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Beating the odds

by Suzanne Miller  |  Published November 19, 2012 at 1:03 PM
The history of M&A is littered with pithy quotes from those who understood a thing or two about how tough it is to succeed in the art of the big deal. Take Jack Welch, the former General Electric uber-CEO who was one of the ablest dealmakers of his generation and possessed an ego to match his success. "Number one, cash is king ... number two, communicate ... number three, buy or bury the competition," he once famously advised.

Much has changed since M&A titans like Welch worked around the clock to clobber the competition. For one thing, many have found that spending big again and again just doesn't pay -- even if it means burying the competition. Too many have ended up burying themselves in the process. Sometimes it's turned out that successors to spendthrifts simply can't pull off the same M&A magic that once dazzled investors, either because they lack that singular vision or have simply inherited a mess.

While many on Wall Street may roll their eyes at academic and consultant studies published over the years on how most M&A deals fail, the fact is that many deals do fall short of investor expectations. One big reason is that too many acquirers overpay for targets -- a bad habit many have tried to kick with varying degrees of success since the 2008 financial crisis.

Another big reason is that companies often spend too little time on integration -- focusing more on the glamor of landing a deal and moving on quickly to the next kill. Others have suffered from inconsistent leadership or a patchwork approach to M&A strategy, while others have failed to track the success of what they bought. Too many times, buyers struggle with all, or some, of these problems simultaneously.

With these challenges in mind, The Daily Deal for the past five years has been awarding The Most Admired Corporate Dealmaker awards to dealmakers who have demonstrated an ability to sidestep the pitfalls that trip up so many of their competitors. This year we've expanded the awards to include nine winners that have been among the most active acquirers in their industries with better-than-average five-year records for delivering excess total returns to shareholders.

However, this group is in no way comprehensive. Selecting just nine of the most successful corporate dealmakers from hundreds of potential candidates is challenging, largely because most companies don't break out M&A performance in their balance sheets or financial results. Also, there are numerous ways of determining success. For many companies, it's a highly individual process predicated on specific strategic objectives rather than immediate pops to share prices.

Taking all this into account, The Daily Deal has adopted a fairly straightforward approach. For starters, we focus exclusively on large-cap companies with market capitalizations greater than $5 billion. These are relatively active dealmakers that have excelled in delivering shareholder value. Uniquely and most importantly, we survey our professional audience in the corporate and financial communities to weigh-in on which candidates they believe are most skilled when it comes to more nuanced capabilities including management skills, a defined M&A strategy, integration capabilities, a vision for where the industry is headed and adaptability.

Since the tenure of Welch, who himself preached the importance of these skills, an increasing number of U.S. companies have sought to refine and improve their odds of M&A success. But there are differences in how deals are getting done today from an era that basked in steadily rising share prices. Since the financial crisis, many companies have shied away from transformative deals and have been focusing more on smaller deals with less risk of blow-ups. One of the common threads running through the disparate group of winners this year is an evident willingness to avoid the spotlight and focus on smaller deals that complement increasingly refined strategies. Take Coca-Cola Co., which has largely eschewed the megadeal hunt as the field of attractive targets has narrowed and prices have risen. Instead, the drinks giant has carved out a more focused strategy of smaller deals -- many of them global joint ventures -- to mine pockets of value among entrepreneurial companies, not unlike the strategy of many tech companies. This, tellingly, is the second time Coca-Cola has been an MACD winner.

IBM Corp., this year's winner for information technology, practically invented the art of serial smaller deals. It also tackles integration so thoroughly that it seems to roll out transactions with a conveyer-belt consistency. Over the years, IBM has gained a rare reputation for delivering on its promises of yield from acquisitions. That's been nothing short of extraordinary in a tech industry notorious for its volatility, M&A miscues and the rapid rise and fall of tech stars.IBM's consistency stands in contrast to a former MACD winner, Hewlett-Packard Co., which has since experienced significant setbacks due, in part, to extravagant spending on acquisitions that haven't panned out. Overpaying has been a particular issue for many tech companies under relentless pressure to innovate and grow. This is one of the reasons IBM stands out. In a September investor call hosted by JPMorgan, Verizon Communications CEO Lowell McAdam said: "I'm a fan of the IBM approach here. They do hundreds of acquisitions, but they're all small pieces to the puzzle that create a very rich picture. And that's where our head is." Verizon is another MACD winner this year.

Of course, it's easy enough to get tripped up. One big misstep -- or for that matter one vital missed deal -- can be a big setback or put a company behind other up-and-coming rivals. That's one of the reasons the MACD list of winners tends to change from year to year. It's tremendously challenging to stay on top.In this regard, it's particularly noteworthy that Abbott Laboratories has managed to win an MACD award for five consecutive years -- the only company to garner this honor; but even Abbott's winning streak is destined to end, thanks to its own success in building an empire that it has decided should be split in two, a research-based pharma company and a medical products company, a creative and shareholder-pleasing exercise in dealmaking. That takes affect Jan. 1, 2013, the start of a new MACD cycle.

Tags: Coca-Cola Co. | General Electric Co. | IBM Corp. | Jack Welch | Most Admired Corporate Dealmaker

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Suzanne Miller

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