KUHN CAPITAL Saturday, February 24, 2018
Dispatches from the front

Avoiding Bad M&A Mojo

With the recent spate of what looks like M&A deals gone wild (see Itron Short Circuit and Gallic Indigestion), we were inspired to revisit some particularly effective writing on how to avoid Bad M&A Mojo. Yes, buying and selling are powerful tools for growth or exit, but like a hammer, they can wildly rebound off the anvil if not firmly gripped.

The brief article we like, “Not All M&As Are Alike -- and That Matters”, was written by Joe Bower, a Harvard Business School professor with a gift for pithy common sense. We have boldly paraphrased Professor Bower thoughts below:

When Buying Industry Overcapacity
About a third of all M&A is based on the expectation that a combination will generate economies by reducing industry overcapacity, eliminating duplicated effort and excess supply, and thereby firming up prices. Most of these deals fail to deliver on their promise.

What the winners did was figure out how to rationalize concretely, quickly and effectively. In the course of doing this, these buyers didn’t presume their own company did things better, and they didn’t expect people to destroy something they had spent years building. Instead, they speedily imposed the chosen processes and in cases where the target was as large as their own company but with dissimilar processes, they anticipated resistance and planned around the departure of some key people. Finally, they didn’t mess with process differences associated with country, religion, ethnicity, or gender.

When Buying Geography
In these deals, the buyer typically brings substantially larger scale, lower operating costs and improved product/service value to the deal. For their part, acquired companies enjoy strong local customer relationships, and they generally welcome the buyer’s more streamlined, efficient processes. However, in contrast to overcapacity consolidations, in geographic deals it’s more important to hold on to key employees — and customers — than to realize efficiencies quickly. Winners on geographic buys introduce different values subtly and gradually.

When Buying Product/Market Extensions
Research shows that the success of M&A designed to extend a company’s product line or international reach often depends on the relative sizes of the two companies. If near-equals merge, expect problems associated with the target’s resistance to new processes and values. If, on the other hand, a large player buys a clearly smaller target, the chances for success rise markedly. Apparently in these cases, the target realizes that resistance is futile.

When Buying R&D
Sometimes, you must buy proprietary intellectual property or technical expertise rather than miss a market opportunity. These sorts of transactions can also be quite attractive to targets, since they are often cash-poor and facing huge competitors. However, you must know precisely what the value of the R&D is you’re buying: some buyers are serial purchasers of second-rate technology. Also, pay attention to cultural differences: the target’s people won’t work if the values don’t fit, and there’s no time for stately assimilation. So put your best people in charge of acquisition integration and make the project their only priority.

When Buying into an Adjoining Industry
An adventurous M&A rationale, this approach calls for inventing a business model based on the presumption that synergies will be realized by combining the relevant parts of adjoining industries. The bet is therefore not only on successful integration, but on a novel model. With all these moving parts, the successful deal seems to feature several distinct steps: first, installation of the buyer’s control system at the target; second, elimination of processes irrelevant to the hybrid model; third is a pruning of the businesses that don’t fit the buyer’s vision. Any further efforts to integrate the businesses are guided by specific, concrete opportunities to create value.

Bower’s M&A piece concludes with the warning, “If the strategy is unclear, there is no reason for a company to go down one of the more difficult paths it can follow.” Stay tuned for next month’s Dispatch where we will address how to assure the clarity of your M&A rational or thesis.

Ryan Kuhn

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