Build for the Future
- © 2023 Boston Consulting Group
- Site Search Search
Related Expertise: Business Transformation , Post-Merger Integration , Corporate Finance and Strategy
Lessons from Eight Successful M&A Turnarounds
November 12, 2018 By Ib Löfgrén , Lars Fæste , Tuukka Seppä , Jonas Cunningham , Niamh Dawson , Daniel Friedman , and Rüdiger Wolf
M&A is tough, especially when it involves an underperforming asset that needs a turnaround. About 40% of all deals, on average, require some kind of turnaround, whether because of minor problems or a full-blown crisis. With M&A valuations now at record levels, companies must pay higher prices simply to get a deal done. In this environment, leaders need a highly structured approach to put the odds in their favor.
The greatest M&A turnarounds
Automotive: groupe psa + opel, biopharmaceuticals: sanofi + genzyme, media: charter communications + time warner cable + bright house networks, industrial equipment: konecranes + mhps, retail grocery: coop norge + ica norway, shipbuilding: meyer werft + turku shipyard, retail: office depot + officemax, energy: vistra + dynegy.
We recently analyzed large turnaround deals—those in which the target was at least half the size of the buyer in terms of revenue, with the target’s profitability lagging its industry median by at least 30%. Our key finding was that these deals can be just as successful as smaller deals that don’t require a turnaround in terms of value creation. However, they have a much greater variation in outcomes. In other words, the risks are greater and the potential returns are also greater. Critically, our analysis identified four key factors that lead to success in turnaround deals.
1. These buyers use a “full potential” approach to identify all possible areas of improvement. Rather than merely integrating the target company to capture the most obvious synergies, a full-potential approach generates improvements to the target company, captures all synergies, and capitalizes on the opportunity to make needed upgrades to the acquirer as well. (See the exhibit.)
Copy Shareable Link
2. These buyers have a clear rationale for how the deal will create value, and they take a structured, holistic approach:
- They initially fund the journey by generating quick wins that deliver cash to the bottom line quickly, typically restructuring back-end operations to reduce costs and increase efficiency.
- Then they pivot from cost-cutting to growth measures in order to win in the medium term. They revamp the portfolio, selling off some business units and assets and buying others that align with their strategic direction.
- Finally, they invest in the future, often focusing on building digital businesses, upgrading processes with AI, and investing in R&D to secure long-term growth and expanding margins.
Winning buyers have a clear rationale, execute with rigor and speed, and address culture upfront.
3. Successful acquirers execute their plan with rigor and speed. They begin developing plans long before the deal closes, so that they can begin implementation on day one, seamlessly combining the core elements of post-merger integration and a turnaround program. These acquirers are extremely diligent in building clear milestones and objectives into the plan to ensure that key integration and improvement steps are achieved on time. Throughout the process, they move as quickly as possible, regarding speed as their friend. Moreover, they are confident enough to make their targets public and to systematically report on progress.
4. Winning acquirers address culture upfront by reorienting the organization around collaboration, accountability, and bottom-line value. Culture can often be hard to quantify or pin down, but it’s critical in shaping a company’s performance following an acquisition. (See Breaking the Culture Barrier in Postmerger Integrations , BCG Focus, January 2016.)
The case studies on the following pages illustrate these four principles. They offer clear evidence that M&A-based turnarounds may be hard but carry significant opportunity when done right.
Groupe PSA, the parent company of Peugeot, Citroën, Vauxhall Motors, and DS Automobiles, was languishing after the 2008 financial crisis. Demand was particularly slow to recover in Europe, which accounted for more than two-thirds of the company’s sales. After losing $5.4 billion in 2012 and $2.5 billion in 2013, Groupe PSA struck a deal to sell 14% of the company to Chinese competitor Dongfeng and another 14% to the French government, for $870 million each. With the capital raised, it launched a turnaround program in 2014. As part of the program, Groupe PSA bought the Opel brand, which had lost about $19 billion since 1999, from General Motors. The deal was finalized in August 2017.
The turnaround has a strong growth element with a focus on strengthening brands. A sales offensive was built on reducing the variety of models available, offering more attractive leases (possible thanks to the company’s stronger financial services capability), and maintaining discount discipline. Cost efficiency is another important element. Limiting the number of models reduces complexity across the combined group, which reduces costs in both manufacturing and R&D. The increased scale across fewer models leads to simpler procurement and more negotiating clout with suppliers.
The turnaround continued at a relentless pace through the first half of 2018, with profitability restored at Opel and margins continuing to rise for Groupe PSA as a whole.
Overall, gross margins have increased by 35% since 2013. During the same period, Groupe PSA has rebounded from losing money to an EBIT margin of 6%, in line with competitors such as General Motors and ahead of Hyundai and Kia. Perhaps most impressive, the company’s market cap has increased more than 700%. In all, the transformation has allowed Groupe PSA to resume its position as one of the top-performing automakers in the world.
Key success factors in this turnaround: Groupe PSA started the turnaround by raising capital to fund the journey. That enabled it to buy GM’s Opel unit, halt steep financial losses quickly, and generate a profit within one year of the acquisition.
Raising capital allowed Groupe PSA to buy GM’s Opel unit and generate a profit within one year.
In 2009, French pharmaceutical company Sanofi was in acquisition mode. Many of its products were losing patent protection, and the company wanted to shift from traditional drugs into biologics. One potential target was Genzyme.
From 2000 through 2010, Genzyme had grown rapidly, but manufacturing issues at two of its facilities halted production and led to a shortage of key drugs in its portfolio. Sales plunged, the US Food and Drug Administration issued fines, and investors called for management changes. But many features of the company still met Sanofi’s needs, including a lucrative orphan drug business with no patent cliff and a strong history of innovation. Sanofi made an offer: $20 billion, or $74 per share, which was roughly Genzyme’s value before the manufacturing problems hit.
Management laid out a bold ambition and moved fast. The company streamlined manufacturing, opening a new plant to reduce the drug shortage and simplifying operations to remove bottlenecks at existing plants. Next, it moved sales and marketing for some of Genzyme’s businesses, including oncology, biosurgery, and renal products, under the Sanofi brand. It also reduced the overall sales force by about 2,000 people.
Genzyme’s R&D pipeline was integrated into Sanofi, and a new portfolio review process led to the cessation of some studies and the reprioritizing of others. And about 30% of Genzyme’s cost base was reduced through the integration with Sanofi. Genzyme’s diagnostics unit was sold off, and about 8,000 full-time employees were eliminated in the EU and North America.
The moves generated positive results fast. Overall, the integration led to about $700 million in cost reductions through synergies. By 2011, the company was back in expansion mode with 5% revenue growth, increasing to 17% in 2012. Only about 13% of Sanofi’s revenue came from Genzyme products, but these were poised for strong growth, positioning Sanofi as a global leader in rare-disease therapeutics and spurring its evolution into a dominant player in biologics.
Key success factors in this turnaround: Sanofi laid out a bold ambition in its acquisition of Genzyme, and it executed a strategic repositioning with extreme speed, cutting costs and increasing top-line growth.
Genzyme executed a strategic repositioning with speed, cutting costs and increasing top-line growth.
With 8% of the US market in 2014, cable TV provider Charter Communications found itself facing fierce competition for multichannel video subscribers, who usually had bundled services with increasingly important broadband subscriptions. The threat came not only from other multichannel video providers in its markets—including direct-broadcast satellite services and large telcos—but from internet streaming services, as many cable subscribers were “cutting the cord” and streaming video over mobile and other devices.
To protect its market share and profits, Charter significantly expanded its subscriber base in 2015 by acquiring Time Warner Cable and Bright House Networks, which had a 20.8% and 3.6% share of the US cable market, respectively, paying $67 billion for the two businesses. The acquisitions made Charter the second-largest broadband provider and the third-largest multichannel video provider in the US.
With the deal closed, Charter launched a bold transformation that captured extensive synergies among the three businesses in areas such as overhead, product development, engineering, and IT, and it introduced uniform operating practices, pricing, and packaging. Most important, the company’s increased scale improved its bargaining power with content providers. Charter went beyond synergies in a full-potential plan to accelerate revenue growth, product development, and innovation through the increased scale, improved sales and marketing capabilities, and enhanced cable TV footprint brought about by the combination of the three companies. It improved products and services, centralized pricing decisions, and streamlined operations to achieve additional operating and capital efficiency.
As a result, Charter kept up its premerger growth trend and profitability, growing at an annual rate of 5.5% post-merger to reach $42 billion in revenues in 2017. In addition, Charter’s value creation significantly outperformed that of its peers, increasing annualized TSR to 289% from the closing of the transaction to the end of 2017.
Key success factors in this turnaround: Charter made a bold move in acquiring both Time Warner Cable and Bright House Networks. Management developed an extensive plan to generate operational synergies and rationalize the commercial offering of the new entity.
Charter developed an extensive plan to generate operational synergies and rationalize the new entity’s offering.
Konecranes is a global provider of industrial and port cranes equipment and services. Several years ago, in the face of increased competition, Konecranes was struggling to cut costs or grow organically. In 2016, it bought a business unit from Terex Corporation called Material Handling & Port Solutions (MHPS), its principal competitor. The MHPS business included several brands that complemented Konecranes’ products and services, along with some sizeable overlaps in technology and manufacturing networks.
Before the deal closed, Konecranes drafted an ambitious full-potential plan to generate about $160 million in synergies within three years through cost reductions and new business. That represented a 70% improvement over the joint company’s pro forma financials. The turnaround plan encompassed all main businesses and functions across both legacy Konecranes and MHPS operations.
As part of the preclose planning, Konecranes’ leaders designed an overall transformation to start after the merger was finalized. The program covered all business units and functions and was extremely comprehensive, including the following:
- Reducing procurement spending through increased volumes
- Consolidating service locations
- Aligning technological standards and platforms
- Closing some manufacturing sites
- Streamlining corporate functions
- Adopting more efficient processes
- Optimizing the go-to-market approach
- Identifying new avenues of growth
The full program consisted of 350 individual initiatives, organized into nine major work streams and aligned with the overall organization structure to create clear accountabilities and tie the program’s impact directly to financial results. Still, many of the initiatives were complex by nature, so solid planning and rigorous program management and reporting have been critical.
Konecranes also carried out a holistic baseline survey to assess the cultures of the two organizations and define a joint target culture. An extensive cultural development and communications plan featured strongly in the early days of the integration.
The company has reported on its progress to investors as part of its quarterly earnings calls, and two years into the three-year plan, it has hit or exceeded its targets. That performance has earned praise from investors, leading to a share price increase of more than 50% since the acquisition was announced.
Key success factors in this turnaround: The combination of competitors presented a clear opportunity to create value from synergies, but management took the more ambitious approach of using the deal as a catalyst for the combined entity to perform at its full potential. Hitting —and often exceeding—performance targets has led to a dramatic rise in the company’s stock price.
Konecranes used the deal as a catalyst for the combined entity to perform at its full potential.
Coop Norge ranked third in Norway’s competitive and consolidated retail-grocery landscape in 2014, with a 22.7% share. But the company faced a major strategic challenge from its two larger competitors, which were able to use their scale advantages to negotiate favorable prices from suppliers while opening new stores. A smaller player, ICA Norway, was in a more precarious position, with a 2014 operating loss of more than $57 million on revenue of $2.1 billion. An acquisition made sense. In buying ICA, Coop aimed to become the number-two player and so increase economies of scale in procurement and logistics. ICA stores in Norway were a strong strategic fit as well, complementing Coop’s existing locations.
After the acquisition closed, Coop rebranded all ICA supermarkets and discount stores to concentrate on fewer, winning formats and to fully leverage improvements and synergies in areas such as procurement, logistics, and store operations. Coop’s discount brand, Extra, was already showing good momentum in the market, and this was accelerated through the ICA Norway transaction.
The integration and rebranding created pride and momentum internally at ICA, which led to improved growth and financial performance at the acquiring company as well. Coop moved up to second place in the market, generated new economies of scale, and realized 87% of its expected results from synergies within just eight months of the close and 96% after two years. And because the company stayed true to its existing store strategy, it was able to lean on previous experience and maintain its long-term vision. Operating profits rose by approximately $270 million, from a loss of $160 million in 2015 to a profit of $106 million in 2016. Revenue during that period increased by 10.7%, to nearly $6 billion, of which ICA stores and Coop’s existing locations accounted for 7.8 and 2.9 percentage points, respectively.
Coop Norge’s early successes in the integration created strong momentum and a culture of success.
Key success factors in this turnaround: The early successes achieved in the integration created strong momentum and a culture of success, enabling the combined entity to increase both revenue and profits in a highly competitive market.
In the early 2010s, the global shipbuilding industry declined significantly, in part because of a contraction in the demand for ships. That left many shipyards—including the Turku yard, which operated in the sophisticated niche of cruise ships and ferries—in need of cash. When Turku’s owner, STX Finland, verged on insolvency in 2014, the Finnish government (which had a stake in STX) began looking for a new owner. Meyer Werft, a leading European shipbuilder, believed that the Turku shipyard could be operated profitably and bought 70% of the yard in September 2014. As part of the deal, Turku secured two new cruise ship projects. With the orders confirmed, Meyer Werft bought the remaining shares, becoming sole owner.
Renamed Meyer Turku Oy, the company began to integrate the shipyard’s operations and find synergies in development, procurement, and other support functions. Having negotiated up-front for new business, it was able to fill Turku’s production capacity, benefit from increased scale, and begin to boost profitability almost immediately. Critically, the deal helped restore trust among employees, which extended to other important stakeholders such as customers and lenders. Such trust is essential in an industry that hinges on building a small number of very large projects, and it was fostered by Meyer Werft’s delivery on promises right from the start.
Meyer Werft then looked to planning growth in the longer term: increasing capex to boost capacity—and profitability—still further and investing in a new crane, cabin production, and a new steel storage and pretreatment plant while modernizing existing equipment. It also entered into a joint R&D project with the University of Turku to develop more sustainable practices across a ship’s life cycle—from raw materials to manufacturing processes and beyond. And it hired 500 new workers, partially replacing retiring employees, in 2018.
As a result, the company increased revenues from $590 million in 2014 to $970 million in 2017, an annual growth rate of more than 18%. It also increased profit margins to 4% in 2017, up from a loss of 5% in the acquisition year. The company now has a stable order book out to 2024, and productivity continues to climb.
Key success factors in this turnaround: In addition to making operational improvements, Meyer Werft was able to foster trust among employees and customers by delivering on its promises and showing its commitment through long-term investment.
Meyer Werft fostered trust among employees and customers by delivering on its promises.
In early 2013, Office Depot and OfficeMax were in a similar situation: online retailers were threatening their business. They agreed on a merger, with the goal of generating synergies by reducing the cost of goods sold, consolidating support functions to cut overhead, and eliminating redundancies in the distribution and sales units.
Because the two companies were merging as equals—rather than one buying the other— some decisions were difficult to make before the close (for example, which IT system the combined entity would use and where headquarters would be located). But management was able to define synergy targets and begin planning the integration during the six months before the close. The companies also created an integration management office (IMO) that addressed areas that were critical for business continuity, specifying which units would be integrated and which would be left as is.
The IMO created playbooks for 15 integration teams, addressing finance, marketing, the supply chain, and e-commerce operations, and developed a plan for communication, talent management, and change management for the overall effort. It categorized all major decisions into two groups: those that could be made prior to the close (because the steering committee was aligned) and those that couldn’t be made during that period. For decisions in the second category, the IMO laid out the two or three best options to consider. Critically, the IMO’s rigorous plans included timelines for how the businesses would evolve over the first, second, and third years of the merger, helping to align functions and manage interdependencies.
Once the deal closed, all this preparation allowed the two organizations to start the integration process immediately on day one. Within weeks, they had agreed on a leadership team for the combined entity, a headquarters site, and an IT platform. The organization was largely redesigned in just two months—a remarkably rapid effort given that it ultimately affected about 9,000 employees.
Most important, the smooth integration process allowed the companies to be extremely rigorous in capturing more synergies—and doing it faster—than anticipated. For example, they integrated the e-commerce businesses in a way that allowed them to retain most key customers. In the first year after the deal closed, the company captured cost savings close to three times management’s original targets; cost savings of the end-state organization were 50% more. In all, the merger unlocked about $700 million, putting the new company in a much better competitive position.
An extremely rigorous integration plan allowed Office Depot and OfficeMax to exceed cost savings targets.
Key success factors in this turnaround: Office Depot and OfficeMax merged in response to the threat of online competition. An extremely rigorous integration plan allowed the combined business to dramatically exceed its cost savings targets.
Texas-based Vistra Energy operates in 12 US states and delivers energy to nearly 3 million customers, with a mix of natural gas, coal, nuclear, and solar facilities enabling about 41,000 megawatts of generation capacity. It was formed in October 2016 when its predecessor emerged from a protracted bankruptcy process.
At the conclusion of bankruptcy proceedings, Vistra underwent a corporate restructuring, moving from a siloed operating model to a unified organization with a centralized leadership team and common objectives. New governance structures facilitated more consistent and rigorous corporate decision making, with an emphasis on capital allocation and risk management. In addition, management immediately launched a turnaround effort to reduce costs and improve performance across the entire organization.
In all, the company managed to reduce costs and enhance EBITDA by approximately $400 million per year, exceeding its original target by $40 million without any drop in service levels or safety standards. At the same time, investments in new service offerings—many enabled by digital technology—boosted customer satisfaction.
In 2017, Vistra announced the acquisition of Dynegy, one of its largest peers, resulting in the largest competitive integrated power company in the US. The combined entity offers significant synergies, with Vistra now on track to deliver $500 million of additional EBITDA per year, along with annual after-tax free cash flow benefits of nearly $300 million and $1.7 billion in tax savings. The deal also allows Vistra to expand into new US markets, diversifying its operations and earnings, reducing its overall business risk, and creating a platform for future growth.
The addition of Dynegy also supports Vistra’s shift toward a more modern power generation fleet based on natural gas. The company preceded that deal with the acquisition of a large, gas-fueled power plant in west Texas, and it also retired several uneconomical coal-burning facilities. In all, Vistra’s generation profile has evolved from approximately two-thirds coal-fueled sources to more than 50% natural gas and renewables.
With these measures—a successful turnaround followed by two strategic acquisitions—Vistra has positioned itself to sustainably create value for its shareholders in a very competitive industry.
Key success factors in this turnaround: Vistra’s acquisition of Dynegy represented both a pivot to growth and an opportunity to extend cost savings to an acquired operating platform.
Managing Director & Partner
Managing Director & Senior Partner; Global Leader, BCG Transform Practice
Partner & Director, Change, Transaction & Integration Excellence
Managing Director & Senior Partner; Global Leader of Transactions & Integrations
Managing Director & Senior Partner
ABOUT BOSTON CONSULTING GROUP
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.
© Boston Consulting Group 2023. All rights reserved.
For information or permission to reprint, please contact BCG at [email protected] . To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com . Follow Boston Consulting Group on Facebook and X (formerly Twitter) .
Subscribe to our M&A, Transactions, and PMI E-Alert.
- Browse All Articles
- Newsletter Sign-Up
- 20 Jun 2023
- Cold Call Podcast
Elon Musk’s Twitter Takeover: Lessons in Strategic Change
In late October 2022, Elon Musk officially took Twitter private and became the company’s majority shareholder, finally ending a months-long acquisition saga. He appointed himself CEO and brought in his own team to clean house. Musk needed to take decisive steps to succeed against the major opposition to his leadership from both inside and outside the company. Twitter employees circulated an open letter protesting expected layoffs, advertising agencies advised their clients to pause spending on Twitter, and EU officials considered a broader Twitter ban. What short-term actions should Musk take to stabilize the situation, and how should he approach long-term strategy to turn around Twitter? Harvard Business School assistant professor Andy Wu and co-author Goran Calic, associate professor at McMaster University’s DeGroote School of Business, discuss Twitter as a microcosm for the future of media and information in their case, “Twitter Turnaround and Elon Musk.”
- 29 Nov 2022
- Research & Ideas
Is There a Method to Musk’s Madness on Twitter?
Elon Musk's brash management style has upended the social media platform, but was bold action necessary to address serious problems? Andy Wu discusses the tech entrepreneur's takeover of Twitter.
- 13 Dec 2021
The Unlikely Upside of Mergers: More Diverse Management Teams
Mergers shake up the status quo at companies and help women and people of color move up the ladder. Research by Letian Zhang mines data from 37,000 deals. Open for comment; 0 Comments.
- 14 Jan 2021
- Working Paper Summaries
Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger
With heated debate over antitrust regulation of online platforms, this study finds that when a larger platform acquired its greatest competitor, users were not better off with a single platform compared with two competitors, despite marked efficiency improvements experienced by the acquiring platform.
- 30 Nov 2020
Short-Termism, Shareholder Payouts, and Investment in the EU
Shareholder-driven “short-termism,” as evidenced by increasing payouts to shareholders, is said to impede long-term investment in EU public firms. But a deep dive into the data reveals a different story.
- 26 Jun 2020
Weak Credit Covenants
Prior to the 2020 pandemic, the leveraged loan market experienced an unprecedented boom, which came hand in hand with significant changes in contracting terms. This study presents large-sample evidence of what constitutes contractual weakness from the creditors’ perspective.
- 13 Jan 2020
Do Private Equity Buyouts Get a Bad Rap?
Elizabeth Warren calls private equity buyouts "Wall Street looting," but a recent study by Josh Lerner and colleagues shows they have both positive and negative impacts. Open for comment; 0 Comments.
- 05 Nov 2019
The Economic Effects of Private Equity Buyouts
Private equity buyouts are a major financial enterprise that critics see as dominated by rent-seeking activities with little in the way of societal benefits. This study of 6,000 US buyouts between 1980 and 2013 finds that the real side effects of buyouts on target firms and their workers vary greatly by deal type and market conditions.
- 21 Aug 2019
Improving Customer Compatibility with Operational Transparency
Service firms seeking prospective customers usually highlight the advantages of their offerings and downplay the tradeoffs. This study suggests a different approach: Provide transparency into advantages as well as tradeoffs. The transparency helps customers make informed decisions and can lead to better outcomes for both firms and customers over the long run.
- 05 Jun 2019
If Your Customers Don't Care What You Charge, What Should You Charge?
Consumer inertia is the tendency of some customers to buy a product, even when superior options exist. Alexander J. MacKay discusses how that habit affects competitive strategy and even regulatory oversight. Open for comment; 0 Comments.
- 04 Jun 2019
Political Influence and Merger Antitrust Reviews
This paper uses a large sample of United States mergers between 1998 and 2010 to study how political connections help firms obtain favorable antitrust regulatory outcomes for mergers. Given that antitrust regulators are subject to congressional oversight, the authors predict and find evidence that outcomes systematically favor firms that are constituents of politicians serving on judiciary committees.
- 30 May 2019
US Antitrust Law and Policy in Historical Perspective
Since the late 19th century, American antitrust law and policy has responded to multiple changes: technological advances that have transformed business structures, political imperatives that have reformed regulations and informed prosecutorial discretion, and economic theories that have reshaped the boundaries of government interventions into the economy. Today, antitrust remains a contested field.
- 10 Apr 2019
Trade Secrets Protection and Antitakeover Provisions
The study examines managers’ responses when facing an increased threat of their firm being acquired. Results add to our knowledge of the use of antitakeover provisions, showing that managers, particularly in high-innovation firms, increase certain provisions to protect long-term innovation output in the presence of elevated acquisition risk.
- 14 May 2018
Amazon vs. Whole Foods: When Cultures Collide
Amazon's acquisition of Whole Foods seemed a Wall Street dream come true. But then Amazon's data-driven efficiency met the customer-driven culture at Whole Foods—and the shelves began to empty. Dennis Campbell and Tatiana Sandino discuss their new case study. Open for comment; 0 Comments.
- 12 Feb 2018
Private Equity, Jobs, and Productivity: Reply to Ayash and Rastad
In 2014, the authors published an influential analysis of private equity buyouts in the American Economic Review. Recently, economists Brian Ayash and Mahdi Rastad have challenged the accuracy of those findings. This new paper responds point by point to their critique, contending that it reflects a misunderstanding of the data and methodology behind the original study.
- 25 Jan 2016
When Negotiating a Price, Never Bid with a Round Number
Investors who offer “precise” bids for company shares yield better outcomes than those who offer round-number bids, according to research by Petri Hukkanen and Matti Keloharju. Open for comment; 0 Comments.
- 03 Sep 2009
- What Do You Think?
Are Retention Bonuses Worth the Investment?
There is a time and place for retention bonuses but they should be used sparingly, wrote many respondents to this month's column, says Professor Jim Heskett. Others challenged the value of bonuses, and suggested compelling alternatives. (Online forum now closed; next forum begins October 2.) Closed for comment; 0 Comments.
- 15 Dec 2008
The Surprisingly Successful Marriages of Multinationals and Social Brands
What happens when small iconic brands associated with social values—think Ben & Jerry's—are acquired by large concerns—think Unilever? Can the marriage of a virtuous mouse and a wealthy elephant work to the benefit of both? Professors James E. Austin and Herman B. "Dutch" Leonard discuss their research. Closed for comment; 0 Comments.
- 28 Nov 2005
Unilever: Transformation and Tradition
In a new book, professor Geoffrey Jones looks at Unilever's decades-old transformation from fragmented underperformer to focused consumer products giant. This epilogue summarizes the years 1960 to 1990. Closed for comment; 0 Comments.
- 02 Apr 2001
Not All M&As Are Alike—and That Matters
In this Harvard Business Review article, Professor Joseph L. Bower shares some of the results of his year-long study of M&A activity sponsored by HBS. Discover how five distinct merger and acquisition strategies scenarios play out—and his recommendations for success. Closed for comment; 0 Comments.
Mergers and Acquisitions
Leading provider of teaching materials for management education
Mergers and acquisitions (M&A) are key components of corporate strategy. This module explores both the financial and strategic issues that arise in M&A.
5 Topics in This Module
The introduction includes two main readings, which together cover the institutional and financial aspects of the typical M&A transaction. Finance Reading: The Mergers and Acquisitions Process describes the M&A landscape and explains the process, including fundamentals of valuation, deal strategy, and financial and strategic objectives in M&A deals. The second reading, "Business Valuation in Mergers and Acquisitions," covers valuation using discounted cash flow (DCF) and multiples; it also includes a discussion of how to value potential synergies.
Growth and Value Creation
The short main case, Stanley Black & Decker, Inc., asks students to calculate the value of cost synergies in a merger transaction and explore how this value is allocated among the shareholders and management in both companies. The alternative case, Canadian Pacific’s Bid for Norfolk Southern , covers potential merger benefits and how to value them in more detail, including the valuation of a revised offer of cash and stock. The supplementary background notes provide more technical discussions of equity consideration, deal net present value (NPV), and accretion and dilution of earnings per share (EPS).
Hostile Takeovers and Defensive Tactics
Roche’s Acquisition of Genentech looks at the motivations and tactics of a hostile tender offer. The case requires students to make financial calculations and discuss the fiduciary duties of the target’s board of directors. The alternative case, Keurig: Hostile Takeover (A) , focuses on how the CEO should respond to a hostile takeover attempt and his obligations to shareholders, the board, and employees. The two supplements provide a more technical and comprehensive discussion of corporate governance and hostile takeover tactics.
In the one-session case, MCI Takeover Battle: Verizon Versus Qwest , MCI’s board of directors has to evaluate competing bids from Verizon and Qwest. Qwest makes a richer offer, but it has a weaker balance sheet; Verizon has a long record of successful mergers and acquisitions. Is the board obliged to accept the higher market value of the two offers, or does it have the discretion to take its own view of fundamental value? In the alternative case, Auction for Burger King (A), the CEO of Diageo, the owner of Burger King, must evaluate and rank four complicated bids with varying proportions of cash, equity, and classes of debt. In Finance Simulation: M&A in Wine Country V2, students play the role of CEO at one of three publicly-traded wine producers. Each player evaluates merger and acquisition opportunities among the three companies then determines reservation prices, values targets, and negotiates deal terms before deciding whether to accept or reject final offers.
1 hour, 30 minutes
In Kinder Morgan, Inc.—Management Buyout , the founder and current CEO wishes to take the company private in a leveraged buyout (LBO) along with a consortium of buyers. This introduces several kinds of conflicts of interest among the board and CEO for students to discuss. Students must also value the company, including its share in a subsidiary. The alternative case, Hertz Corporation (A) , examines the LBO of Hertz in 2005. Students are asked to locate the sources of value in the deal, in operations, and in the financing and deal structures. While the case itself does not include detailed financial projections, both the teaching note and an electronic spreadsheet include sample projections.
About this module
This module covers the structure and process of M&A, the reasons these deals occur, and the ways they are valued. Students explore different types of M&A—divestitures, mergers of equals, hostile takeovers, and leveraged buyouts—and the value-creating potential of these deals. The materials encourage students to consider the conflicting interests of different stakeholders in M&A transactions and the corporate governance responsibilities of executives and boards.
Learn how M&A transactions are structured
Practice valuing M&A deals using discounted cash flow and multiples
Explore how to value potential merger benefits and synergies
Understand how stakeholder interests may conflict in M&A
Analyze different bidding strategies in M&A deals
Understand why hostile takeovers occur and how firms respond
Understand the characteristics of leveraged buyouts
- SUGGESTED TOPICS
- The Magazine
- Managing Yourself
- Managing Teams
- Work-life Balance
- The Big Idea
- Data & Visuals
- Reading Lists
- Case Selections
- HBR Learning
- Topic Feeds
- Account Settings
- Email Preferences
The Case for M&A in a Downturn
- Brian Salsberg
Companies that made significant acquisitions during the financial crisis outperformed those who didn’t.
As companies begin planning for a post-Covid future, there may be opportunities to make one or more long-sought acquisitions. Deal premiums are likely to come down and assets that companies had been reluctant to sell may become available. But the window for maximizing value could be relatively short, if history is any indication. An analysis of evidence from the global financial crisis shows that companies that made significant acquisitions outperformed those that did not. Companies considering an M&A will need to consider some of the unique aspects to getting a deal done, from transaction diligence to post-acquisition integration.
In these difficult times, we’ve made a number of our coronavirus articles free for all readers. To get all of HBR’s content delivered to your inbox, sign up for the Daily Alert newsletter.
Most companies are still in the early days of assessing the impact from the Covid-19 crisis on their business. But as they begin planning for the future, there may be opportunities to make one or more long-sought acquisitions.
- Brian Salsberg is the EY Global Buy and Integrate Leader. In this role, he leads fully-integrated M&A management services across sectors for the EY organization. He has experience working directly with CEOs, executives, business teams and boards of directors, as well as PE-backed companies, in all facets of strategic planning, due diligence, corporate development and M&A.
The six types of successful acquisitions
There is no magic formula to make acquisitions successful. Like any other business process, they are not inherently good or bad, just as marketing and R&D aren’t. Each deal must have its own strategic logic. In our experience, acquirers in the most successful deals have specific, well-articulated value creation ideas going in. For less successful deals, the strategic rationales—such as pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio—tend to be vague.
Stay current on your favorite topics
Empirical analysis of specific acquisition strategies offers limited insight, largely because of the wide variety of types and sizes of acquisitions and the lack of an objective way to classify them by strategy. What’s more, the stated strategy may not even be the real one: companies typically talk up all kinds of strategic benefits from acquisitions that are really entirely about cost cutting. In the absence of empirical research, our suggestions for strategies that create value reflect our acquisitions work with companies.
In our experience, the strategic rationale for an acquisition that creates value typically conforms to at least one of the following six archetypes: improving the performance of the target company, removing excess capacity from an industry, creating market access for products, acquiring skills or technologies more quickly or at lower cost than they could be built in-house, exploiting a business’s industry-specific scalability, and picking winners early and helping them develop their businesses.
An acquisition’s strategic rationale should be a specific articulation of one of these archetypes, not a vague concept like growth or strategic positioning, which may be important but must be translated into something more tangible. Furthermore, even if your acquisition is based on one of the archetypes below, it won’t create value if you overpay.
Improve the target company’s performance
Improving the performance of the target company is one of the most common value-creating acquisition strategies. Put simply, you buy a company and radically reduce costs to improve margins and cash flows. In some cases, the acquirer may also take steps to accelerate revenue growth.
Pursuing this strategy is what the best private-equity firms do. Among successful private-equity acquisitions in which a target company was bought, improved, and sold, with no additional acquisitions along the way, operating-profit margins increased by an average of about 2.5 percentage points more than those at peer companies during the same period. 1 1. Viral V. Acharya, Moritz Hahn, and Conor Kehoe, “Corporate governance and value creation: Evidence from private equity,” Social Science Research Network working paper, February 19, 2010. This means that many of the transactions increased operating-profit margins even more.
Keep in mind that it is easier to improve the performance of a company with low margins and low returns on invested capital (ROIC) than that of a high-margin, high-ROIC company. Consider a target company with a 6 percent operating-profit margin. Reducing costs by three percentage points, to 91 percent of revenues, from 94 percent, increases the margin to 9 percent and could lead to a 50 percent increase in the company’s value. In contrast, if the operating-profit margin of a company is 30 percent, increasing its value by 50 percent requires increasing the margin to 45 percent. Costs would need to decline from 70 percent of revenues to 55 percent, a 21 percent reduction in the cost base. That might not be reasonable to expect.
Consolidate to remove excess capacity from industry
As industries mature, they typically develop excess capacity. In chemicals, for example, companies are constantly looking for ways to get more production out of their plants, even as new competitors, such as Saudi Arabia in petrochemicals, continue to enter the industry.
The combination of higher production from existing capacity and new capacity from recent entrants often generates more supply than demand. It is in no individual competitor’s interest to shut a plant, however. Companies often find it easier to shut plants across the larger combined entity resulting from an acquisition than to shut their least productive plants without one and end up with a smaller company.
Reducing excess in an industry can also extend to less tangible forms of capacity. Consolidation in the pharmaceutical industry, for example, has significantly reduced the capacity of the sales force as the product portfolios of merged companies change and they rethink how to interact with doctors. Pharmaceutical companies have also significantly reduced their R&D capacity as they found more productive ways to conduct research and pruned their portfolios of development projects.
While there is substantial value to be created from removing excess capacity, as in most M&A activity the bulk of the value often accrues to the seller’s shareholders, not the buyer’s. In addition, all the other competitors in the industry may benefit from the capacity reduction without having to take any action of their own (the free-rider problem).
Would you like to learn more about our Strategy & Corporate Finance Practice ?
Accelerate market access for the target’s (or buyer’s) products.
Often, relatively small companies with innovative products have difficulty reaching the entire potential market for their products. Small pharmaceutical companies, for example, typically lack the large sales forces required to cultivate relationships with the many doctors they need to promote their products. Bigger pharmaceutical companies sometimes purchase these smaller companies and use their own large-scale sales forces to accelerate the sales of the smaller companies’ products.
IBM, for instance, has pursued this strategy in its software business. Between 2010 and 2013, IBM acquired 43 companies for an average of $350 million each. By pushing the products of these companies through IBM’s global sales force, IBM estimated that it was able to substantially accelerate the acquired companies’ revenues, sometimes by more than 40 percent in the first two years after each acquisition. 2 2. IBM investor briefing 2014, ibm.com.
In some cases, the target can also help accelerate the acquirer’s revenue growth. In Procter & Gamble’s acquisition of Gillette, the combined company benefited because P&G had stronger sales in some emerging markets, Gillette in others. Working together, they introduced their products into new markets much more quickly.
Get skills or technologies faster or at lower cost than they can be built
Many technology-based companies buy other companies that have the technologies they need to enhance their own products. They do this because they can acquire the technology more quickly than developing it themselves, avoid royalty payments on patented technologies, and keep the technology away from competitors.
For example, Apple bought Siri (the automated personal assistant) in 2010 to enhance its iPhones. More recently, in 2014, Apple purchased Novauris Technologies, a speech-recognition-technology company, to further enhance Siri’s capabilities. In 2014, Apple also purchased Beats Electronics, which had recently launched a music-streaming service. One reason for the acquisition was to quickly offer its customers a music-streaming service, as the market was moving away from Apple’s iTunes business model of purchasing and downloading music.
Cisco Systems, the network product and services company (with $49 billion in revenue in 2013), used acquisitions of key technologies to assemble a broad line of network-solution products during the frenzied Internet growth period. From 1993 to 2001, Cisco acquired 71 companies, at an average price of approximately $350 million. Cisco’s sales increased from $650 million in 1993 to $22 billion in 2001, with nearly 40 percent of its 2001 revenue coming directly from these acquisitions. By 2009, Cisco had more than $36 billion in revenues and a market cap of approximately $150 billion.
Exploit a business’s industry-specific scalability
Economies of scale are often cited as a key source of value creation in M&A. While they can be, you have to be very careful in justifying an acquisition by economies of scale, especially for large acquisitions. That’s because large companies are often already operating at scale. If two large companies are already operating that way, combining them will not likely lead to lower unit costs. Take United Parcel Service and FedEx, as a hypothetical example. They already have some of the largest airline fleets in the world and operate them very efficiently. If they were to combine, it’s unlikely that there would be substantial savings in their flight operations.
Economies of scale can be important sources of value in acquisitions when the unit of incremental capacity is large or when a larger company buys a subscale company. For example, the cost to develop a new car platform is enormous, so auto companies try to minimize the number of platforms they need. The combination of Volkswagen, Audi, and Porsche allows all three companies to share some platforms. For example, the VW Toureg, Audi Q7, and Porsche Cayenne are all based on the same underlying platform.
Some economies of scale are found in purchasing, especially when there are a small number of buyers in a market with differentiated products. An example is the market for television programming in the United States. Only a handful of cable companies, satellite-television companies, and telephone companies purchase all the television programming. As a result, the largest purchasers have substantial bargaining power and can achieve the lowest prices.
While economies of scale can be a significant source of acquisition value creation, rarely are generic economies of scale, like back-office savings, significant enough to justify an acquisition. Economies of scale must be unique to be large enough to justify an acquisition.
Pick winners early and help them develop their businesses
The final winning strategy involves making acquisitions early in the life cycle of a new industry or product line, long before most others recognize that it will grow significantly. Johnson & Johnson pursued this strategy in its early acquisitions of medical-device businesses. J&J purchased orthopedic-device manufacturer DePuy in 1998, when DePuy had $900 million of revenues. By 2010, DePuy’s revenues had grown to $5.6 billion, an annual growth rate of about 17 percent. (In 2011, J&J purchased Synthes, another orthopedic-device manufacturer, so more recent revenue numbers are not comparable.) This acquisition strategy requires a disciplined approach by management in three dimensions. First, you must be willing to make investments early, long before your competitors and the market see the industry’s or company’s potential. Second, you need to make multiple bets and to expect that some will fail. Third, you need the skills and patience to nurture the acquired businesses.
Beyond the six main acquisition strategies we’ve explored, a handful of others can create value, though in our experience they do so relatively rarely.
Roll-up strategies consolidate highly fragmented markets where the current competitors are too small to achieve scale economies. Beginning in the 1960s, Service Corporation International, for instance, grew from a single funeral home in Houston to more than 1,400 funeral homes and cemeteries in 2008. Similarly, Clear Channel Communications rolled up the US market for radio stations, eventually owning more than 900.
This strategy works when businesses as a group can realize substantial cost savings or achieve higher revenues than individual businesses can. Service Corporation’s funeral homes in a given city can share vehicles, purchasing, and back-office operations, for example. They can also coordinate advertising across a city to reduce costs and raise revenues.
Size is not what creates a successful roll-up; what matters is the right kind of size. For Service Corporation, multiple locations in individual cities have been more important than many branches spread over many cities, because the cost savings (such as sharing vehicles) can be realized only if the branches are near one another. Roll-up strategies are hard to disguise, so they invite copycats. As others tried to imitate Service Corporation’s strategy, prices for some funeral homes were eventually bid up to levels that made additional acquisitions uneconomic.
Consolidate to improve competitive behavior
Many executives in highly competitive industries hope consolidation will lead competitors to focus less on price competition, thereby improving the ROIC of the industry. The evidence shows, however, that unless it consolidates to just three or four companies and can keep out new entrants, pricing behavior doesn’t change: smaller businesses or new entrants often have an incentive to gain share through lower prices. So in an industry with, say, ten companies, lots of deals must be done before the basis of competition changes.
Enter into a transformational merger
A commonly mentioned reason for an acquisition or merger is the desire to transform one or both companies. Transformational mergers are rare, however, because the circumstances have to be just right, and the management team needs to execute the strategy well.
Transformational mergers can best be described by example. One of the world’s leading pharmaceutical companies, Switzerland’s Novartis, was formed in 1996 by the $30 billion merger of Ciba-Geigy and Sandoz. But this merger was much more than a simple combination of businesses: under the leadership of the new CEO, Daniel Vasella, Ciba-Geigy and Sandoz were transformed into an entirely new company. Using the merger as a catalyst for change, Vasella and his management team not only captured $1.4 billion in cost synergies but also redefined the company’s mission, strategy, portfolio, and organization, as well as all key processes, from research to sales. In every area, there was no automatic choice for either the Ciba or the Sandoz way of doing things; instead, the organization made a systematic effort to find the best way.
Novartis shifted its strategic focus to innovation in its life sciences business (pharmaceuticals, nutrition, and products for agriculture) and spun off the $7 billion Ciba Specialty Chemicals business in 1997. Organizational changes included structuring R&D worldwide by therapeutic rather than geographic area, enabling Novartis to build a world-leading oncology franchise.
Across all departments and management layers, Novartis created a strong performance-oriented culture supported by shifting from a seniority- to a performance-based compensation system for managers.
The final way to create value from an acquisition is to buy cheap—in other words, at a price below a company’s intrinsic value. In our experience, however, such opportunities are rare and relatively small. Nonetheless, although market values revert to intrinsic values over longer periods, there can be brief moments when the two fall out of alignment. Markets, for example, sometimes overreact to negative news, such as a criminal investigation of an executive or the failure of a single product in a portfolio with many strong ones.
Such moments are less rare in cyclical industries, where assets are often undervalued at the bottom of a cycle. Comparing actual market valuations with intrinsic values based on a “perfect foresight” model, we found that companies in cyclical industries could more than double their shareholder returns (relative to actual returns) if they acquired assets at the bottom of a cycle and sold at the top. 3 3. Marco de Heer and Timothy Koller, “ Valuing cyclical companies ,” McKinsey Quarterly , May 2000.
While markets do throw up occasional opportunities for companies to buy targets at levels below their intrinsic value, we haven’t seen many cases. To gain control of a target, acquirers must pay its shareholders a premium over the current market value. Although premiums can vary widely, the average ones for corporate control have been fairly stable: almost 30 percent of the preannouncement price of the target’s equity. For targets pursued by multiple acquirers, the premium rises dramatically, creating the so-called winner’s curse. If several companies evaluate a given target and all identify roughly the same potential synergies, the pursuer that overestimates them most will offer the highest price. Since it is based on an overestimation of the value to be created, the winner pays too much—and is ultimately a loser. 4 4. K. Rock, “Why new issues are underpriced,” Journal of Financial Economics , 1986, Volume 15, pp. 187–212. A related problem is hubris, or the tendency of the acquirer’s management to overstate its ability to capture performance improvements from the acquisition. 5 5. R. Roll, “The hubris hypothesis of corporate takeovers,” Journal of Business , 1986, Volume 59, Number 2, pp. 197–216.
Since market values can sometimes deviate from intrinsic ones, management must also beware the possibility that markets may be overvaluing a potential acquisition. Consider the stock market bubble during the late 1990s. Companies that merged with or acquired technology, media, or telecommunications businesses saw their share prices plummet when the market reverted to earlier levels. The possibility that a company might pay too much when the market is inflated deserves serious consideration, because M&A activity seems to rise following periods of strong market performance. If (and when) prices are artificially high, large improvements are necessary to justify an acquisition, even when the target can be purchased at no premium to market value.
By focusing on the types of acquisition strategies that have created value for acquirers in the past, managers can make it more likely that their acquisitions will create value for their shareholders.
Marc Goedhart is a senior expert in McKinsey’s Amsterdam office, Tim Koller is a partner in the New York office, and David Wessels, an alumnus of the New York office, is an adjunct professor of finance and director of executive education at the University of Pennsylvania’s Wharton School. This article, updated from the original, which was published in 2010, is excerpted from the sixth edition of Valuation: Measuring and Managing the Value of Companies , by Marc Goedhart, Tim Koller, and David Wessels (John Wiley & Sons, 2015).
Explore a career with us
M&A as competitive advantage
How M&A practitioners enable their success
Building the right organization for mergers and acquisitions
Successful and Failed Mergers and Acquisitions to Learn From
Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
Mergers and acquisitions are nothing if not learning experiences. It’s rare that a transaction doesn’t provide the participants with at least some takeaways.
DealRoom has worked with hundreds of companies over the years on their M&A transactions, and when asked about what they’ve learned, the breadth of their answers is astounding.
However, most answers tend to fall into one of a few broad categories.
Below, we look at some of these lessons, three positive and three negative, as well as the well-known examples that you can learn from.
Learning from Successes
Here are examples of successful acquisitions:
1. The right price is the right price for you: Morgan Stanley and E*Trade acquisition
Overpaying for a target is always a mistake.
But it’s also important to distinguish between what most people think is the right price and what constitutes the right price for the buyer.
There is a fine line here, where hubris can quickly make things go awry, but if there’s sound logic underpinning the deal for the two companies to come together, it may make sense to pay a premium to ensure you land the asset.
This was the case in 2020 when Morgan Stanley acquired E*Trade for $13 billion - a 30% premium on a stock that was already trading at 13 times earnings.
Coupled with news of a Covid-19 shutdown, it’s fair to say the market didn’t react well to the acquisition: Morgan Stanley’s share price dropped from $55 to less than $30 within a month.
But move forward to July 2021 and the stock is worth $75 . It was right for them. Just not for everybody else.
2. Understand where the market is going: Facebook and Instagram acquisition
It’s easy to believe that everyone that makes a successful acquisition simply understands at what stage their market is at.
In theory, that should be easier for people already operating in that market, but shifts in technology take even the most experienced companies by surprise (see the number of retailers that have gone bankrupt, failing to anticipate the rise of ecommerce by way of example).
Facebook’s acquisition of Instagram for $1 billion in 2012 makes it look like a company that knew exactly where social media was headed. It seemed like a lot to pay for 25 million users - particularly when Facebook had hundreds of millions.
But Instagram allowed advertisers to advertise in ways that Facebook couldn’t. And Mark Zuckerberg knew that advertising was key to the survival of social media. Fast forward to 2021 and Instagram has 1 billion users.
3. When the right company appears, acquire: Walt Disney Co. and Pixar acquisition
Some of the best acquisitions are opportunistic. Just because a company isn’t actively looking to make acquisitions doesn’t mean that undertaking M&A is a bad idea.
A number of factors can conspire to make buying another company a good idea when least expected. On the rare occasions when these deals present themselves, you’ll be able to identify them because both sides of the transaction will know that a deal makes perfect sense.
This was what happened when Disney acquired Pixar in 2006. The two had a distribution agreement which was coming to an end and had to be renegotiated. But as soon as both sides considered it, a merger made far more sense.
The synergies were huge. Best of all, Disney was able to acquire Pixar with a share deal that valued it at a premium of less than 5% of its going market price.
A match made in heaven.
7 Steps to a Successful M&A Deal (Useful Guide)
Learning from Failures
Here are examples of acquisition failures:
1. Underestimating culture: Amazon and Whole Foods acquisition
Underestimate culture at your peril. Perhaps culture in M&A isn’t given the importance it deserves because it’s considered the ‘soft’ side of a deal.
A litany of failed deals owing to culture clashes between two companies shows what a colossal error this is. When Amazon acquired Whole Foods in 2017, from the outside, it looked like a match made in heaven.
Amazon had a way into the grocery market, and Whole Foods instantly overtook its rivals in technology.
Only everybody forgot culture. Amazon, whose culture is largely based on efficiency and making incremental gains using technology, runs contrary to the more traditional and homespun values of Whole Foods.
In a way, the whole point of organic food is that it’s not efficient. It’s quality at the cost of efficiency.
Although the two companies remain an entity, it’s now generally accepted that their cultures were far too misaligned from the outset for the deal to be a success.
2. Rushing due diligence: Caterpillar and ERA acquisition
As soon as a company makes the decision to undertake a transaction, there’s an inherent desire to get the deal done.
This desire shouldn’t overtake the necessity to make sure that everything is in order beforehand.
The example of western companies trying to get on the China bandwagon through acquisitions at the turn of the century is littered with examples of companies failing to take ample due diligence in order to just get the deals done.
One such example is provided by Caterpillar and ERA in 2002. On the surface, Caterpillar was acquiring an industry leader in China, giving it the ideal launchpad into the world’s largest coal market.
Underneath the surface?
ERA’s coordinated accounting misconduct which had gone on for years. Caterpillar was cavalier in its attitude to due diligence . The result was a $580 million write down in the value of the target.
3. Overestimating synergies: News Corporation and MySpace acquisition
M&A synergies may be the most commonly cited reason for executives for undertaking mergers and acquisitions. As a rule, the bigger the deal, the bigger the estimated synergies from the deal will be.
And while synergies usually do exist, so does the temptation to overstate them. A sort of built-in bias in dealmakers’ thinking.
A Bain survey of executives showed that around 60% of them state that they’re guilty of overestimating synergies from deals.
Mixing new with traditional media provides ample cases of companies overpaying for new media with the idea that it will generate huge synergies.
The case of News Corporation acquiring MySpace for $580 million in 2005 is a case in point. News Corporation, with its speciality in delivering media adverts, thought Myspace would generate $1 billion in synergies per year.
A huge overestimation. Some years later, it was divested for a figure of $35 million .
The 8 Biggest Mergers and Acquisitions Failures of All Time
Top 10 reasons why mergers & acquisitions fail.
There’s no need to reinvent the wheel every time you decide to participate in mergers and acquisitions.
There are enough deals that have been concluded - good and bad - that can be learned from. Even if the examples aren’t associated with your industry, or the companies are several sizes the size of your own, take some lessons from each.
Applying them gives anybody a good roadmap on their M&A journey.
Get M&A knowledge straight to your inbox
Receive the latest M&A tips and resources from real-world practitioners we only share with our subscribers
Set yourself up for success!
- Pipeline management
- Diligence management
- Integration management
- Divestiture management
What is DealRoom?
Get weekly updates about M&A Science upcoming webinars, podcasts and events!
- Price reduced
- Recently added
- Coming soon
- Aggregates & quarry
- Oil & gas
- Popular make
- Bucket trucks
- Earth moving
- Compact track loaders
- Motor graders
- Skid steers
- Skip loaders
- Wheel loaders
- Cold planers
- Road reclaimers
- Power generation
- Dump trailers
- Flatbed trailers
- Log trailers
- Articulated trucks
- Dump trucks
- Haul trucks
- Off-highway trucks
- Service trucks
- Specialty trucks
- Tank trailer trucks
Evaluating Merger & Acquisition Opportunities for Expansion
Insight - 77 min read, august 12, 2023.
Mergers and acquisitions (M&A) are strategic transactions that can play a crucial role in business expansion. By combining resources, expertise, and market presence, companies can unlock new growth opportunities and gain a competitive edge. However, evaluating M&A opportunities is a complex process that requires careful analysis and consideration. In this article, we will explore the various aspects of evaluating merger and acquisition opportunities for expansion and discuss the key factors businesses should consider before making a decision.
Understanding Mergers and Acquisitions
Mergers and acquisitions are transactions in which two or more companies merge their operations or one company acquires another. These transactions can happen for various reasons, such as expanding into new markets, gaining access to new technologies, or achieving cost savings through economies of scale. Understanding the different types of mergers and acquisitions is essential for evaluating opportunities effectively.
Definition of Mergers and Acquisitions
A merger occurs when two companies join forces to form a new entity, pooling their resources and combining their operations. This is often driven by the desire to increase market share and enhance competitiveness. By merging, companies can leverage their strengths and synergies to create a more robust and efficient organization.
On the other hand, an acquisition involves one company purchasing another, either through a stock purchase or an asset purchase. In an acquisition, the acquiring company absorbs the target company, integrating its operations into its own. This can be a strategic move to expand the acquiring company's product or service offerings, enter new markets, or gain access to valuable intellectual property or talent.
Types of Mergers and Acquisitions
There are several types of mergers and acquisitions, each with its dynamics and implications. Understanding these types is crucial for analyzing the potential impact and benefits of a transaction.
Horizontal Mergers and Acquisitions:
Horizontal mergers and acquisitions occur when two companies operating in the same industry come together. The primary goal is to gain market share and increase competitiveness by combining resources, expertise, and customer bases. By joining forces, companies can achieve economies of scale, enhance their market presence, and potentially reduce costs through streamlined operations.
Vertical Mergers and Acquisitions:
Vertical mergers and acquisitions involve companies in the same industry but at different stages of the supply chain. For example, a manufacturer may acquire a distributor or a retailer to optimize their operations and achieve cost savings. By integrating different stages of the supply chain, companies can eliminate inefficiencies, improve coordination, and enhance overall performance.
Conglomerate Mergers and Acquisitions:
Conglomerate mergers and acquisitions occur when companies from unrelated industries merge. This type of transaction is driven by the desire to diversify business operations and enter new markets. By combining different business lines, companies can reduce their reliance on a single industry or market, mitigate risks, and tap into new growth opportunities.
Financial Mergers and Acquisitions:
Financial mergers and acquisitions involve financial institutions merging their operations to enhance their offerings. This can include banks, insurance companies, or investment firms coming together to provide a comprehensive range of financial services. By merging, financial institutions can leverage their expertise, expand their customer base, and improve their competitive positioning in the market.
Each type of merger and acquisition presents unique opportunities and challenges. It is crucial for companies to carefully evaluate the strategic fit, potential synergies, and financial implications before embarking on such transactions. Proper due diligence and thorough analysis are essential to ensure successful integration and long-term value creation.
The Role of Mergers and Acquisitions in Business Expansion
Mergers and acquisitions can be instrumental in fueling business expansion. They offer several benefits to companies looking to grow their operations and reach new heights. However, it is crucial to weigh these benefits against the risks and challenges that come with such transactions.
When it comes to business growth, mergers, and acquisitions have proven to be effective strategies. By joining forces with another company, businesses have the potential to increase their market share and expand their customer base. This can be achieved by tapping into new markets and gaining a larger share of the existing ones. The combination of resources, expertise, and customer networks can create synergies that drive growth and profitability.
Moreover, mergers and acquisitions can provide access to new technologies, intellectual property, and human capital. This opens up opportunities for innovation and allows companies to stay ahead of the competition. By acquiring or merging with a company that possesses complementary assets or expertise, businesses can enhance their competitive advantage and position themselves as industry leaders.
Another significant benefit of mergers and acquisitions is the potential for cost savings and operational efficiency. Through consolidation and streamlining of operations, companies can achieve economies of scale and eliminate redundant processes. This not only reduces costs but also improves overall productivity and profitability. Additionally, M&A transactions can facilitate the sharing of best practices, enabling companies to learn from each other and improve their operations.
However, it is important to acknowledge the risks and challenges associated with mergers and acquisitions. Integration issues can arise when combining different cultures, processes, and systems. This can lead to operational disruptions, decreased productivity, and employee dissatisfaction. Effective change management and communication strategies are crucial to address these challenges and ensure a smooth transition.
Furthermore, regulatory hurdles and compliance requirements can pose significant challenges during the M&A process. Companies must navigate complex legal frameworks and obtain necessary approvals to ensure compliance with antitrust laws and other regulations. Failure to do so can result in costly fines and legal consequences.
Financial risks are also a consideration in mergers and acquisitions. Transactions involve significant costs, including due diligence, legal fees, and integration expenses. It is essential to carefully evaluate the financial implications and ensure that the potential benefits outweigh the costs. Additionally, unforeseen market changes or economic downturns can impact the success of M&A transactions. Companies must be prepared to adapt and adjust their strategies accordingly.
In conclusion, mergers and acquisitions play a vital role in business expansion. They offer numerous benefits, including increased market share, access to new technologies, and cost savings. However, it is essential to carefully consider and manage the risks and challenges that come with these transactions. Successful M&A requires thorough planning, diligent execution, and effective integration strategies to unlock the full potential of business growth.
Evaluating Potential M&A Opportunities
When evaluating merger and acquisition opportunities, businesses must consider a range of factors to ensure a strategic fit and mitigate risks. Failure to evaluate these factors thoroughly can lead to unfavorable outcomes and hinder the expansion goals of the acquiring company.
Key Factors to Consider When Evaluating M&A Opportunities
Several key factors should be taken into account when evaluating potential M&A opportunities. Firstly, strategic alignment is essential to ensure that the transaction aligns with the acquiring company's long-term goals and vision.
For example, if a technology company is looking to acquire a software development firm, it is crucial to assess whether the target company's products and services complement the acquiring company's existing offerings. This analysis helps determine whether the acquisition will enhance the acquiring company's competitive advantage and contribute to its growth strategy.
In addition to strategic alignment, the compatibility of the two companies business models, cultures, and values should also be assessed. This evaluation helps identify potential synergies and integration challenges that may arise during the post-merger integration process.
Financial considerations play a significant role in evaluating M&A opportunities. The valuation of the target company and the financial health of both parties are crucial in determining the feasibility and value of the transaction.
For instance, a thorough financial analysis helps assess the target company's profitability, cash flow, and debt levels. It also enables the acquiring company to evaluate the potential return on investment and estimate the time required to achieve the desired financial outcomes.
Additionally, regulatory and legal factors, market dynamics, and the competitive landscape should be analyzed to evaluate the risks and opportunities associated with the M&A opportunity.
Understanding the regulatory environment and potential legal hurdles is essential to ensure compliance and avoid any legal complications that may arise from the transaction. Analyzing market dynamics and the competitive landscape helps assess the potential impact of the acquisition on market share, customer base, and industry positioning.
The Importance of Due Diligence in M&A
Conducting thorough due diligence is a critical step in evaluating potential M&A opportunities. This involves a comprehensive assessment of the target company's financials, legal standing, operations, and market position.
During the due diligence process, financial statements, tax records, and other relevant financial documents are carefully reviewed to gain insights into the target company's financial performance and stability. The legal due diligence involves examining contracts, licenses, intellectual property rights, and any pending litigation that may affect the transaction.
Operational due diligence focuses on understanding the target company's operational capabilities, including its production processes, supply chain management, and technology infrastructure. This evaluation helps identify any operational risks or inefficiencies that may impact the success of the merger or acquisition.
The market due diligence involves analyzing the target company's market position, customer base, and competitive landscape. This assessment helps evaluate the potential growth opportunities and market risks associated with the M&A opportunity.
By conducting a rigorous evaluation, businesses can make informed decisions and negotiate favorable terms. Thorough due diligence not only helps identify potential risks and liabilities but also uncovers hidden synergies and growth opportunities that may have been overlooked.
In conclusion, evaluating potential M&A opportunities requires a comprehensive analysis of factors such as strategic alignment, financial considerations, regulatory and legal factors, and conducting thorough due diligence. By considering these key factors and conducting a rigorous evaluation, businesses can increase their chances of successful M&A transactions and achieve their expansion goals.
Case Studies of Successful Mergers and Acquisitions
Examining case studies of successful mergers and acquisitions can provide valuable insights and lessons learned for businesses considering similar transactions. These real-world examples highlight the strategies, challenges, and outcomes of various M&A deals, offering valuable lessons for companies embarking on their expansion journey.
One notable case study is the merger between Company A and Company B, two leading players in the technology industry. This merger was driven by the desire to leverage each company's strengths and create a more competitive entity in the market. Through meticulous planning and strategic alignment, the merged company was able to combine its resources, expertise, and customer base to achieve significant growth.
Another interesting case study is the acquisition of Company C by Company D, both in the healthcare sector. The acquisition was motivated by Company D's goal to expand its service offerings and geographical reach. By thoroughly conducting due diligence and prioritizing cultural integration, Company D successfully integrated Company C's operations into its own, resulting in improved efficiency and a stronger market presence.
Lessons Learned from Successful M&A
Successful M&A transactions often share common themes that organizations can learn from. They involve meticulous planning, clear communication, and a focus on long-term value creation. Additionally, successful M&A deals prioritize cultural integration, strategic alignment, and thorough due diligence. By studying these case studies, businesses can gain valuable knowledge and apply best practices to their own M&A evaluations.
One key lesson learned from these case studies is the importance of cultural integration. When two companies merge, their cultures, values, and ways of doing business may differ. However, by proactively addressing these differences and finding common ground, companies can create a harmonious work environment that promotes collaboration and innovation.
Furthermore, strategic alignment is crucial for the success of an M&A deal. Companies need to ensure that their goals and objectives are aligned and that the merger or acquisition will contribute to long-term value creation. This requires careful evaluation of the potential synergies and opportunities that the transaction can bring.
Thorough due diligence is another critical aspect of successful M&A. Companies must conduct comprehensive assessments of the target company's financials, operations, and market position. This helps identify any potential risks or challenges that may arise post-transaction and allows for informed decision-making.
In conclusion, studying case studies of successful mergers and acquisitions provides valuable insights into the strategies, challenges, and outcomes of such transactions. By learning from these real-world examples, businesses can gain knowledge and apply best practices to their own M&A evaluations, ensuring a higher chance of success and long-term value creation.
The Future of Mergers and Acquisitions
As the business landscape continues to evolve, so does the nature of mergers and acquisitions. Understanding emerging trends in M&A is crucial for businesses looking to stay ahead of the curve and harness new growth opportunities.
Mergers and acquisitions (M&A) have long been a strategic tool for companies seeking to expand their market share, diversify their product offerings, or enter new markets. However, the landscape of M&A is constantly changing, driven by technological advancements, shifting consumer preferences, and evolving regulatory frameworks.
Emerging Trends in M&A
Several emerging trends are shaping the future of mergers and acquisitions. One such trend is the increasing emphasis on digital transformation and technology-driven deals. As technology continues to disrupt industries, companies are looking to M&A to acquire innovative startups and digital capabilities. This allows them to stay competitive in a rapidly changing business environment.
Another significant trend in M&A is the growing focus on sustainability and ESG (Environmental, Social, and Governance) considerations. In recent years, there has been a paradigm shift towards responsible and ethical business practices. Companies are now evaluating potential M&A targets based on their environmental impact, social responsibility initiatives, and corporate governance practices. This reflects a broader societal shift towards sustainability and the recognition that sustainable business practices can drive long-term value creation.
Furthermore, the rise of globalization and the interconnectedness of markets have led to an increase in cross-border M&A activity. Companies are seeking opportunities in foreign markets to gain access to new customers, distribution channels, and talent pools. This trend is driven by the desire to achieve economies of scale, expand geographic reach, and leverage synergies between complementary businesses.
The Impact of Technology on M&A
Technology is playing a transformative role in M&A, revolutionizing every stage of the deal lifecycle. From deal sourcing and target identification to due diligence and integration, technology-driven solutions are streamlining processes and enhancing decision-making.
Artificial intelligence (AI) and machine learning algorithms are being used to analyze vast amounts of data and identify potential M&A targets that align with a company's strategic objectives. These advanced analytics tools can sift through financial statements, industry reports, and customer data to uncover hidden opportunities and assess the risks associated with a potential deal.
Moreover, automation tools are being employed to streamline due diligence processes. Instead of manually reviewing contracts, financial records, and legal documents, software applications can quickly extract relevant information, flag potential red flags, and provide real-time insights. This not only saves time but also reduces the chances of human error and improves the overall quality of due diligence.
Post-merger integration is another area where technology is making a significant impact. Companies are using project management software, collaboration tools, and communication platforms to facilitate the seamless integration of people, processes, and systems. This ensures that the synergies identified during the M&A process are effectively realized, and the combined entity can start delivering value to stakeholders as quickly as possible.
In conclusion, the future of mergers and acquisitions is shaped by emerging trends such as digital transformation, sustainability considerations, and globalization. Technology is playing a pivotal role in enabling companies to navigate these trends and make informed decisions throughout the M&A process. By embracing these trends and leveraging technology-driven solutions, businesses can position themselves for success in an ever-evolving business landscape.
Conclusion: Making the Right M&A Decisions for Business Expansion
Evaluating merger and acquisition opportunities for business expansion demands a comprehensive analysis of various factors, including strategic alignment, financial considerations, due diligence, and emerging trends. By thoroughly evaluating potential M&A opportunities, businesses can make informed decisions that drive growth, mitigate risks, and pave the way for a successful expansion journey.
Key Takeaways for Businesses Considering M&A
Understand the different types of mergers and acquisitions and their implications.
Weigh the potential benefits of M&A, such as increased market share and access to new technologies, against the risks and challenges.
Thoroughly evaluate key factors, including strategic alignment, financials, and regulatory considerations, when assessing potential M&A opportunities.
Conduct due diligence to uncover any hidden risks, liabilities, or synergies related to the target company.
Learn from successful M&A case studies to gain insights and apply best practices to future evaluations.
Stay informed about emerging trends in M&A, such as technology-driven deals and sustainability considerations.
Join our inventory mailing list to get early access to our best deals
Ace Your M&A Case Study Using These 5 Key Steps
- Last Updated November, 2022
Mergers and acquisitions (M&A) are high-stakes strategic decisions where a firm(s) decides to acquire or merge with another firm. As M&A transactions can have a huge impact on the financials of a business, consulting firms play a pivotal role in helping to identify M&A opportunities and to project the impact of these decisions.
M&A cases are common case types used in interviews at McKinsey, Bain, BCG, and other top management consulting firms. A typical M&A case study interview would start something like this:
The president of a national drugstore chain is considering acquiring a large, national health insurance provider. The merger would combine one company’s network of pharmacies and pharmacy management business with the health insurance operations of the other, vertically integrating the companies. He would like our help analyzing the potential benefits to customers and shareholders.
M&A cases are easy to tackle once you understand the framework and have practiced good cases. Keep reading for insights to help you ace your next M&A case study interview.
In this article, we’ll discuss:
- Why mergers & acquisitions happen.
- Real-world M&A examples and their implications.
- How to approach an M&A case study interview.
- An end-to-end M&A case study example.
Let’s get started!
Why Do Mergers & Acquisitions Happen?
There are many reasons for corporations to enter M&A transactions. They will vary based on each side of the table.
For the buyer, the reasons can be:
- Driving revenue growth. As companies mature and their organic revenue growth (i.e., from their own business) slows, M&A becomes a key way to increase market share and enter new markets.
- Strengthening market position. With a larger market share, companies can capture more of an industry’s profits through higher sales volumes and/or greater pricing power, while vertical integration (e.g., buying a supplier) allows for faster responses to changes in customer demand.
- Capturing cost synergies. Large businesses can drive down input costs with scale economics as well as consolidate back-office operations to lower overhead costs. (Example of scale economies: larger corporations can negotiate higher discounts on the products and services they buy. Example of consolidated back-office operations: each organization may have 50 people in their finance department, but the combined organization might only need 70, eliminating 30 salaries.)
- Undertaking PE deals. Private equity firms will buy a majority stake in a company to take control and transform the operations of the business (e.g., bring in new top management or fund growth to increase profitability).
- Accessing new technology and top talent. This is especially common in highly competitive and innovation-driven industries such as technology and biotech.
For the seller, the reasons can be:
- Accessing resources. A smaller business can benefit from the capabilities (e.g., product distribution or knowledge) of a larger business in driving growth.
- Gaining needed liquidity. Businesses facing financial difficulties may look for a well-capitalized business to acquire them, alleviating the stress.
- Creating shareholder exit opportunities . This is very common for startups where founders and investors want to liquidate their shares.
There are many other variables in the complex process of merging two companies. That’s why advisors are always needed to help management to make the best long-term decision.
Real-world Merger and Acquisition Examples and Their Implications
Let’s go through a couple recent merger and acquisition examples and briefly explain how they will impact the companies.
Nail the case & fit interview with strategies from former MBB Interviewers that have helped 89.6% of our clients pass the case interview.
KKR Acquisition of Ocean Yield
KKR, one of the largest private equity firms in the world, bought a 60% stake worth over $800 million in Ocean Yield, a Norwegian company operating in the ship leasing industry. KKR is expected to drive revenue growth (e.g., add-on acquisitions) and improve operational efficiency (e.g., reduce costs by moving some business operations to lower-cost countries) by leveraging its capital, network, and expertise. KKR will ultimately seek to profit from this investment by selling Ocean Yield or selling shares through an IPO.
ConocoPhillips Acquisition of Concho Resources
ConocoPhillips, one of the largest oil and gas companies in the world with a current market cap of $150 billion, acquired Concho Resources which also operates in oil and gas exploration and production in North America. The combination of the companies is expected to generate financial and operational benefits such as:
- Provide access to low-cost oil and gas reserves which should improve investment returns.
- Strengthen the balance sheet (cash position) to improve resilience through economic downturns.
- Generate annual cost savings of $500 million.
- Combine know-how and best practices in oil exploration and production operations and improve focus on ESG commitments (environmental, social, and governance).
How to Approach an M&A Case Study Interview
Like any other case interview, you want to spend the first few moments thinking through all the elements of the problem and structuring your approach. Also, there is no one right way to approach an M&A case but it should include the following:
- Breakdown of value drivers (revenue growth and cost synergies)
- Understanding of the investment cost
- Understanding of the risks. (For example, if the newly formed company would be too large relative to its industry competitors, regulators might block a merger as anti-competitive.)
Example issue tree for an M&A case study:
- Will the deal allow them to expand into new geographies or product categories?
- Will each of the companies be able to cross-sell the others’ products?
- Will they have more leverage over prices?
- Will it lower input costs?
- Decrease overhead costs?
- How much will the investment cost?
- Will the value of incremental revenues and/or cost savings generate incremental profit?
- What is the payback period or IRR (internal rate of return)?
- What are the regulatory risks that could prevent the transaction from occurring?
- How will competitors react to the transaction?
- What will be the impact on the morale of the employees? Is the deal going to impact the turnover rate?
An End-to-end BCG M&A Case Study Example
Your client is the CEO of a major English soccer team. He’s called you while brimming with excitement after receiving news that Lionel Messi is looking for a new team. Players of Messi’s quality rarely become available and would surely improve any team. However, with COVID-19 restricting budgets, money is tight and the team needs to generate a return. He’d like you to figure out what the right amount of money to offer is.
First, you’ll need to ensure you understand the problem you need to solve in this M&A case by repeating it back to your interviewer. If you need a refresher on the 4 Steps to Solving a Consulting Case Interview , check out our guide.
Second, you’ll outline your approach to the case. Stop reading and consider how you’d structure your analysis of this case. After you outline your approach, read on and see what issues you addressed, and which you didn’t consider. Remember that you want your structure to be MECE and to have a couple of levels in your Issue Tree .
Example M&A Case Study Issue Tree
- Revenue: What are the incremental ticket sales? Jersey sales? TV/ad revenues?
- Costs: What are the acquisition fees and salary costs?
- How will the competitors respond? Will this start a talent arms race?
- Will his goal contribution (the core success metric for a soccer forward) stay high?
- Age / Career Arc? – How many more years will he be able to play?
- Will he want to come to this team?
- Are there cheaper alternatives to recruiting Messi?
- Language barriers?
- Injury risk (could increase with age)
- Could he ask to leave our club in a few years?
- Style of play – Will he work well with the rest of the team?
Analysis of an M&A Case Study
After you outline the structure you’ll use to solve this case, your interviewer hands you an exhibit with information on recent transfers of top forwards.
In soccer transfers, the acquiring team must pay the player’s current team a transfer fee. They then negotiate a contract with the player.
From this exhibit, you see that the average transfer fee for forwards is multiple is about $5 million times the player’s goal contributions. You should also note that older players will trade at lower multiples because they will not continue playing for as long.
Based on this data, you’ll want to ask your interviewer how old Messi is and you’ll find out that he’s 35. We can say that Messi should be trading at 2-3x last season’s goal contributions. Ask for Messi’s goal contribution and will find out that it is 55 goals. We can conclude that Messi should trade at about $140 million.
Now that you understand the up-front costs of bringing Messi onto the team, you need to analyze the incremental revenue the team will gain.
Calculating Incremental Revenue in an M&A Case Example
In your conversation with your interviewer on the value Messi will bring to the team, you learn the following:
- The team plays 25 home matches per year, with an average ticket price of $50. The stadium has 60,000 seats and is 83.33% full.
- Each fan typically spends $10 on food and beverages.
- TV rights are assigned based on popularity – the team currently receives $150 million per year in revenue.
- Sponsors currently pay $50 million a year.
- In the past, the team has sold 1 million jerseys for $100 each, but only receives a 25% margin.
Current Revenue Calculation:
- Ticket revenues: 60,000 seats * 83.33% (5/6) fill rate * $50 ticket * 25 games = $62.5 million.
- Food & beverage revenues: 60,000 seats * 83.33% * $10 food and beverage * 25 games = $12.5 million.
- TV, streaming broadcast, and sponsorship revenues: Broadcast ($150 million) + Sponsorship ($50 million) = $200 million.
- Jersey and merchandise revenues: 1 million jerseys * $100 jersey * 25% margin = $25 million.
- Total revenues = $300 million.
You’ll need to ask questions about how acquiring Messi will change the team’s revenues. When you do, you’ll learn the following:
- Given Messi’s significant commercial draw, the team would expect to sell out every home game, and charge $15 more per ticket.
- Broadcast revenue would increase by 10% and sponsorship would double.
- Last year, Messi had the highest-selling jersey in the world, selling 2 million units. The team expects to sell that many each year of his contract, but it would cannibalize 50% of their current jersey sales. Pricing and margins would remain the same.
- Messi is the second highest-paid player in the world, with a salary of $100 million per year. His agents take a 10% fee annually.
Future Revenue Calculation:
- 60,000 seats * 100% fill rate * $65 ticket * 25 games = $97.5 million.
- 60,000 seats * 100% * $10 food and beverage * 25 games = $15 million.
- Broadcast ($150 million*110% = $165 million) + Sponsorship ($100 million) = $265 million.
- 2 million new jerseys + 1 million old jerseys * (50% cannibalization rate) = 2.5 million total jerseys * $100 * 25% margin = $62.5 million.
- Total revenues = $440 million.
This leads to incremental revenue of $140 million per year.
- Next, we need to know the incremental annual profits. Messi will have a very high salary which is expected to be $110 million per year. This leads to incremental annual profits of $30 million.
- With an upfront cost of $140 million and incremental annual profits of $30 million, the payback period for acquiring Messi is just under 5 years.
Presenting Your Recommendation in an M&A Case
- Messi will require a transfer fee of approximately $140 million. The breakeven period is a little less than 5 years.
- There are probably other financial opportunities that would pay back faster, but a player of the quality of Messi will boost the morale of the club and improve the quality of play, which should build the long-term value of the brand.
- Further due diligence on incremental revenue potential.
- Messi’s ability to play at the highest level for more than 5 years.
- Potential for winning additional sponsorship deals.
5 Tips for Solving M&A Case Study Interviews
In this article, we’ve covered:
- The rationale for M&A.
- Recent M&A transactions and their implications.
- The framework for solving M&A case interviews.
- AnM&A case study example.
Still have questions?
If you have more questions about M&A case study interviews, leave them in the comments below. One of My Consulting Offer’s case coaches will answer them.
Other people prepping for mergers and acquisition cases found the following pages helpful:
- Our Ultimate Guide to Case Interview Prep
- Types of Case Interviews
- Consulting Case Interview Examples
- Market Entry Case Framework
- Consulting Behavioral Interviews
Help with Case Study Interview Prep
Thanks for turning to My Consulting Offer for advice on case study interview prep. My Consulting Offer has helped almost 89.6% of the people we’ve worked with get a job in management consulting. We want you to be successful in your consulting interviews too. For example, here is how Kathryn Kelleher was able to get her offer at BCG.
Leave a Comment Cancel reply
Save my name, email, and website in this browser for the next time I comment.
© My CONSULTING Offer
3 Top Strategies to Master the Case Interview in Under a Week
We are sharing our powerful strategies to pass the case interview even if you have no business background, zero casing experience, or only have a week to prepare.
No thanks, I don't want free strategies to get into consulting.
We are excited to invite you to the online event., where should we send you the calendar invite and login information.
Mastering M&A: Your Ultimate Guide for Understanding Mergers and Acquisitions
- August 11, 2023
Table of Contents
The process of two companies or their major business assets consolidating together is known as an M&A (merger and acquisition). It is a business strategy involving two or more companies merging to form a single entity or one company acquiring another. These transactions take place entirely on the basis of strategic objectives like market growth, expanding the company’s market share, cost optimisation and the like.
M&As are also an essential component of investment banking capital markets . It helps in revenue generation, shaping market dynamics, and more. This article will provide a profound understanding of mergers and acquisitions including the types, processes, and various other nitty-gritty involved in the investment banking fundamentals relevant to this business strategy .
Types of Mergers and Acquisitions
There are many types associated with the mergers and acquisitions strategy. These are:
The merger or consolidation of businesses between firms from one industry is known as a horizontal merger. This occurs when competition is high among companies operating in the same domain. Horizontal mergers help companies gain a higher ground due to potential gains in market share and synergies. Investment banking firms have a major role to play in identifying potential partners for this type of merger.
A vertical merger occurs between two or more companies offering different supply chain functions for a particular type of goods or service. This form of merger takes place to enhance the production and cost efficiency of companies specialising in different domains of the supply chain industry. Investment banking firms help in the evaluation of said synergies to optimise overall operational efficiency.
A conglomerate merger occurs when one corporation merges with another corporation operating in an entirely different industry and market space. The very term ‘conglomerate’ is used to describe on company related to several different businesses.
Friendly vs. Hostile Takeovers
Leveraged buyouts (lbos) .
A leveraged buyout occurs when a company is purchased via two transactional forms, namely, equity and debt. The funds of this purchase are usually supported by the existing or in-hand capital of a company, the buyer’s purchase of the new equity and funds borrowed.
Investment banking services are majorly relied upon throughout the entire process encompassing a leveraged buyout. Investment banking skills are necessary for supporting both sides during a bid in order to raise capital and or decide the appropriate valuation.
Mergers and Acquisitions Process
To succeed in investment banking careers, your foundational knowledge in handling mergers and acquisitions (M&A) should be strong. Guiding clients throughout the processes involved in M&A transactions is one of the core investment banking skills.
Preparing for Mergers and Acquisitions
To build a strong acquisition strategy, you need to understand the specific benefits the acquirer aims to gain from the acquisition. It can include expanding product lines or entering new markets.
Target Identification and Screening
The acquirer defines the requirements involved in identifying target companies. They may include criteria like profit margins, location, or target customer base. They use these criteria to search for and evaluate potential targets.
The due diligence process begins after accepting an offer. A comprehensive examination is conducted wherein all aspects of the target company's operations are analysed. They may include financial metrics, assets and liabilities, customers, and the like. Confirming or adjusting the acquirer's assessment of the target company's valuation is the main goal.
Assuming positive initial discussions, the acquirer requests detailed information from the target company, such as current financials, to further evaluate its suitability as an acquisition target and as a standalone business.
Negotiating Deal Terms
After creating several valuation models, the acquirer should have enough information to make a reasonable offer. Once the initial offer is presented, both companies can negotiate the terms of the deal in more detail.
Financing M&A Transactions
Upon completing due diligence without significant issues, the next step is to finalise the sale contract. The parties decide on the type of purchase agreement, whether it involves buying assets or shares. While financing options are usually explored earlier, the specific details of financing are typically sorted out after signing the purchase and sale agreement.
Once the acquisition deal is closed, the management teams of the acquiring and target companies cooperate together to merge the two firms and further implement their operations.
Taking up professional investment banking courses can help you get easy access to investment banking internships that will give you the required industry-level skills you need to flourish in this field.
Financial statements analysis .
Financial statement analysis of a merger and acquisition involves evaluating the financial statements of both the acquiring and target companies to assess the financial impact and potential benefits of the transaction. It may include statements like the income statement, balance sheet, and cash flow statement. It is conducted to assess the overall financial health and performance of the company.
In investment banking, financial modelling is a crucial tool used in the financial statement analysis of a merger and acquisition (M&A). Investment bankers develop a merger model, which is a comprehensive financial model that projects the combined financial statements of the acquiring and target companies post-merger.
Cash Flow Analysis
Examining a company's cash inflows and outflows to assess its ability to generate and manage cash effectively. In investment banking jobs , one of the primary roles is to assess the transaction structure, including the consideration paid and the timing of cash flows.
Utilising various financial ratios to interpret and analyse a company's financial performance, efficiency, and risk levels. Investment banking training equips professionals with a deep understanding of various financial ratios and their significance. They learn how to calculate and interpret ratios related to profitability, liquidity, solvency, efficiency, and valuation.
Comparable Company Analysis
Comparable Company Analysis (CCA) plays a crucial role in mergers and acquisitions (M&As) due to its importance in determining the valuation of the target company. In investment banking training , you will learn how to conduct a CCA and identify a group of comparable companies in the same industry as the target company.
By comparing the target company's financial metrics to its peers, you can identify the company's strengths, weaknesses, and positioning within the industry and provide appropriate guidance.
Discounted Cash Flow (DCF) Analysis
Discounted Cash Flow (DCF) analysis is a crucial valuation technique used in M&As. It helps determine the intrinsic value of a company. It helps project the potential cash flows of a company in the future. DCF analysis involves factors like revenue growth, operation costs, working capital requirements and the like.
Investment banking training provides the skills in building complex financial models that are required for DCF analysis. They develop comprehensive models that incorporate projected cash flows, discount rates, and terminal values to estimate the present value of a company.
Merger Consequences Analysis
Merger Consequences Analysis helps assess the potential outcomes and impact on financial performance, operations, and value of the entities partaking in the M&A. Investment bankers conduct an extensive evaluation to identify and quantify potential synergies that may result from the merger or acquisition, encompassing cost savings, revenue growth opportunities, operational efficiencies, and strategic advantages.
This analysis aids in estimating the financial implications of these synergies on the combined entity.
Legal and Regulatory Considerations
If you are pursuing an investment banking career , knowledge of the various legalities involved in M&As will help you nail any investment banking interview . The regulatory legalities involved in the process of M&As that partaking entities and investment banking services need to consider:-
Antitrust Laws and Regulations
Antitrust laws and regulations aim to foster fair competition and prevent anti-competitive practices. In the context of M&A, it is vital to assess whether the combination of the acquiring and target companies could potentially harm competition significantly.
Complying with antitrust laws may involve seeking clearance from regulatory bodies or implementing remedies to address any potential anti-competitive concerns.
Securities Laws and Regulations
Securities laws and regulations are of utmost importance in M&A transactions, considering the issuance of securities or transfer of ownership interests. Compliance with these laws governs the disclosure of material information, fair treatment of shareholders, and the filing of requisite documents with regulatory entities.
Regulatory Approvals and Filings
M&A transactions often necessitate obtaining approvals from various regulatory bodies, including government agencies, industry regulators, or competition authorities. These approvals ensure adherence to specific industry regulations and are typically indispensable for proceeding with the transaction.
Additionally, filings and disclosures like Form S-4 or 8-K, may be mandatory for furnishing relevant information about the transaction to legal authorities.
Confidentiality and Non-Disclosure Agreements
Confidentiality is crucial throughout M&A transactions. To safeguard sensitive information and trade secrets, parties involved usually enter into non-disclosure agreements (NDAs). These NDAs outline the terms and conditions governing the sharing and handling of confidential information throughout the entire transaction process.
The following M&A documents are instrumental in organising and formalising the holistic M&A process. They give clarity, safeguard the interests of all parties included, and guarantee compliance with pertinent legal and regulatory prerequisites all through the transferring process.
Letter of Intent (LOI)
The Letter of Intent (LOI) is the first and most urgent document that frames the agreements proposed in an M&A. It fills in as the commencement for exchanges and conversations among the gatherings participating in the business procedure.
The Merger Agreement is a legally approved contract that covers every detail of the merger. It may include crucial information like the price of purchase, terms of payment, warranties, post-closure commitments and representations. This arrangement formalises the responsibilities between the partaking parties.
Share Purchase Agreement
The Share Purchase Agreement is a legally binding contract that oversees the assets of the target organisation being acquired. It frames the terms, conditions, and legitimate liabilities connected with the exchange of ownership interests.
Asset Purchase Agreement
An Asset Purchase Agreement is utilised when particular assets of the target organisation are being gained. It is a legal contract that sets out the regulatory commitments attached to the procurement and division of those assets.
Confidentiality Agreements, also known as Non-Disclosure Agreements (NDAs), play a major role in protecting sensitive data collected during the M&A cycle. They lay out rules and commitments to guarantee the safe handling and non-exposure of restrictive proprietary information and secrets.
Due Diligence Checklist
The Due Diligence Checklist is a broad list that helps direct the assessment process by framing the important documents, data, and areas to be evaluated. It works with an exhaustive and deliberate evaluation of the objective organisation's monetary, legal, functional, and business viewpoints.
M&A Case Studies
M&A case studies serve as a hub of knowledge, enabling companies to make informed decisions and avoid common pitfalls. By delving into these real-world examples, organisations can shape their M&A strategies, anticipate challenges, and increase the likelihood of successful outcomes. Some of these case studies may include:-
Successful M&A Transactions
Real-life examples and case studies of M&A transactions that have achieved remarkable success provide meaningful insights into the factors that contributed to their positive outcomes. By analysing these successful deals, companies can uncover valuable lessons and understand the strategic alignment, effective integration processes, synergies realised, and the resulting post-merger performance.
These case studies serve as an inspiration and offer practical knowledge for companies embarking on their own M&A journeys.
Failed M&A Transactions
It's equally important to learn from M&A transactions that did not meet expectations or faced challenges. These case studies shed light on the reasons behind their failure. We can examine the cultural clashes, integration issues, financial setbacks, or insufficient due diligence that led to unfavorable outcomes.
By evaluating failed M&A deals, companies can gain valuable insights so they can further avoid the pitfalls and consider the critical factors to build a successful M&A strategy.
Lessons Learned from M&A Deals
By analysing a wide range of M&A transactions, including both successful and unsuccessful ones, we can distill valuable lessons. These case studies help us identify recurring themes, best practices, and key takeaways.
They provide an in-depth and comprehensive understanding of the various pitfalls and potential opportunities involved in an M&A that can enhance their decision-making processes to develop effective strategies.
Taking up reliable investment banking courses can be instrumental in taking your career to unimaginable heights in this field.
M&A Strategies and Best Practices
By implementing the following M&A strategies, companies can enhance the likelihood of a successful merger or acquisition:
Strategic Fit and Synergies
One of the key aspects of M&A is ensuring strategic fit between the acquiring and target companies. This involves evaluating alignment in terms of business goals, market positioning, product portfolios, and customer base.
Integration Planning and Execution
A well-balanced integration plan is crucial for a successful M&A. It encompasses creating a roadmap for integrating the acquired company's operations, systems, processes, and people.
Effective execution of the integration plan requires careful coordination, clear communication, and strong project management to ensure a seamless transition and minimise disruption.
Merging organisations often have different cultures, values, and ways of doing business. Cultural integration is essential to aligning employees, fostering collaboration, and maintaining morale. Proactively managing cultural differences, promoting open communication, and creating a shared vision can help mitigate integration challenges and create a cohesive post-merger organisation.
M&A transactions involve multiple stakeholders, including employees, customers, suppliers, investors, and regulatory bodies. Managing their expectations, addressing concerns, and communicating the strategic rationale and benefits of the deal are all crucial.
Engaging with stakeholders throughout the process helps build trust and support, ensuring a smoother transition and post-merger success.
Risk Management in Mergers and Acquisitions
M&A transactions involve inherent risks that need to be effectively managed. Conducting comprehensive due diligence, identifying and assessing potential risks, and developing risk mitigation strategies are essential steps.
It's important to consider legal and regulatory compliance, financial risks, operational challenges, cultural integration issues, and potential resistance from stakeholders.
Post-Merger Performance Evaluation
Evaluating the performance of the merged entity post-transaction is critical to assessing the success of the deal and identifying areas for improvement. This involves tracking financial performance, measuring synergies realised, monitoring customer and employee satisfaction, and conducting periodic assessments.
Continuous evaluation helps refine strategies and ensure the realisation of intended benefits.
Mergers and acquisitions (M&A) are intricate processes that require in-depth knowledge and expertise in investment banking operations. The components discussed, such as M&A documentation, case studies, and strategies, emphasise the importance of comprehensive analysis, due diligence, and risk management.
Many students tend to pursue investment banking careers because of the comparatively high investment banking salary involved. If you are one of these enthusiasts, pursuing a Certified Investment Banking Operations Professional course from Imarticus can provide you with the investment banking certification you need to get started .
This course help you develop the specialised skills and knowledge required for a successful career in investment banking. It covers essential topics related to M&A, financial analysis, valuation methods, and regulatory considerations, equipping learners with the necessary tools to navigate the complexities of M&A transactions.
Share This Post
Subscribe to our newsletter, get updates and learn from the best, do you want to boost your career, drop us a message and keep in touch.
Keep In Touch
TCLA - The Corporate Law Academy
Mergers and acquisitions case studies and interviews | a guide for future lawyers.
Jaysen Sutton -
18 min read
Share on social:
mergers and acquisitions case studies and interviews, a guide for future lawyers.
Enjoyed this post? Check out our new Mergers and Acquisitions Course , which covers exactly what you need to know about M&A for interviews at top commercial law firms. Free access to this course is given to all premium subscribers .
If you don’t know what commercial law is or what commercial lawyers do, it’s hard to know whether you want to be one.
I’m going to discuss one aspect of commercial law: mergers and acquisitions or “M&A”, and with any luck, convince you it can be exciting.
I’ll also cover many of the aspects of mergers and acquisitions that you need to know for law firm interviews and case study exercises.
Let’s begin with an example, which highlights the impact of mergers and acquisitions. In 2017, Amazon bought Whole Foods and became the fifth largest grocer in the US by market share. This single manoeuvre shed almost $40 billion in market value from companies in the US and Europe .
The fall in value of rival supermarkets reflected fears over Amazon’s financial capacity and its potential to win a price war between supermarkets. Amazon the customer data to understand where, when and why people buy groceries, and it has the technology to integrate its offline and online platforms. When you’re in the race to be the first trillion-dollar company, acquisitions can take you a long way ( Edit: In August 2018, Apple managed to beat Amazon to win this title ).
But not all companies share Amazon’s success. In fact, out of 2,500 M&A deals analysed by the Harvard Business Review, 60% destroyed shareholder value .
That begs the question:
[divider height=”30″ style=”default” line=”default” themecolor=”1″]
Why do firms merge or acquire in the first place?
I’ll use law firms as an example. You’ll have seen that they often merge, or adopt structures called Swiss vereins, which allow law firms to share branding and marketing but keep their finances and legal liabilities separate.
In the legal world, it can be hard to find organic growth or organic growth can be very slow. Clients like to shop around, which can make it hard to retain existing business. It’s competitive: other law firms can poach valuable partners and bring their clients with them. And whilst entering new markets is an attractive option, it’s expensive, often subject to heavy-regulation and requires the resolve and means to challenge the existing players in that market.
Consolidation can help law firms, which are squeezed between lower-cost entrants and the global players, to compete. This is why we’ve seen many mergers in the mid-market. A combined firm is bigger, less vulnerable to external shocks, and has access to more lawyers and clients. The three-way merger between Olswang, Nabarro and CMS is a good example of this. The year before its merger, Olswang had revenues below £100m and a 77% fall in operating profit. Now, under the name CMS, it’s one of the largest UK law firms by lawyer headcount and revenue.
But mergers aren’t only a defensive move. They can allow law firms to speed-up entry into new markets. For example, were it not for its merger, it would have been difficult for Dentons to open an office in China. Chinese clients, especially state-owned enterprises, are often less likely to pay high legal fees, while local expertise and personal relationships can play a bigger role. There’s also regulation, which prevents non-Chinese lawyers from practicing Chinese mainland law, and plenty of competition from established Chinese law firms. That helps to explain Dentons’ 2015 merger with Dacheng, a firm with decades of experience and an established presence in the Chinese market. Now Dentons is positioned to serve clients investing in China, as well as Chinese clients looking for outbound work at a fraction of the time and cost.
Mergers can also synergies, or at least that’s one of the most frequently used buzzwords to justify an M&A deal. The idea is that when you combine two firms together, the value of the combined firm is more than the sum of its individual parts.
Synergies for a law firm merger could come from cutting costs by closing duplicate offices and laying off support staff. It could also be the fact that a combined law firm could sell more legal services than the two law firms individually, which may be bolstered by the fact that they can cross-sell their expertise to each other’s clients and benefit from economies of scale (e.g. better negotiating paper due to their size).
Finally, mergers can offer reputational benefits. Branding is an essential part of the legal world and combinations gain a lot of legal press. Mergers may allow fairly unknown firms to access new clients and generate far more business if they partner with an established firm. Very large global firms often pride themselves as a ‘one-stop shop’, pitching the fact that their size allows them to service all the needs of a client across any jurisdiction.
While it’s true that Swiss vereins have led the likes of DLA Piper and Baker McKenzie to develop very strong brands, collaboration hasn’t always worked out and some law firms have paid the ultimate price. Internal problems and mismanagement plagued the merger of Dewey & LeBoeuf , which, at the time, was called the largest law firm collapse in US history. Bingham McCutchen collapsed for similar reasons. Most recently, King & Wood Mallesons made the mistake of merging with an already troubled SJ Berwin. Poor incentive structures, defections and a fragile merger structure later led to the collapse of KWM Europe. Only time will tell whether Dentons’ 31 plus combinations, as well as the aggressive use of Swiss vereins by other firms, will be a success.
So that’s the why, I’ll now go through the how. Note, in this article, I’ll discuss the mechanics of acquisitions rather than mergers: you can see the difference in the definitions section below. As lawyers, you’ll find acquisitions are more common and you’re more likely to be asked about the acquisition process in law firm interviews and assessment centres.
Mergers & Acquisitions Definitions
- Acquisition : The purchase of one company by another company.
- Acquirer / Buyer : The company purchasing the target company.
- Asset purchase : The purchase of particular assets and liabilities in a target company. An alternative to a share purchase.
- Auction sale : The process where a company is put up for auction and multiple buyers bid to buy a target company.
- Due diligence : The process of investigating a business to determine whether it’s worth buying and on what terms it should be bought.
- Debt finance : This means raising finance through borrowing money.
- Equity finance : This means raising finance by issuing shares.
- Mergers : When two companies combine to form a new company.
- Share purchase : When a company buys another company through the purchase of its shares. An alternative to an asset purchase.
- Swiss verein : In the law firm context, this is a structure used by some law firms to ‘merge’ with other law firms. They share marketing and branding, but remain legally and financially separate.
- Target company : The company that is being acquired.
Kicking off the Acquisition Process
The buy side.
Sometimes the acquirer will have identified a company it wants to buy before it reaches out to advisers. Other times, it’ll work closely with an investment bank or a financial adviser to find a suitable target company.
Before making contact with the target company, the acquirer will typically undertake preliminary research, often with the help of third-party services to compile reports on companies. They’ll look through a range of material including:
- news sources and press releases
- insolvency and litigation databases
- filings at Companies House
- the industry and competitors
The aim is to better understand the target company. The company’s management will want to check for any big risks and form an early view of the viability of an acquisition. Then, if they’re convinced, the first contact may be direct or arranged through a third party, such as an investment bank or consultant.
Note: In practice, lawyers – especially trainees – spend a lot of time using the sources above. Companies House is a useful online resource to find out about private companies. It’s where you’ll find their annual accounts, annual returns (now called a confirmation statement) and information on the company’s incorporation.
The sell side
Sometimes, a target company wants to sell. The founders may want to retire, the company may be performing poorly, or investors may want to cash out and move on.
If a target company wants more options, it may initiate an auction sale. This is a competitive bid process, which tends to drive bid prices up and help the target company sell on the best terms possible. For example, Unilever sold its recent spreads business to KKR using this method.
But, an auction sale isn’t always appropriate. Sometimes the target company will enter discussions with just one company. This may be preferable if the company is struggling, so it can ensure speed and privacy, or the target company may have a particular acquirer in mind. For example, Whole Foods used a consultant to arrange a meeting with Amazon . That was after reading a media report which suggested Amazon was interested in buying the company.
Friendly v Hostile Takeovers
In the UK, takeovers are often used to refer to public companies. While we’ll be focusing on acquisitions of private companies, I’ll cover this here because they’re often in the news and sometimes come up in law firm interviews.
The board of directors are the people that oversee a company’s strategy. Directors owe duties to shareholders – the owners of the company – and are appointed by the shareholders to manage a company’s affairs.
If a proposed acquisition is brought to the attention of the board and the board recommends the bid to shareholders, we call this a friendly takeover. But if they don’t, it’s a hostile takeover, and the acquirer will try to buy the company without the cooperation of management. This may mean presenting the offer directly to shareholders and trying to get a majority to agree to sell their shares.
Sometimes, it’s not too difficult; Cadbury’s board first rejected Kraft’s bid and accused the company of attempting to buy Cadbury “on the cheap”. Later, when Kraft revised its offer, the board recommended its bid to shareholders.
In other situations, hostile takeovers can be messy, especially if neither party wants to back down. This was the case in 2011 between the infamous activist investor Carl Icahn and The Clorox Company.
Icahn and the Clorox Company
In 2011, Carl Icahn made a bid to buy The Clorox Company (Clorox), the owner of many consumer products including Burt’s Bees. In his letter to the board, Icahn also tried to start a bidding war, inviting other buyers to step in and bid.
Clorox’s board rejected Icahn’s bid and quickly hired Wachtell, Lipton, Rosen & Katz, a US law firm, to defend itself. Wachtell wasn’t just any law firm. Icahn and Wachtell had been rivals for decades. In fact, between 2008 and 2011, Wachtell had successfully defended two companies from Icahn.
This was round three.
Clorox adopted a “poison pill” strategy, a tactic that allowed Clorox’s existing shareholders to buy the company’s shares at a discount. This made the attempted takeover more expensive. Martin Lipton, one of the founding partners of Wachtell, had invented the poison pill to prevent hostile takeovers in the 80’s. It was “one of the most anti-shareholder provisions ever devised” according to Icahn. Now, Clorox was using this weapon to stop the activist investor.
But that didn’t stop Icahn. In a scathing letter to the board , he raised his bid for the company. A week later, the board rejected it again.
Icahn made a third bid. This time his letter threatened to remove the entire board. But the board didn’t back down.
Eventually, Icahn did.
The war between Icahn and Wachtell didn’t stop there. In 2013, Wachtell successfully defended Dell from Icahn. A few months after that, Icahn tried to sue Wachtell. In response, the law firm said:
“ Icahn takes his bullying campaign to a new level, seeking to intimidate lawyers who help clients resist his demands by making wild allegations and threatening liability. Those tactics will not work here .”
Remember when I said corporate law could be exciting?
What are the ways a company can acquire another company?
This is one of the most common questions in law firm commercial interviews.
There are two ways to acquire a company. A company can buy the shares of a target company in a share purchase or buy particular assets (and liabilities) in an asset purchase.
In a share purchase, the acquirer buys a majority of shares in the target company and therefore becomes its new owner . This means all of the company’s assets and liabilities transfer automatically, so, usually, there’s no need to worry about securing consent from third parties or transferring contracts separately. This is great because the business can continue without disruption and the transition is fairly seamless.
However, as the liabilities of a company also transfer in share purchase, it’s important the acquirer investigates the target really well. It’ll also want to try protect itself from known risks when negotiating the acquisition agreement.
For example, suppose three months after the acquisition has completed, a former employee brings an unfair dismissal claim against the acquirer. If this was something they had known about pre-acquisition, they’ll want to be indemnified for those costs (we’ll come back to this later).
Conversely, if they didn’t know about it at the time of the acquisition and they didn’t protect themselves in the acquisition agreement, they’ll have to pay out. That’s one of the risks of doing a share purchase. (Although as we’ll discuss later, there are certain things you can do to reduce the risks of this happening.)
We call this an asset purchase . It means that the acquirer identifies the specific assets and liabilities it wants to buy from the target and leaves everything else behind. That’s great because the acquirer will know exactly what it’s getting and there’s little risk of hidden liabilities.
However, asset purchases are less common and can be difficult to execute. Unlike share purchases, assets don’t transfer automatically, so the acquirer may have to renegotiate contracts or seek consent from third parties to proceed with the acquisition.
Before negotiations begin, the target company will want the acquirer to sign a confidentiality agreement or a non-disclosure agreement.
This is important because the seller will provide the acquirer with access to private information during the due diligence process. Suppose the acquirer decided not to proceed with the acquisition and there was no confidentiality agreement in place; the acquirer could use this information to poach staff, better compete with the target or reveal damaging information to the public.
So, lawyers for the acquirer and the target company will negotiate the confidentiality agreement. They’ll decide what counts as confidential, what happens to information if the acquisition doesn’t complete, as well as any instances where confidential information can be passed on without breaching the contract.
If an acquirer is dead set on buying a particular target company then, in an ideal situation, it will want to be the only one negotiating with that company. This would give the acquirer time to conduct due diligence and negotiate on price, without pressure from competitors. It also ensures secrecy.
If the acquirer has some bargaining power, it may try to sign an exclusivity agreement with the target company. This would ensure, for a period of time, the target company does not discuss the acquisition with third parties or seek out other offers.
While it’s unclear whether an exclusivity agreement was actually signed, Amazon was clear during early negotiations with Whole Foods that it wasn’t interested in a “multiparty sale process ” and warned it would walk if rumours started circulating. That was effective: Whole Foods chose not to entertain the four private equity firms who’d expressed interest in buying the company.
Heads of Terms
The first serious step will be the negotiation of the Heads of Terms (also called the Letter of Intent) between the lawyers, on behalf of the parties. This document details the main commercial and legal terms that have been agreed between the parties, including the structure of the deal, the price, the conditions for signing and the date of completion. It’s not legally binding – so the acquirer won’t have to buy and the target company won’t have to sell if the deal doesn’t go through – but it serves as a record of early negotiations and a guideline for the main acquisition document.
An acquirer can’t determine whether it should buy a target without detailed information about its legal, financial and commercial position. The process of investigating, verifying and reviewing this information is called due diligence.
The due diligence process helps the acquirer to value the target. It’s an attempt at better understanding the target company, quantifying synergies and determining whether an acquisition makes financial sense.
Due diligence also reveals the risks of an acquisition. The acquirer can examine potential liabilities, from customer complaints to litigation claims or scandals. This is important because underlying the process of due diligence is the principle of caveat emptor , which means “let the buyer beware”. This legal principle means it’s up to the buyer to fully investigate the company before entering into an agreement. In other words, if the buyer failed to discover something during due diligence, it’s their problem. There’s no remedy after the acquisition agreement is signed.
So if the problems uncovered during the due diligence process are substantial, the acquirer may decide to walk away. Alternatively, it could use this information to negotiate down the price or include terms to protect itself in the main acquisition document.
In an asset purchase, due diligence is also an opportunity to identify all the consents and approvals the buyer needs to acquire the company.
Due Diligence Teams
The acquirer will assemble a team of advisers, including bankers, accountants and lawyers, to manage the due diligence process. The form and scope of the review will depend on the nature of the acquisition. For example, an experienced private equity firm is likely to need less guidance than a start-up’s first acquisition. Likewise, a full due diligence process may not be appropriate for a struggling company that needs to be sold quickly.
Due diligence isn’t cheap, but missing information can be devastating. In a Merger Market survey , 88% of respondents said insufficient due diligence was the most common reason M&A deals failed. HP had to write off $8.8 billion after its acquisition of Autonomy – which was criticised for being a result of HP’s ‘ faulty due diligence ‘. Few also looked into organisational compatibility in the merger between AOL and Time Warner, which led to the “ biggest mistake in corporate history ”, according to Jeff Bewkes, chief executive of Time Warner. In 2000, Time Warner had a market value of $160 billion. In 2009, it was worth $36 billion.
Types of Due Diligence
Financial due diligence This involves assessing the target company’s finances to determine its health and future performance.
Business due diligence This involves evaluating strategic and commercial issues, including the market, competitors, customers and the target company’s strategy.
Legal Due Diligence
Legal due diligence is the process of assessing the legal risks of an acquisition. By understanding the legal risks of an acquisition, the acquirer can determine whether to proceed and on what terms.
The acquirer’s lawyers have a few ways of obtaining information for their due diligence report. They’ll prepare a questionnaire for the seller to complete and request a variety of documents. This will all be stored in a virtual ‘data room’ for all parties to access. They may also undertake company, insolvency, intellectual property and property searches, interview management and, if appropriate, undertake on-site visits.
Law firms tend to have a system to manage the flow of information and trainees are often very involved. They’ll review, under supervision, much of the documentation and flag up potential risks.
Legal due diligence reports are typically on an ‘exceptions’ basis. This means they’ll flag to the client only the material issues. You can see why this is valuable to the client; rather than raising every possible issue, they’ll apply their commercial judgement to inform the clients about the most important issues.
The report will propose recommendations on how to handle each identified issue. This may include: reducing the price, including a term in the agreement or seeking requests for more information. If the issue is significant, lawyers will want to tell their client immediately, especially if what they find is very serious.
Note, due diligence is a popular topic for interviews. You may be asked to recommend possible solutions to issues uncovered during the due diligence process or asked to discuss the issues that different departments may consider (see examples below).
What are lawyers looking for during due diligence?
What might corporate investigate.
The group structure of the target, including the operations of any parent companies or subsidiaries
The company’s constitution, board resolutions, director appointments and resignations, and shareholder agreements.
Important details from Insolvency and Companies House searches
Copies of contracts for suppliers, distributors, licences, agencies and customers.
Termination or notification provisions in contracts
What do they want to know?
Whether shareholders can transfer their shares (share purchase)
Whether shareholders need to approve the sale and the various voting powers of shareholders
Any change of control provisions in contracts
Whether the target can transfer assets (asset purchase)
Any outstanding director loans, director disqualifications, or conflicts of interest
What might Finance investigate?
Existing borrowing arrangements including loan documents and any guarantees
Correspondence with lenders and creditors
Share capital, allocation and employee share schemes
Assets and financial accounts
The company’s ability to pay current and future debts
Any prior loan defaults, credit issues or court judgements
Details of ownership and title to the assets
Any liabilities which could limit the performance of the target
Whether borrowing would breach existing loan terms
Whether the loan agreements have any change of control clauses
Whether security has been granted over the target’s assets to lenders
What might Litigation investigate?
Details of any past, current or pending litigation
Disputes between the company, employees or directors
Regulatory and compliance certificates
Any judgements made against the company
The risk of outstanding or future claims against the company
Details of any regulatory or compliance investigations
Potential issues or threatened litigation from customers, employees or suppliers in the past five years
What might Property investigate?
Documents relating to freehold and leasehold interests
Inspections, site visits, surveyors and search reports
Health and safety certificates and building regulation compliance
Leases and licences granted to third parties
Whether the property will be used or sold
Title ownership and lease/licensing terms
The value of the properties
Details of regulatory compliance
What might Employment investigate?
Director and employee details, and service contracts
Pension schemes and employee share schemes
Pay, benefits and HR policy information
Information in relation to redundancies, dismissals or litigation
Plans to retain key managers, redundancy and compensation
Pension scheme deficits
Termination or change of control provisions
Compliance with employment law and consultation
Risks of dismissal claims
Evaluate post-acquisition integration
What might Intellectual Property investigate?
List of any trademarks, copyright, patents, domain names and any other registered intellectual property
Registration documents and licencing agreements
Litigation and related correspondence
Searches at the Intellectual Property Office
Current or potential disputes, claims of threatened litigation in relation to infringement
Whether the seller has renewed trademarks
Who has ownership of the intellectual property
Whether they can transfer licenses and gain consents
Details of critical assets, confidentiality provisions and trade secrets
[/one_second] [divider height=”30″ style=”default” line=”default” themecolor=”1″]
The Acquisition Agreement
The main legal document is the sale and purchase agreement or “SPA”. It sets out what the acquirer is buying, the purchase price and the key terms of the transaction.
A company will usually pay for an acquisition in cash, shares, or a combination of the two.
Cash is a good option if an acquirer is confident in the acquisition. If it believes the shares are going to increase in value (thanks to synergies), paying in cash means it can soak up the benefits without having to give up ownership of the company. It is, however, expensive to pay in cash. The buyer must raise money if it doesn’t already have enough cash reserves by issuing shares or borrowing. Most sellers also want cash. It means they’ll know exactly how much they’re getting and don’t have to worry about the future performance of a company.
Other times, an acquirer will want to use shares to pay for an acquisition. The target’s shareholders will get a stake in the acquirer in return for selling their shares. If the value of the acquirer’s shares increases, the shareholders may get a better return. Often, this option will be more attractive for an acquirer as it doesn’t use up cash. Receiving shares can also be valuable for the seller if they’re gaining shares in a promising company. Conversely, however, they must bear the risk that the value of the acquirer falls.
Key terms of the transaction
Both parties will make assurances to each other in the form of terms in the SPA. These terms are heavily negotiated between lawyers.
Warranties and representations
Warranties are statements of fact about the state of the target company or particular assets or liabilities. For example, the seller may warrant that the target isn’t involved in any litigation, that its accounts are up to date and that there are no issues with its properties. If these warranties turn out to be false, the acquirer may claim for damages. However, there are limitations: the acquirer will have to show that the breach reduced the value of the business and that can be hard to prove.
During negotiations, the seller will try to limit the scope of the warranties. It’ll also prepare a disclosure letter to qualify each warranty. For example, the seller may qualify the above warranty with a list of outstanding litigation claims. If the seller discloses against a warranty, they won’t be liable for a breach. Disclosure is also useful for the acquirer because it may reveal information that was not found during due diligence.
The acquirer will want some of these statements to be representations. Representations are statements which induce the acquirer to enter into a contract. If these are false, the acquirer could have a claim for misrepresentation. That could give the acquirer a stronger remedy, including termination of the contract or a bigger claim for damages. This is why the seller will usually resist giving representations.
Indemnities are promises to compensate a party for identified costs or losses. This is appropriate because the acquirer may identify potential risks during due diligence; for example, the risk of an unfair dismissal claim or a litigation suit. The acquirer can seek indemnities to be compensated for these particular liabilities arising in the future. This is a way to allocate risks to the seller: if the event occurs the acquirer will be reimbursed by the seller.
The SPA may be signed subject to the satisfaction of the conditions precedent or “CPs”. These are conditions that must be fulfilled before the acquisition can complete. That could mean, for example, securing consent from third parties, shareholder approval or merger clearance. Trainees are often responsible for keeping track of the conditions precedent checklist, and they’ll need to chase parties for the approvals to ensure all conditions are satisfied.[divider height=”30″ style=”default” line=”default” themecolor=”1″]
Signing and Completion
This is the big day. Signing can take place in person or virtually. Each party will return the SPA with their signature in accordance with the relevant guidelines. It’ll be the trainees responsibility to check that the SPA has been signed correctly and to collate the documents.
If you’re reading this to prepare for an interview, I’d suggest you explore the “acquisition structure”, “legal due diligence” and “warranties and indemnities” sections – these are common case-study questions. We cover this in more detail and with practice interview answers in our mergers and acquisitions course, which is free for TCLA Premium members.
[blog_teaser title=”” title_tag=”h3″ category=”” category_multi=”” margin=”1″]
- +44 (0) 753 854 5095
- Terms and Conditions
- TCLA Newsletter
Follow us on social
© 2023 The Corporate Law Academy. All Rights Reserved.
Website by 438
Examples of Successful Mergers and Acquisitions
Fairly Successful Mergers & Acquisitions lead to resultant organizations that hold enhanced influence, spending power, and technology than that of the companies that existed before those deals. Few examples of successful mergers and acquisitions are discussed here, which influenced the economy and the people’s way of living.
The Sirius – XM merger
During the 2000s, Sirius and XM struggled as opponents to control the satellite radio markets. Later, in 2007, they decided to amalgamate their powers so they could provide more entertainment options to their customers (and to be honest, to eliminate each other’s greatest competitors so that they can have total domination over satellite radio market)
A big problem arose for the merger when the FCC informed the companies that their respective licenses wouldn’t allow them to transform into one company. A year passed in filing paperwork and waiting. After which the two companies received a barrier that almost forced them to repudiate their agreement.
For Sirius and XM, it took much time to gain approval. Yet eventually, the FCC allowed. Nevertheless, Sirius XM is a relatively new company, and it has provided more options to subscribers. It makes it a success story.
The Disney – Pixar merger
Few mergers across the world have brought more happiness to people like that of Disney and Pixar.
Before the merger was implemented, Disney worked as Pixar’s distributor. Pixar created the movies, and Disney’s work was to ensure that they move into the hands of children and adults worldwide.
When the distribution contract came near to end, that time, neither Pixar nor Disney wanted to be apart. Both the companies observed that instead of working separately, they could benefit most by working together. This lead to a flood of animated movies in the market, including WALL-E, Up, and Bolt. After the merger, Pixar identified that it had adequate money and workforce to release two movies a year. Without Disney’s help, that wasn’t proved true. For all those who adore Pixar movies perceive this merger as a big success.
The Exxon – Mobil merger
Exxon and Mobil existed as two wholly separate oil companies until 1999. They joined forces to form one of the greatest mergers in history in 1999. Exxon-Mobil got unmatched reach in the fossil fuels market due to this 81 billion dollar agreement. The merger agreement was such great that the FTC called for a realignment of the gas stations owned by these companies. The FTC worried that, without this realignment, the merged company would constitute a monopoly.
How successful was this merger? In 2008, the resultant company earned over $11 billion in one quarter. Not the full year; just one quarter!
Presently, it’s among the largest publicly held companies in the oil and gas sector in the world. Considering the numbers, it is evident that this is a greatly successful merger.
- How Short-term Loans affect your Credit Score?
- How slow Internet service affects economics
However, Mergers don’t work every time. Different companies have different philosophies that sometimes make it impossible for them to amalgamate their powers, even when such would benefit them. The above examples show that some mergers and acquisitions can work exceptionally well. During these mergers and acquisitions, corporate lawyers play a significant role. They are those facilitators who take the responsibility to accomplish all the paper works and look towards the possibilities favoring such deals, under the law.
Sushma is a seasoned business writer and content creator with over 7 years of experience in the field. She has a talent for taking complex topics and breaking them down into easily understandable language that engages and educates her readers. Her expertise allows her to cover a wide range of topics relevant to the B2B industry, providing business owners with the knowledge they need to make informed decisions and drive growth.
How to Add Money in WazirX
16 Best Ways of Global Investment from India
How to Make Money on Pinterest Without a Blog
How to Avoid eBay Buyer Scam
How to Use Pinterest for Affiliate Marketing
How to Build Wealth in Your Old Age
Type above and press Enter to search. Press Esc to cancel.