M&A Toolkit: Strategic Fit, Facts on M&A Deals

M&A TOOLKIT

Strategic Fit:

Facts on M&A

© 2007-2013 IESIES Development Ltd. All Ltd. Reserved
© 2007-2013 Development Rights All Rights Reserved

Only 20% of M&A deals create value

DEAL VALUE CREATION 1996-1999

Deal Created
Value Deal Destroyed
17% Value

53%
Value 30%
Neutral

Definition of value creation:
Impact on share price compared to peers 1 year after deal closed

Source: KPMG Global study, 1999, based on 700 deals
© 2007-2013 IES Development Ltd. All Rights Reserved

Making small deals in related businesses improves Created
value
the odds
Neutral/
destroyed
100% value

80%

60%

40%

20% 45 38
23 27
14
0%
ALL Small Large Small Large
DEALS
Related Unrelated
Source: McKinsey study, Valuation, 2007-2013 IES Development Ltd. All Rights Reserved
©
Copeland, Koller and Murrin

Deals where the company has a strong core business Created
value
are more likely to be successful
Neutral/
destroyed
value
100%

80%

60%

40%

20% 39
23
0% 6
ALL DEALS Weak core Strong core
Source: Valuation, Copeland, Koller andIES Development Ltd. All Rights Reserved
© 2007-2013 Murrin

Pure stock deals did not even increase the value of the target
and acquirer

Net increase (as %) in market capitalisation of target AND acquirer


69% of pure stock deals destroyed value for the acquirer’s
shareholders

Proportion of transactions with a Negative impact on the Acquirer’s share price


Average acquisition premiums range from 20 to 30%

Source: Datastream; Dealogic; McKinsey analysis

The chance of value creation improves if you do deals frequently

Risk adjusted return
% 7
6
5
4
3
2
1
0
1 '11-25
Number of deals done
(over 10 years)

Source: SDC, FactSet, UBS

Based on historical results, some types of deal are more likely to
create value for the acquirer

IMPROVING THE ODDS

•Do small deals

•……frequently…...

•.….for cash……..

•…..in related businesses……

•….when you have a strong core business


It is hard to explain why M&A is so popular based on value
creation

If only 20-25% of deals create value for the
acquirer……….

…..why are there so many?

……especially big one-offs, in
unrelated businesses, for
shares, when the core business is
weak?

Corporate M&A is very likely to have a poor decision-making
process
COGNITIVE BIAS IN DECISION-MAKING

Egos (agency problem)

Over-optimism
Poor
decision-
Group think making
process
“Sunk” cost (commitment)

Confirmation bias

There are 2 almost guaranteed ways to make money from M&A

All the academic studies show…….it is
easy to make money from M&A

1) Sell

2) Advise


SUMMARY


M&A can go wrong at any stage in the transaction process

MOST COMMON M&A MISTAKES
•Acquiring without a clear strategy

•Illusory synergies

•Overpaying How many mistakes
did Quaker Oats
make?
•Due diligence failure

•Loose Post-merger integration

•Post-merger culture clash

There are three themes that will run through this course

• The importance of a clear strategy as the foundation for
M&A success

• Joined up thinking – guided by the “Value Hypothesis” from
deal screening through valuation, due diligence to merger
integration

• Healthy scepticism about M&A


Some acquirers believe they can manage the target better than
existing management……..


………………but are often disappointed


M&A Toolkit: Strategic Fit, Facts on M&A Deals

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