The What, The Why, The How: Mergers and Acquisitions

The What, The Why, The How - Mergers and Acquisitions

Copyright © 2019 by Kerry D. Gray

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the author, except in the case of brief quotations embodied in critical reviews and certain other non-commercial uses permitted by copyright law.

Tellwell Talent

www.tellwell.ca

ISBN

978-0-2288-0100-9 (Paperback)

978-0-2288-0101-6 (eBook)

Table of Contents

Introduction

Chapter 1

Recent Trends in Mergers and Acquisitions

Chapter 2

Understanding Mergers and Acquisitions

Chapter 3

Motives (Strategy) behind Mergers and Acquisitions

1. To achieve growth objectives:

2. To take advantage of synergy opportunities (i.e., 2 + 2 = 5)

3. To reduce risk

4. Other miscellaneous motives

Chapter 4

Why Mergers and Acquisitions Fail

1. Misgauging Strategic Fit

2. Overpayment on price or incorrect deal structure

3. Wrong leaders or wrong leadership styles

4. Not communicating clearly or enough

5. Blind pursuit of synergies

6. Not focusing on customers and sales

7. Management incongruence or incompetence

8. Clash of cultures and inadequate human resources (HR) plans

9. Inability to integrate technology

Chapter 5

Roadmap for a Merger or Acquisition

Role of the Board

Hostile Takeover

Other Types of Transactions

Tax Considerations

Valuation

Planning and Implementation Roadmap

Conclusion

References

Appendix A

Major Fallacies of Management Theory

Appendix B

History of Merger Waves

Appendix C

Operational & Financial Synergies

Appendix D

Hubris Syndrome (David Owen)

Appendix E

Organizational Culture Assessment Tool

Appendix F

Pre-Transaction and Due Diligence Checklist

for Mergers and Acquisitions

Introduction

A group of middle managers were gathered around the coffee table on a break from a conference called Managing Careers in the New Millennium. The discussion centred on the general trends and stresses impacting their personal and professional lives. One observation from a young accountant struck a chord with those attending. Hell! he said. Forget all this talk about planning to change careers three, four, or five times. Never mind road blocks like baby boomers and flat organizational structures that force us into changing companies to chase new opportunities. I can do all that without even having to get up out of my chair!

The young accountant explained, "I came to work with Royal Insurance as a senior financial analyst. Within six months of being hired, due to a merger I was working for Dominion Insurance. As part of the integration, the former Royal Insurance corporate services department was centralized, and I was moved into a new department implementing total quality management (TQM) and process improvement. It wasn’t three years when another international insurance and banking conglomerate took over Dominion Insurance and my TQM department was eliminated. I was then asked to accept a new position and move to Winnipeg or Toronto. Instead I took a buy-out and went to work for the government.

But wait, my story doesn’t end there. Working for the government less than five years, I have been involved with two ministry mergers. For the first one, we led the planning and implementation, and in the second two ministries and parts of a third ministry worked together to integrate into one unit. Each and every time my job and related responsibilities changed significantly.

Our young accountant’s story may not be typical, but it does reflect a changing reality in many board rooms, executive suites and employees’ work-life experience.

Corporate mergers and acquisitions (M&As) are being announced almost daily and have become a regular presence in today’s business news. Consequently, they are exerting significant impact on communities, shareholders, related organizations, managers, and employees. This book looks at M&As to determine the value and implications of an M&A strategy, the motivations behind them, their impact, and why mergers succeed or fail. This book also provides a guide for evaluating a potential M&A and issues to consider in implementing the merger once a decision has been made to proceed. To round out the discussion, I have also included two relatively new topics related to the success or failure of mergers: organizational culture and integration of technology in merging organizations.

The ultimate result for the reader is a tool that can assist boards, management, and other stakeholders to understand the strategies, risks, and impact of M&As. This information will assist in making the best decisions when considering the pros and cons of a particular transaction or when considering or adopting a larger cohesive M&A strategy. Finally, to provide a final nugget of value, a roadmap is provided on how to approach and implement a merger or acquisition. When followed, this road map will improve the quality of these implementations and increase the odds of achieving all the benefits and success expected from your transaction.

Chapter 1

Recent Trends in Mergers and Acquisitions

Recent stories from the National Post (February 2018):

Torstar Corp. will be able to invest in transforming its business thanks to a solid cash position, reduced operating costs and synergies from the acquisition of several Postmedia newspapers, CEO John Boynton said Wednesday. (February 2, 2018)

Qualcomm is raising its takeover bid for NXP Semiconductors by nearly 16 per cent to about $43.22 billion, citing in part NXP’s strong results since the companies first announced their merger in October 2016. (February 20, 2018)

"Westons’ Choice Properties to create Canada’s largest REIT, buys rival for $3.9B." (February 15, 2018)

If you run a Google search for the phrase 2017 corporate mergers the results might surprise you as it returns over 2,000,000 results. I accept that not all these records are unique or announce a new transaction; regardless, the current level of activity, interest, and clamour around M&As is enormous, this despite recent economic, political, and social turmoil and a history of extremely high failure rates. Research consistently confirms that at least 50 percent of M&As fail to meet objectives. Regardless, the pace of merger activity at least in the short term appears robust and continuously growing. In fact, all indications are that M&A activity will continue, and we can expect activity to increase over time.

In his book Mergers, Acquisitions, and Corporate Restructures, Patrick Gaughan describes M&A activity by comparing them to ocean waves with periods of low swells contrasted with periods of crashing seas. He writes, The year 2000 marked an extension of the greatest wave in U.S. history. It began in the 1990s which featured the most intensive period of mergers and acquisitions. In fact, this period is now recognized as the fifth great merger wave in U.S. history (Gaughan 2001, 4).

It is generally agreed by researchers and academics that historically M&C activity happened in waves. The first four waves occurred in the following periods: 1897–1904, 1916–1929, 1965–1969, and 1984–1989. Although merger activity declined in the 80s, the fifth wave began with increased merger activity in the early 90s. The sixth one began in 2004.

(Institute for Mergers, Acquisitions and Alliances) (Figure 1.1)

Although the triggers initiating these waves are not conclusively understood, they do seem to follow periods of economic growth, regulatory changes, and technological shocks. (Gaughan 2011, 36).

The economic trigger identified by Gaughan is typically an economic expansion resulting in higher than average profits and increases in cash reserves. This environment spurs companies to grow in an attempt to meet shareholder expectations for continuing rapid growth and higher investor returns or to use their new cash reserves to grow and meet increases in consumer demand for products and services.

In addition, following periods of economic expansions companies may pursue a M&A for defensive reasons. During periods of growth competitors may have gained an advantage and market leaders may pursue a merger or acquisition to maintain or regain their market share and status.

The second trigger, regulatory shocks occurs from activity in the political arenas. This includes both the deregulation and removal of legal barriers and the introduction of new regulations due to political, societal changes or environmental concerns.

Historically regulations often prevented specific merger combinations. A Canadian example of regulatory barriers that, until the 1990s, prevented companies operating within one of the four pillars of financial services (banking, insurance, trust, and investment) from owning or having significant influence or combining operations of corporations with other companies operating within the four pillars.

However, following the removal of some of these barriers in the 90’s significant consolidation and mergers began to appear, one which is widely known was the takeover of Canada Trust by the Toronto Dominion Bank.

On the flip side increased regulation or introduction of new regulations has also resulted in smaller organizations and financial institutions (Credit Unions and smaller State Banks) to seek partners for the sole reason of gaining enough mass in order to respond to new reporting and capital requirements.

Although many barriers (legislation and regulations) remain, ostensibly to protect consumer interests, there has been significant blurring of the lines in many industries or markets. Examples of this include the blurring between wholesale and retail operators and allowing product creep between different financial service sectors. These changes are all thanks to deregulation by politicians often in response to consumers’ desire for convenience and sometimes based on a political bias or philosophy related to free-market economics.

The third major cause of the merger waves identified by Gaughan are technological shocks, which can come in many forms, from drastic technology improvements within industries (e.g., robotics, logistical software, adoption of the modern day desktop computer) to the creation of new industries driven by technological change. Examples of the latter include Uber, Airbnb, Amazon, Netflix, Facebook, Kobo, and Kindle.

In addition, the explosion of accessible data and information advances in hardware and software technology has now reached its teenage if not its adult maturity stage. As a result humankind has been introduced if not inundated with a level of technological sophistication that was never contemplated by Charles Babbage in 1837 when he designed his mechanical computer. Nor I would suggest, was it imagined by his son Henry in 1910 when he built the first mechanical computer using his father’s design or by Konrad Zuse when he built his electro-mechanical programmable computer, the Z1, between 1936 and 1938. I would even go so far as to suggest that the current level of sophistication and functionality may not have been envisioned by Steve Jobs or Bill Gates or other early electrical engineers or computer pioneers when they first connected transistors to invent electric computing machines.

Today, new software applications are launched