that the solar-powered dumpster – named Philae – bouncy-balled into an unfortunate landing spot in the shadow of a cliff. (Double merde.)

But there is good news. Despite the fact that the intended 4-5 month mission length has been reduced to days, some 80% of the overall mission’s objectives will be met anyway, being handled not by the dumpster but by Rosetta, the mother ship from which it was launched.

Take-Aways and Observations by The MergerVerger:

Good things take enormous amounts of time and ridiculous amounts of planning. That may seem obvious but too many business people overlook it when trying to merge two “similar” companies. Effective integration can take ages but if your underlying mission is well conceived it will be worth all the years of occasional course assessment and correction to hit the goal.

When projects take this long, the leaders must actively manage expectations and must create incentive systems that will keep people focused and enthusiastic during the inevitable “dull” periods. Checking in and checking up over and over and over again can keep your people upbeat and your mission on track.

That said, you should always be ready to change targets. If the bidding gets too high, listen for that chorus of hundreds and hundreds of past deal failures: “Walk away,” it says. As our rocket scientist friends clearly showed, there are other targets beyond the first choice and the right marriage of flexibility and dedication can get you there.

Never ever ever forget the mission-critical elements, no matter how small or simple they might appear. What, for example, are you going to do if your solar-powered acquisition lands in the shade? Have back-up plans for your back-up plans.

A corollary to that thought is this trite but true: do not put all your eggs in one basket (no matter how cool the basket). Remember, even if the Philae never landed on 67P, 80% of the mission objectives would have been secured just by getting Rosetta into the neighborhood.

Comet_on_19_September_2014_NavCam-660x543Finally, do not kid yourself with lightweight worst-case scenarios for the deal. When you put together your pro forma numbers did you base your worst case on the impact of, say, rain on your parade? Try making it 3” hailstones instead. And add in a small plane crashing on the parade route. And maybe a tuba player with symptoms of ebola. THAT’S a disaster on parade! Unlikely – of course – but what if?

Summary:

  • Vision
  • Planning
  • Patience
  • Communication
  • Flexibility
  • Teamwork

Illustrations courtesy of the European Space Agency

Yo ho, Investment Bankers

Those were heady days, The Merger Verger recalls, when you could make a fee by helping a client acquire a company and then make another fee a few Closing Dinneryears later helping the client sell the same company after the acquisition failed.

So why should an investment banker give a rat’s ass about acquisition integration?

Because those days are over. Clients are smarter. And even smart investment bankers are smarter.  So let’s think about the M&A advisory business and acquisition integration.

  • If an investment bank really understands the issues associated with integrating a target company, it can help its clients make more successful acquisitions.
  • If an investment bank understands the challenges associated with integration, it can prepare smarter and more accurate pro forma numbers, which will lead to a greater likelihood of a client hitting its ROI threshold.
  • If an investment bank is aware of the operational aspects of the companies it’s selling, it will create more informative (and more accurate) selling memoranda, which should increase the selling price.
  • If an investment bank is conscious of the issues of integration, it can better develop and focus its list of buyer prospects in an exclusive sale assignment, which also should increase the selling price.
  • If an investment bank is realistic about the expected difficulties of an integration process, it will prevent its clients from knowingly overpaying for a target in a bidding war. (I know, that is a ridiculous thing for The Merger Verger to suggest but it could happen, couldn’t it? Maybe? Once? Just for fun? No? Damn.)

If an investment bank truly wants to build the reputation of providing its M&A clients with a service that adds actual value and is competitively unique, it should be thinking about the process of acquisition integration and about the needs of the client after the deal has closed.  There’s a lot to learn here – and much of it not easily quantifiable – but the payoff should be high.

Query: Is there an investment bank out there that would be willing to attempt to capture these benefits by building its own integration expertise, providing ongoing client service through the whole of the purchase and integration life cycle? Wouldn’t that keep one nicely “in bed” with the client and also create a track record that was superior not just by number of deals done but by amount of value created? Or is that too long term of an investment for an investment bank to make?

About the art: The pirate sketch is by Disney artist Marc Davis (1913-2000) for the Pirates of the Caribbean films. Davis did artwork for such famous Disney films as Peter Pan, Sleeping Beauty and 101 Dalmatians. A collection of his work is on exhibit now through November 4, 2014 at the Walt Disney Family Museum.

Hate Being Right

About a year and a half ago, The Merger Verger commented on an acquisition by a company out of Australia, Ansell Limited (ASX: ANN). In the announcement of the deal CEO Magnus Nicolin was quoted as saying the following:

The overall integration process will be a gradual one as we take time to get to know the Comasec business.

Bend Over, Mon Petit Shareholder
Bend Over, Mon Petit Shareholder

TMV’s posting was entitled “Short This Stock” because we know that a “wait and see” approach to acquisition integration is usually a prescription for disaster. So we got to wondering how that whole thing panned out for old Magnus.

Ansell’s recent financial reports have pretty vague and jolly things to say about their recent acquisitions (the largest of which was Comasec) and they don’t break out comparative data. But the point of the Merger Verger’s commentary was on the value of the stock and that picture is not so rosy. Over the 18 months since our posting, Ansell’s shares have risen approximately 10% while the S&P/ASX Health Care index has risen over 30%.

In other words, had you invested in the index instead of Ansell, you would have had less risk due to diversification and a gain three times greater.   (Yoo hoo, Magnus?)

One chart says it all (blue line = Ansell, black line = Health Care index; time horizon = 2 years to today):Ansell shares 2yr v Index

Lousy acquisition integration practices followed by lousy stock performance … cause and effect? Who knows? But an integration strategy as dumb as “wait and see” surely didn’t help.

Too Many Balls (and Too Few Planes) in the Air

So the woes are official.  United’s recent announcement of its 2Q 2012 quarterly results confirmed what virtually every customer already knew: the merger of United and Continental is still causing problems.  It’s not quite Jeffrey Smisek with his Head on Fire but it’s not good either.

Even the most carefully orchestrated integrations can hit clear air turbulence, particularly when merging entities as complicated as airlines.  Let’s look at some of the issues in hopes of finding a little preventive medicine.  (Ahem … American, are you out there?)

The UAL announcement noted the following problems:

  • Cut-over to a single reservation system has been more complex than anticipated.
  • Changes to the frequent flier policies have wrought confusion and pissed off customers, particularly at the most-active flier levels.
  • On-time arrival metrics have slumped.
  • Flight cancellations have increased.
  • Baggage handling mishaps have increased.
  • Spare plane inventory was cut back only to have to be rebuilt.
  • Reservation transaction times have increased, making them more expensive and more frustrating to customers.
  • Changes to the company’s revenue accounting system have led to revenue adjustments.

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Patient Sufferance Comes to an End: 1776

Today’s suggested reading is the U.S. Declaration of Independence.  It is a required text for all Americans and worth the five minutes for ROWers as well. (You can find the text anywhere but The Merger Verger likes the offering from the National Archives, available here.)

The Declaration can be cast as a document that has relevance to acquisition integration but the tether is thin, I admit.  However, it IS the essential communiqué from our founding fathers to the rest of the world announcing America’s management buyout from our British parent.  And it is a clear and powerful articulation of the strategic rationale behind one of the most unprecedented, most complicated, and most successful mergers in history. 

Nicely done gentlemen.

Doug

To Do or Not To Do?

Here’s a great quote that The Merger Verger came across the other day.  It should warm the cockles (whatever they are) of every integration manager’s heart:

Perhaps most important in the overall scheme of things, companies that beat the odds in M&A are prepared to walk away from a bad deal.  They insist on high-level approval of deals and often use the compensation system to encourage executives to ward off ill-considered acquisitions … They also set a walk-away price.

This last step is crucial.  Consider a finding from a recent Bain survey of 250 executives.  Respondents cited “allowing politics of emotions to interfere with decision-making” as the greatest due-diligence challenge.  Successful corporate buyers excel at resisting risky deals.

Source: Rovit, Sam, David Harding and Catherine Lemire. Strategy & Leadership, vol. 32, no. 5, 2004, pp 18-24.

“Successful corporate buyers excel at resisting risky deals.”  Ye Olde Merger Verger could not have said it better himself.