A New York City subway train holds 1,200 people. This blog was viewed about 6,600 times in 2013. If it were a NYC subway train, it would take about 6 trips to carry that many people.
600 people reached the top of Mt. Everest in 2012. This blog got about 9,700 views in 2012. If every person who reached the top of Mt. Everest viewed this blog, it would have taken 16 years to get that many views.
The concert hall at the Sydney Opera House holds 2,700 people. This blog was viewed about 13,000 times in 2011. If it were a concert at Sydney Opera House, it would take about 5 sold-out performances for that many people to see it.
The stats helper monkeys at WordPress.com mulled over how this blog did in 2010, and they provided me with this high level summary of its overall blog health (this is their data and words, not mine, but I thought it might be interesting to the regular readers of this blog):
The Blog-Health-o-Meter™ reads Fresher than ever.
The average container ship can carry about 4,500 containers. This blog was viewed about 16,000 times in 2010. If each view were a shipping container, your blog would have filled about 4 fully loaded ships.
In 2010, there were 22 new posts, growing the total archive of this blog to 99 posts. There were 3 pictures uploaded, taking up a total of 190kb.
The busiest day of the year was January 6th with 111 views. The most popular post that day was 2010 M&A Forecast.
Where did they come from?
The top referring sites in 2010 were digg.com, arbitrageview.com, bunhill.city.ac.uk, reversemergerblog.com, and facebook.com.
Some visitors came searching, mostly for scott moeller, surviving a merger, intelligent mergers, book cover, and m&a 2011.
Attractions in 2010
These are the posts and pages that got the most views in 2010.
2010 M&A Forecast December 2009
Worst Mergers or Acquisitions of all Time December 2009
About me April 2007
Intelligent M&A Book April 2007
Due Diligence Requirements in M&A Deals June 2010
If you want to expand overseas — from whatever your base — what do you do? Start up new in a country in which you’ve never operated before? Maybe a joint venture? Do a big acquisition there?
If you’ve decided that an acquisition is the best route forward, then you have the big decision to make about which country (or countries) to enter? This question is easy to ask, but often expensive and difficult to answer. Help is now at hand!
Cass Business School has an M&A Research Centre (full disclosure: I’m the director of that research centre). We’ve recently published, in conjunction with Allen & Overy, Credit Suisse and Ernst & Young, a new index which ranks 175 countries on the ease with which one can do an M&A deal there: The Cass MARC M&A Maturity Index. Ernst & Young have turned this study into an interactive website, and the study itself can be obtained from Cass here.
Whereas others have looked at the attractiveness of markets for M&A solely based on financial and economic factors, for example, or even the legal environment, this index looks at six country development indicators:
- Regulatory factors (e.g., rule of law and regulatory quality)
- Economic factors (e.g., GDP growth and economic freedom)
- Financial factors (e.g., stock market capitalisation and access to financing)
- Political factors (e.g., political stability and corruption of officials)
- Technological factors (e.g., R&D expenditure and innovation)
- Socio-cultural factors (e.g., people, talent and labour skills)
These are combined in the index and a score for each country is generated, ranging from 1.0 (best) to 5.0 (worst). Approximately two-thirds of countries, including Indonesia, Egypt, Ukraine and Nigeria, appear in the bottom grouping as relatively unattractive — and the reasons differ per country, of course. The top one-third has those that are mature (Canada heads the list, and ends with China) and those that are ‘transitional’, which is the most interesting group.
In fact, the press coverage of this study since its release three days ago has been greatest about this transitional group, which has a number of countries from the Middle East (led by the UAE but also including Qatar, Saudi Arabia and Kuwait), Central Europe (Czech Republic, Poland and some others), Latin America (Chile, Mexico, etc) and Asia (Thailand, India, Philippines, etc). You can see some of these articles here: Middle East and Asia, for example. There’s even a video: Cass M&A research signals the emergence of Asia.
I found one of the most interesting findings to be that the technological factors were the discriminating factor amongst those transitional countries as to whether they were attractive for M&A activity or not: in fact, technological development represented 40% of the differences between these countries. Amongst the most mature markets, socio-cultural factors were most important.
Very interesting will be to see the movement in a year when the second such index is issued, and at which time I expect to see some of the ‘transitional’ countries to move into the ‘mature’ category.
One of the more interesting discussions in any deal is at the beginning when you need to decide what the confidential name should be for the project. This is needed because at that time the deal is very hush-hush secretive with few people knowing about the potential takeover or merger.
Should the information about the deal get outside the company and its close-knit group of advisors, it could affect the pricing and even the ultimate success of the deal … maybe allowing a competitor to buy what you’re wanting to buy. If other outsiders learn of the deal, they could trade on that inside information, making illegal profits. And if the deal is prematurely annouced because of such a leak, the careful planning on the planned announcement date may be incomplete.
Thus it is that most companies (and their advisors) create a code name for the deal prior to public announcement. During that period, the actual target and bidder’s names will not appear in any of the planning documents. If one of those documents was seen by someone outside that inner circle, presumably they would not be able to determine who the target and bidder were. (Of course, a deep analysis of any such document might reveal the identities of the two companies, as the discussion of those companies may be uniquely linked to just one possible real company for each of those with a code name.)
How to choose the names is fun. Should it relate in some way to the company name itself? Thus, when Bank of New York started looking to merge with Mellon Bank, they called the deal ‘Project Melody’, where the first three letters of the project name and the company name were the same. Interestingly, some regulators today, concerned about market leaks, might think this was not enough in code to prevent inadvertent disclosure.
Or should the project name be linked to where the firm is located? And thus Cadbury used the code name ‘Project Eagle’ for Kraft, as it was from the US as denoted by an American Eagle; similarly, Banco Santander of Spain called it’s acquisition of Abbey National of Great Britain by the name of ‘Project Jack’, which was derived from a common term for the British flag, ‘Union Jack’; and Mellon Bank, in it’s code name for the above deal, called Bank of New York ‘Project Cider’, which was a play on words from nickname for the headquarters city of that bank, the ‘Big Apple’.
I was recently interviewed by Quentin Webb of Reuters for an article that was widely distributed on just this topic. You can find it here in an article entitled ‘M&A deals are all in a code name’. In it, he quotes me as saying:
Banker-turned-academic Scott Moeller said while at Deutsche Bank he worked with a list of composers Blu-Tacked to the wall; the musical giants stood in for financial technology companies that could be bid targets.
Moeller, now director of the M&A research centre at London’s City University, said codes must be memorable and should not be “too cute” or otherwise offensive to clients — making musicians a safe bet.
“Nobody can complain about being called Bach, or Beethoven, or Mozart,” he said in a telephone interview.
“My only other criterion was I had to be able to spell whatever it was — so no matter what, we’re not going to have Project Mussorgsky or Project Tchaikovsky,” he added.
I should add that the reason that we started using composer names was because we ran out of animals. Originally in the Corporate Development department at Deutsche Bank, we had various code names for potential targets where the first letter of the animal name was the first letter of the potential target. Thus, Project Penguin was Paine Weber, Project Dolphin was Donaldson Lufkin & Jenrette, Project Monkey was Morgan Stanley, etc. This made it easier as we updated information about each of our competitors and potential acquisition candidates back in the mid-1990′s. But there just aren’t as many animals as there are composers, and Deutsche Bank was making lots of acquisitions at the time.
Because they are fun and often tell a story about the start of the deal, I would love to collect some other code names, so please share them here.
The rise of hostile deals. Again.
What does this mean?
If you look over the last several booms that have gone on over the last 20 or 30 years, the M&A cycles that happen, a leading edge indicator of an M&A cycle starting up again, tends to be hostile deals. Because, what happens is, sellers aren’t that happy about selling, at a given price. Where they see the market, they think, this isn’t the best time to sell. But, as buyers tend to heat up, and get a little more interested, before sellers become interested in selling you see a bit of a hostile trend emerge. And, people begin to do deals, but maybe not on such a consensual basis. So, if you look over time, it’s usually an indicator that you’re going to see an M&A cycle start up again. And, it’s sort-of the early form of that.
I must totally agree. Several additional points to note:
- Most of these ‘hostile’ deals will end up friendly when the target company agrees to be purchased at a price much higher than they had expected to see their share price anytime soon. HP, for example, has now won a bidding war with Dell for 3Par, and the final price was over three times the undisturbed share price of 3Par before the bidding began. It’s not surprising the board of 3Par ultimately agreed!
- ‘Hostile’ usually means ‘unsolicited’. It doesn’t have to be unfriendly, with the CEOs exchanging lawsuits and even punches (as happened when Sir Philip Green of Arcadia / Topshop accosted Sir Stuart Rose of Marks & Spencer in London in 2004 as he was trying to take over M&S in a truly hostile bid). And once the right price has been reached, as happened earlier this year when Kraft took over Cadbury, it becomes ‘friendly’.
- These deals early in a merger cycle (or even before the cycle begins) are likely to be strategic and not financial acquisitions. At this particular time, the Private Equity market hasn’t yet returned (despite some ‘green shoots’), so the ‘hostile’ bidders are the strategic buyers that we are seeing in the market now.
There is also a significant body of research that shows that the companies that make acquisitions early in a merger cycle are more successful than the followers (‘me-too’ deals) later in the cycle as the price of companies gets bid up, fewer targets are available and the most attractive ones have already been taken.
If the hostile deals continue, we may just have the real start to the next merger cycle starting.
Readers of this blog know that I do not usually try to predict the M&A market. I like to look at longer-term trends, trying to identify the drivers for the next merger wave and seeking to provide some guidance on what will make it turn upwards.
I continue to insist that M&A is a confidence market: even if valuations are reasonable, even if the acquirers have lots of excess cash and even if many M&A bankers are saying that they have healthy pipelines of deals, there is one component that must be in place for the market turn. That factor is confidence in the board rooms and executive suites of the buyers. If the chief executive cannot convince the board that NOW is the time to do the deal and that they will not be embarassed by the purchase announcement (especially if it turns out that they could have bought the target cheaper in two or three months — that is, before closing — than they are offering now), then the deals will not be done.
I think there’s still too much talk of ‘double dip’. There’s still too much uncertainty, despite the old Wall Street chestnut that ‘rising markets climb a wall of worry’.
Yet, there’s been a slew of articles written in the past several weeks that talk about ‘merger mania’ or similar sentiments that just might cause a board to seek their first mover advantage in announcing a deal. Especially if that deal has been in discussion with the target for the past several months or even years, waiting for the right time to be consumated.
Look at this article, entitled ‘Mergers and acquisitions mania disrupts bankers’ summer breaks‘ from the Guardian in the UK. As the title suggests, it talks about M&A bankers being forced to cut back their holidays this summer because of the deal volume. And that the size of announced deals was larger a couple weeks ago in mid-August than any other August week since 2006, when the M&A market was almost peaking. (But caution to the reader: one or two large deals can skew these figures, and the announcement of BHP Billiton’s $43.8 billion takeover of Canada’s Potash Corp has done just that, similar to the Pru / AIA deal earlier in the year that did the same at the time.) The Guardian also noted that M&A fees have been increasing at investment banks again, although ‘this year represent[ing] about 35% of global investment banking fees, still below a 10-year average of 38%, according to Guardian calculations based on ThomsonReuters data. The sector peaked in 2008, when M&A accounted for 48% of all investment banking fees.’
Look at this article title from Financial News which also was written about a week ago in mid-August: ‘”Planets align” for M&A recovery’. That article wrote: ‘the M&A market has been building momentum since April, with the three month moving average for weekly M&A rising 71% in the past four months. July and August, traditionally quiet months, have been the busiest summer since the late 1980s.’ It also noted the rise in cash balances at potential acquirers: ‘For the first time in three years, companies also have the means to do deals. Daniel Stillit, special situations analyst at UBS, said: “Leverage multiples [the ratio between net debt and Ebitda] are at their lowest since 2003…”‘ Perhaps most importantly in my mind, the article noted that companies have squeezed out just about all the cost savings they can in order to raise (or even just maintain) profitability, so M&A may be the next area to look for growth.
It’s not just the journalists, although they are experts at picking up short-term trends. The consultancies, although not without some bias, have written of a resurgence as well. Look at this McKinsey article, and the title of the article says it all: ‘A singular moment for merger value?‘ As I talk to private equity investors, they are beginning to be more optimistic, too.
Hmmm. Maybe the confidence is returning.
There’s been a lot of press reaction to our recent report on what happens when a new CEO takes over: ‘Here’s the deal: move fast as a new CEO’. The report was written by Cass Business School and the M&A Research Centre (MARC) (which I head). See also my blog entry ‘What comes next? Change your CEO and (bang!) you’re acquiring another company‘ and another one regarding the intial coverage by Stefan Stern, the ‘On Management’ columnist, in the Financial Times and in the blog entry ‘Article on CEOs and M&A deals‘. Clearly good use of business intelligence when a board is appointing a new CEO!
The Wall Street Journal has written on this topic as well: ‘Why Your New CEO Should Be a Deal Maker’, which emphasises that the firms of CEOs who do deals in their first year in office outperform those who do not do a deal in their first year. The Wall Street Journal has also put together a video interview on this, tieing it to the recent Prudential deal to purchase the Asian assets of AIG … a deal which was recently pulled. See the interview here: ‘Bankers: New CEO Means New M&A. Make That Call Now!‘ and another related article with the same video here:
‘New CEOs Have an Urge to Merge’.
In QFinance, a very extensive on-line financial markets resource, I’ve written an article entitled ‘Due Diligence Requirements in Financial Transactions‘. Due diligence is a critical business intelligence process, and in our book on the use of business intelligence in doing M&A deals better (Intelligent M&A, Navigating the Mergers and Acquisitions Minefield), the chapter on due diligence is the longest. In it, I make the following arguments:
- There is an urgency for companies to conduct intensive due diligence in financial deals, both before announcement (when it should be easy to call off the deal) and after.
- Traditional due diligence merely verifies the history of the target and projects the future based on that history; correctly applied due diligence digs much deeper and provides insight into the future value of the target across a wide variety of factors.
- Although due diligence does enable prospective acquirers to find potential black holes, the aim of due diligence should be this and more, including looking for opportunities to realize future prospects for the enlarged corporation through leveraging of the acquiring and the acquired firms’ resources and capabilities, identification of synergistic benefits, and postmerger integration planning.
- Due diligence should start from the inception of a deal.
- Areas to probe include finance, management, employees, IT, legal, risk management systems, culture, innovation, and even ethics.
- Critical to the success of the due diligence process is the identification of the necessary information required, where it can best be sourced, and who is best qualified to review and interpret the data.
- Requesting too much information is just as dangerous as requesting too little. Having the wrong people looking at the data is also hazardous.
The whole due diligence can therefore be summarised with four ‘w’ questions: What? When and where? Who?
- What do you need to review? Be careful, as note above, of requesting too much as you may then only superfically review even the important things. Focus on the critical, the potential deal-breakers and the things you need to know to design the best post-merger integration (too often managers seek this information AFTER the deal, but by then it’s too late to design a proper post-deal integration strategy).
- When do you need the information and where do you find it? Much due diligence can be done even before a deal is announced … and even before you start discussions with the target. For example, you often don’t need to ask the target for their sales information: even if they are privately held and don’t disclose this information, you can get it from industry sources such as publications, government data bases, suppliers and customers. Management consultants can provide excellent market information. Thus think about whether you can get information from other sources early, as then you don’t waste time once the deal process has started in earnest (once you’ve contacted the target) on things that you could have found out from other sources. It also allows you to focus during the intense due diligence process on facts that are only available from the target itself: such as it’s strategic plans and key contracts (with managers, suppliers, clients, etc). Also, some information can safely be deferred until after the deal is done.
- Who reviews the due diligence information? This critical question is often mishandled because of the (often overemphasised) need for secrecy in the pre-deal announcement period. At that time in the deal process, the finance departments are often driving the deal on behalf of the CEO and Board. You then find accountants reviewing human resource due diligence (employment contracts, for example), IT systems and even looking at operational data. The experts in these area don’t yet know a deal is taking place, but they are best placed to review any due diligence. This continues after the deal is announced, when you’ll find those same accountants walking a shop floor or factory looking for problems. But one of your own plant managers is best placed to look at the target’s factory; your HR team knows best how an employment contract should be written and therefore whether there are problems with the contracts of target company staff. Expand the due diligence team to allow for this proper review by the proper people! And do not outsource the review of this critical process, as you will need the findings from the due diligence process for the entire period — often many years — of integration so you will want this information in-house.
Lastly, do not forget that even the target needs to do due diligence on the buyer: who would want to do a deal only to find out that the bidder could not complete the deal due to circumstances that could have been anticipated.
Well, we’ve got more than one quarter of the year gone. Is it really possible to see more clearly how 2010 will develop for the M&A markets? I think so, and one reason is the behavioural aspects of the market that cause it to be ‘sticky’, as discussed several weeks ago in an article I wrote for the Financial Times entitled ‘A tough challenge for M&A markets‘. There is a slowly growing confidence in business, bouyed by the rising equity markets, but for M&A deals to be announced, an even greater level of confidence is required. This will take time.
But it is useful as well to look at the activity for the first quarter. I believe that it demonstrates that we have bottomed out. The annualised volume for the first quarter globally for announced deals is still at around $2.2 trillion, which is the level of 2009. First quarters, as we have shown before, tend to be the strongest quarter (see our posting on 8 February 2010) and in fact represent up to 50% of the mega-deal (but not total) volume. We’ve not seen too many of these mega-deal announcements, which just confirms my belief that the confidence needs to return first, especially for those huge headline deals.
Nevertheless, the people I talk with are talking up the backlog of deals. So there’s a lot of planning for the right moment. One of my favourite reports on trends in the market is Intralinks‘ quartely Deal Flow Indicator. They note that March 2010 deal flow was up 25% over February which itself was up 5% over January. The trend is thus right. Except for Europe, all regions saw an increase. Notably, the deal flow level in Q1 2010 was at the same level as their benchmark Q1 in 2008.
Another indicator of growing confidence in doing deals is the increased percentage of cross-border deals. In a study (‘Deal Makers Continue to Outperform the Market’) conducted by Cass Business School for Towers Watson, it was reported that cross-border deal activity rose to 36% of all completed deals in the first quarter, which is up from 24% a year ago. These deals are more complex and typically more difficult to get approval, and thus an increase in this activity does indicate confidence. Another positive trend is the re-emergence of private equity buyers, albeit still no where near the level of activity seen several years ago.
Net-net? I see the markets staying at around this level through 2010. That in and of itself is an accomplishment as many were looking for a double dip in 2010.
There’s a proposal in the UK to revise the rules governing public takeovers. This has been prompted by the takeover of Cadbury by Kraft, but has been bubbling under the surface for years and gains attention each time there’s a large, contested offer. The forthcoming election has given the proposals new life as well.
There are certainly arguments to be made to make some tweeks to the takeover code, but the overhall suggested by some of the white paper ideas seems to many to be the proverbial ‘meat cleaver’ approach where a paring knife would suffice.
What’s been suggested? According to Financial News and discussed in an article entitled ‘M&A industry gears up for changes to the Takeover Code’, the full list is the following:
- Raising the threshold for acquirers to secure ownership of a target from 50% to 66.7%
- Forcing companies involved in a transaction to disclose the fees they pay their advisers
- Reducing and formalising the time frame between a bidder announcing its interest in a company and the publication of a ‘put up or shut up’ deadline
- Halving the disclosure requirement for investors in a takeover target from 1% to 0.5%
- Restricting voting rights on a takeover to investors who held their position in the target before the announcement of an intention to make an offer
- Forcing bidders to disclose greater detail how they intend to finance bids and their future plans for the acquired business
- Forcing institutional investors to make public when they have accepted an offer
- Forcing target boards to explain in greater detail the reasons behind accepting an offer
- Making company boards accountable to employees and other stakeholders as well as shareholders.
The reaction in the City has generally been negative. Although there are always problems arising from some parties in every contested M&A deal, the general feeling is that the current system works, it is well known and investors are certainly familiar with how the takeover code operates.
It is unlikely anything will change soon in any case. First, the aforementioned election makes any change impossible until resolved. Second, unless there’s another very large contested deal in the UK where the target is perceived by many to be a ‘national asset’ such as some considered Cadbury to be, it is likely that this attention by the politicians on takeovers will have been fleeting as they move on — and properly so — to other issues in the economy that demand immediate attention, which this issue does not.
Where will it end up? I believe that there will be some tweaking at the edges. And by-the-way, this happens all the time. Each year, the Takeover Panel issues consultation papers, and since 2000, this been as high as five (and each individual paper may have multiple suggestions). Most are not as radical as the above changes such as increasing the ownership change threshold to 66.7% or prohibiting certain shareholders from voting on the change of control, but it is unlikely those big changes would be approved anyway.
Note that some of these suggestions (such as the final one) would move the UK more in the direction of Continental European companies in terms of their accountability, and another suggestion — greater disclosure of fees, for example — are clearly populist suggestions of a political nature.
Debate should be encouraged at all times. But ‘if it ain’t broke, don’t fix it’. At the moment, it is my opinion that the way that mergers and acquisitions proceed in the UK currently works — and works well most of the time both for investors and boards. When it doesn’t work, there is recourse through the Takeover Panel, the Stock Exchanges and the courts. (Of course, there’s fall-out for employees (see my other blog on how M&A deals cause redundancies) and other stakeholders, but those groups also have recourse.) However, unless the new government in May wishes to look at the entire way that companies operate in the UK, focus shouldn’t be only on one aspect of their operations (M&A). But let’s discuss…