Is
it different this time? Sure it is. There are clear distinctions to be
made between the global M&A market of 2006, when deal volume
reached $4.06 trillion, and that of 2000, when the previous record of
$3.33 trillion was set. One difference you see at a glance: The major
role of financial buyers, who accounted for 18% of deals last year as
opposed to 4% in 2000, according to statistics compiled by Dealogic.
Others emerge after a little study: the greater tendency for strategic
buyers to pay in cash, for example, and a smaller average deal size for
those buyers compared with 2000.
But to appreciate one of the biggest changes in the world of
M&A since the turn of the century, you need to hear from someone
like Anne Madden, vice president for corporate planning and development
and global head of M&A at Honeywell International. Madden began her
current role in 2002, with a special assignment from newly arrived CEO
Dave Cote: Study the previous decade of dealmaking at the aerospace,
technology and manufacturing giant, assess the results, and figure out
how to improve on them. About half those deals, Madden and her team
found, had failed to deliver the expected benefits -- which was on a
par with the depressing results that acquirers in general were getting,
according to many studies. So Honeywell took the logical next step. "We
built, from the ground up, new processes that were very specific to
Honeywell," Madden told an audience of corporate development
professionals at a meeting Corporate Dealmaker organized in New York in
October. "We did this for our due diligence process and our integration
process and we instituted a brand-new corporate policy. It really
reshaped the way Honeywell looked at deals in a very fundamental way."
For the strategic players who still account for the bulk of M&A
activity, the difference between 2000 and 2006 is as simple -- and as
complex -- as that. The private equity firms naturally draw attention
as they raise ever-larger funds (around $215 billion in equity last
year alone) and team up on larger and larger transactions. Still
underappreciated are the profound changes taking place within public
companies as they navigate the same trends that animate all that
private money (globalization, the digital revolution and a financial
system that demands growth and rapidly redirects capital toward it) and
also react to the dynamism of the financial players themselves.
Some firms, of course, have been known as skilled acquirers for
years; General Electric Co. and Cisco Systems Inc. come quickly to
mind. What's new is the way that companies that have been in the game
for a long time (including Honeywell International Inc., IBM Corp. and
Procter & Gamble) have improved their processes in recent years,
and the way that other, often smaller companies that haven't been in
the game are being drawn into it by what one middle-market corporate
dealmaker calls an acquisitions "arms race" with PE-backed competitors.
Faced with a world where they have to do deals, all these companies
have also been compelled by regulators, more attentive boards and more
demanding shareholders to learn to do them well.
Most fundamentally, that means learning to think of dealmaking as a
process -- something to be done repeatedly, and according to proven
procedures for planning and follow-through. It has also meant learning
to think of deals in far more practical terms. Mostly absent from this
year's list of major deals are examples of so-called transformative
deals such as AOL-Time Warner, everyone's favorite example of such a
transaction. "We're seeing a much more disciplined and rigorous
approach," says Bob Filek, a partner in PriceWaterhouseCoopers
Transaction Services group.
Chalk it all up to an outbreak of empiricism. Madden says that when
her team examined what went wrong in the deals that had disappointed,
they found the company had tended to get one of three things wrong. "We
either ventured too far from our core businesses or we fell in love
with the property. We convinced ourselves that we were going to do all
kinds of Herculean stuff from a sales synergy perspective and we ended
up overpaying," she told the Corporate Dealmaker conference. "And
lastly, our integration efforts at the time were ad hoc at best."
Honeywell's biggest acquisition of 2006 shows the company's current,
more tightly focused approach. In March, Honeywell announced it had
bought Britain's First Technology plc, a manufacturer with three lines
of business, only one of which was the object of the deal. Honeywell
had to outbid Danaher Corp. to win First Technology, paying $718
million for the company in a deal announced in late March. But by May
it had already sold off First Technology's crash-test dummy business
for $94.7 million, and by year-end it had completed the sale of the
automotive and specialty products division for $90 million. Cote could
thus report in December that Honeywell had gained First Technology's
fast-growing gas sensing business at a good valuation -- and that its
integration into Honeywell Analytics was proceeding apace.
As the strategy consultants will confirm, it isn't only at Honeywell
that such lessons are now being applied. Booz Allen Hamilton, which in
2001 released one of the studies showing that late-1990s acquisitions
tended to destroy value for buyers, last fall published a book of
M&A articles that opens with an essay called "The Era of Good
Mergers." The firm's latest research indicates that there's "virtually
no doubt that the success rate of mergers has increased significantly
in the last four years," according to the piece, which appears in "The
Whole Deal," produced by Strategy + Business magazine. The piece goes
on to give three reasons why the success rate is better: the
predominance of deals driven by consolidation, so that acquirers are
gaining a business they understand; an increase in scrutiny by
shareholders and boards; and significant improvements in execution
capability, particularly integration planning.
Meanwhile, McKinsey Quarterly last month featured a report called
"Are companies getting better at M&A?", a question it answers in
the affirmative. This study looks at acquisitions through the lens of
stock-market reaction, noting that previous research has shown
short-term market reaction to a deal to be a good predictor of
long-term value creation. The authors report that investors have grown
steadily more receptive to deals during the boom that began in 2003,
and that these deals are creating proportionally more value than those
of the previous boom. They note that the preponderance of cash deals
may be a factor in market reaction, since investors tend to prefer
those -- but that even stock deals have been better received. (What
they don't discuss, but might want to consider studying for a future
issue, is whether the popularity of cash transactions and
proportionately smaller deals is evidence of a disciplined approach
that investors are finding more reassuring.)
None of this is to say that dealmaking has ceased to be a
challenging activity -- or guarantees that we won't see plenty of
mistakes made in the future. On the merger front, Gerald Adolph, author
of the Booz Allen article and a senior vice president at the firm,
suspects that the current wave of mostly-consolidation driven deals
will soon give way to deals that are more of a strategic stretch, and
hence harder to pull off. And of course even a consolidation deal is
not exactly a lay-up. "There's no such thing as a safe deal," he
reminds in an interview.
It is the case, however, that many companies are getting better at
recognizing the dangers and figuring out how to manage them. It helps
immensely that previous waves of dealmaking mean there's now more
talent out there they can hire to help them do it.
"There are a lot of skilled deal people coming out of large
organizations," observes Garrick Hoadley, vice president for corporate
development and strategic planning at MoneyGram International. "There's
also a sort of diaspora of senior management with acquisition
experience." Hoadley is part of the trend; he joined Minnneapolis-based
MoneyGram (a $971 million-sales money transfer company that competes
with Western Union) from General Electric Consumer Finance in 2006,
with a mandate to improve its ability to handle transactions.
Many CEOs are adding dealmaking capability, Hoadley says, "because
they're seeing too many deals going past them." It makes sense. Even if
you're a happy, profitable, family-owned company, can you really stand
pat while an aggressive financial player starts rolling up your
competitors, lowering their costs by tapping suppliers in China who are
out of your reach and improving their margins with tighter financial
controls? And as for the dwindling number of public company leaders who
think they can just say no to transactions -- well, there's a private
equity guy on line 1, a hedge fund on line 2 with some unsolicited
restructuring advice, and an investment banker in the lobby with some
strategic options you really ought to review before the next board
meeting.
The power of the financial buyers is being felt by the very largest
companies. They are competing for assets as never before, and just the
potential for such competition is inevitably making corporate
strategists think differently about when and how to execute their
plans. "Financial buyers have raised their consciousness," says Dennis
Block, head of M&A at Cadwalader, Wickersham & Taft LLP.
"They're saying, 'if this is my last chance to acquire these assets,
I'd better act now."
Anne Madden at Honeywell notices the PE firms in multiple ways --
starting with the way they've bid up prices and created a seller's
market for assets. "It's really changed the dynamic for us in the
auction processes we've seen in our spaces," she told the Corporate
Dealmaker meeting. "Gone are the days when the strategic always had an
advantage because of the synergies. It has shifted meaningfully so that
we see private equity all over our spaces all the time. And they're
teaching the sellers to have expectations around prices that have
impacted and infected the entire seller's market."
"As a buyer of assets," she continued, "I am not happy about it at
all. As a seller of assets from time to time -- listen, it's been
great. What it has emboldened Honeywell to do is something we never
would have had the stomach to do 10 years ago, which is to buy a bundle
of assets, only a portion of which we really wanted, and then take the
execution risk on the divestitures. We've done that twice in
multibillion-dollar deals in the past two years, and we have been able
to dispose of those noncore assets exactly the way we predicted we
would and on the timetable we promised."
Perhaps the most significant aspect of the rise of private equity,
though, is the increasing tendency of strategics and financial buyers
to cross-pollinate. This takes multiple forms. There's collaboration on
major transactions, such as the purchase of grocery chain Albertson's
Inc. in January 2006. There's the movement of talent back and forth
across the line, whether through take-privates, the gravitation of
former corporate leaders such as GE's Jack Welch and Gillette's Jim
Kilts to the private equity world, or corporations building their
transactional capabilities by bringing aboard younger dealmakers who
have learned their craft in a private-equity setting.
Finally, there's the way the private-equity playbook for running a
company is influencing what strategic buyers may do with what they buy.
"The PE influence is creating a willingness to be more aggressive in
restructuring the acquired company and, therefore, a bit more
aggressive in bidding," says Adolph of Booz Allen.
At the same time, corporate dealmakers are also learning more from
each other in various ways, including at gatherings organized by the
Conference Board, by various chapters of the Association for Corporate
Growth, and of course by Corporate Dealmaker. (For more discussion from
our October meeting, see following story.)
One thing that always comes through in such conversations is the
viewpoint that sets truly strategic acquirers apart from other members
of the deal community. It sounds obvious, but at a time when
transactions are coming along so furiously that some companies can feel
compelled to attempt one before they're ready, or instead of a smarter
alternative, it's worth repeating: A deal is never an end in itself.
"Growth is a process, not an objective," says Peter Klein, a veteran
corporate dealmaker and growth management consultant who has had a long
career in consumer products. Previously the strategy and business
development chief at Gillette who helped sell that company to Procter
& Gamble in 2005, Klein offers a useful reminder that external
development is but one channel, along with internal, organic
development, of a larger, ongoing strategic workstream -- and that
external growth options include not just acquisitions, but also
licensing, joint ventures, strategic alliances and other possibilities.
Another basic premise of sound corporate dealmaking also bears
repeating here. It is that how a company grows has everything to do
with the industry, culture, idiosyncrasies -- and above all, the people
-- of the company in question.
That being the case, the recognition that acquisitions
should be treated as an ongoing process, and managed with clear
procedures for planning, execution and follow-through, is just the
first part of wisdom. The second part -- the hard part, the really
valuable part -- consists of taking the transactional know-how that's
now out there and putting it to work in a specific company context.
As we close out one record year for M&A and look forward to what
many participants believe could be another, there are signs that
companies are figuring out how to do this. It's not simple, but it is
refreshingly practical compared to the approach that produced so many
deals in the last decade that were long on vision and amazingly short
on execution. And here's an irony: as more and more companies learn to
apply a measured, practical, tailored approach to external growth
initiatives, they could ultimately produce changes in their own
organizations, and in the larger economy, more than equal to what the
visionaries of 2000 were promising. - Ken Klee
| A new record and a changed landscape |
| The
most obvious difference in the M&A world since the previous record
year 2000 is the deal volume generated by financial buyers, but there
have been big changes on the strategic side as well. |
| Global M&A volume for strategic and financial acquirers, quarterly |
|
Announced |
Financial acquirers |
Strategic acquirers |
Total M&A volume |
|
Value ($B) |
No. of deals |
Value ($B) |
No. of deals |
Value ($B) |
No. of deals |
|
2000 Q1 |
$46.2 |
577 |
$1,016.6 |
8,556 |
$1,062.8 |
9,133 |
|
2000 Q2 |
40.5 |
619 |
794.1 |
8,151 |
834.6 |
8,770 |
|
2000 Q3 |
38.3 |
477 |
746.5 |
6,172 |
784.8 |
6,649 |
|
2000 Q4 |
36.0 |
459 |
614.0 |
6,027 |
650.0 |
6,486 |
|
2001 Q1 |
31.0 |
473 |
442.9 |
6,471 |
473.9 |
6,944 |
|
2001 Q2 |
33.8 |
529 |
472.6 |
6,317 |
506.4 |
6,846 |
|
2001 Q3 |
22.9 |
464 |
374.2 |
5,741 |
397.2 |
6,205 |
|
2001 Q4 |
22.4 |
492 |
349.9 |
6,447 |
372.3 |
6,939 |
|
2002 Q1 |
25.8 |
454 |
251.8 |
5,940 |
277.6 |
6,394 |
|
2002 Q2 |
43.8 |
500 |
306.3 |
6,279 |
350.1 |
6,779 |
|
2002 Q3 |
49.4 |
496 |
302.5 |
5,463 |
351.9 |
5,959 |
|
2002 Q4 |
43.0 |
517 |
294.3 |
5,559 |
337.3 |
6,076 |
|
2003 Q1 |
39.9 |
499 |
276.2 |
5,113 |
316.2 |
5,612 |
|
2003 Q2 |
42.1 |
559 |
274.8 |
4,899 |
317.0 |
5,458 |
|
2003 Q3 |
55.6 |
517 |
269.1 |
5,020 |
324.7 |
5,537 |
|
2003 Q4 |
85.7 |
654 |
404.1 |
5,717 |
489.8 |
6,371 |
|
2004 Q1 |
80.4 |
755 |
472.9 |
5,839 |
553.3 |
6,594 |
|
2004 Q2 |
79.4 |
673 |
345.0 |
5,629 |
424.4 |
6,302 |
|
2004 Q3 |
111.9 |
676 |
355.8 |
5,751 |
467.7 |
6,427 |
|
2004 Q4 |
89.9 |
664 |
516.2 |
5,954 |
606.1 |
6,618 |
|
2005 Q1 |
84.0 |
697 |
591.7 |
6,479 |
675.7 |
7,176 |
|
2005 Q2 |
96.8 |
854 |
683.7 |
6,467 |
780.5 |
7,321 |
|
2005 Q3 |
112.2 |
829 |
574.8 |
6,850 |
687.0 |
7,679 |
|
2005 Q4 |
127.4 |
799 |
717.1 |
7,665 |
844.5 |
8,464 |
|
2006 Q1 |
119.1 |
883 |
873.9 |
7,611 |
993.0 |
8,494 |
|
2006 Q2 |
187.7 |
825 |
753.6 |
7,491 |
941.3 |
8,316 |
|
2006 Q3 |
195.8 |
860 |
620.8 |
7,238 |
816.5 |
8,098 |
|
2006 Q4 |
310.2 |
705 |
1,003.2 |
6,576 |
1,313.4 |
7,281 |
| |
| Total annual M&A volume for strategic and financial acquirers |
|
Announced |
Financial acquirers |
Strategic acquirers |
Total M&A volume |
|
Value ($B) |
No. of deals |
Value ($B) |
No. of deals |
Value ($B) |
No. of deals |
|
2000 |
$161.0 |
2,132 |
$3,171.2 |
28,906 |
$3,332.2 |
31,038 |
|
2001 |
110.2 |
1,958 |
1,639.6 |
24,976 |
1,749.7 |
26,934 |
|
2002 |
161.9 |
1,967 |
1,154.9 |
23,241 |
1,316.9 |
25,208 |
|
2003 |
223.4 |
2,229 |
1,224.3 |
20,749 |
1,447.6 |
22,978 |
|
2004 |
361.6 |
2,768 |
1,689.9 |
23,173 |
2,051.5 |
25,941 |
|
2005 |
420.4 |
3,179 |
2,567.4 |
27,461 |
2,987.7 |
30,640 |
|
2006 |
812.7 |
3,273 |
3,251.5 |
28,916 |
4,064.2 |
32,189 |
|
| More medium-size deals |
| Average deal value for strategic acquirers was smaller than in 2000, and buyers were more likely to pay in cash |
| Strategic acquirer deal value bands (as a % of total value) |
|
Announced |
Less than $100M |
$100M to $500M |
$500M to $1B |
$1B to $10B |
Over $10B |
|
2000 |
7% |
13% |
9% |
39% |
31% |
|
2001 |
10% |
18% |
10% |
42% |
20% |
|
2002 |
13% |
24% |
12% |
36% |
14% |
|
2003 |
13% |
24% |
11% |
37% |
16% |
|
2004 |
11% |
19% |
12% |
36% |
22% |
|
2005 |
9% |
18% |
9% |
38% |
26% |
|
2006 |
8% |
17% |
11% |
37% |
28% |
| |
| Strategic acquirers' average deal size |
|
Announced |
Average deal value ($mill.) |
|
2000 |
$205.9 |
|
2001 |
131.4 |
|
2002 |
98.4 |
|
2003 |
110.2 |
|
2004 |
133.1 |
|
2005 |
162.6 |
|
2006 |
187.3 |
| |
| Acquisition currency for strategic acquirer deals |
|
Announced |
Shares |
Cash |
Other* |
|
Value ($B) |
No. of deals |
Value ($B) |
No. of deals |
Value ($B) |
No. of deals |
|
2000 |
$1,311.5 |
2,725 |
$1,182.3 |
12,290 |
$677.4 |
13,891 |
|
2001 |
533.4 |
2,029 |
737.2 |
10,744 |
369.0 |
12,203 |
|
2002 |
261.9 |
1,502 |
658.1 |
12,945 |
234.9 |
8,794 |
|
2003 |
325.7 |
1,273 |
705.1 |
17,288 |
193.5 |
2,188 |
|
2004 |
325.6 |
1,442 |
1,030.3 |
20,137 |
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Juergen Lasowski
And the winners are...
