Like countries or political systems, every M&A deal is different from the next. Some are groundbreaking – note the $80.3-billion 1999 merger of Exxon and Mobil, still the biggest deal in the history of the oil and gas sector. Others barely make a ripple, but appear considered and strategically robust – the $32-billion August 2015 acquisition of Precision Castparts by Berkshire Hathaway springs to mind.
Each deal contains a measure of risk that ranges from moderate to off the chart. Deals can make or break companies. Sometimes, the best deal is the biggest – witness the 2008 merger of brewers InBev and Anheuser-Busch. With others, it’s sometimes the worst. As the property mogul Donald Trump observed: “Sometimes your best investments are the ones you don’t make.”
“Undertaking corporate expansion using the M&A route involves risk,” says Leon Saunders Calvert, global head of Capital Markets and Advisory at Thomson Reuters. “It’s expensive and it is probably one of the largest strategic undertakings companies undertake.” Yet risk and reward have always gone hand in hand. There will always be those who dream big, and others who believe the best way to double your money is to fold it and put it in your pocket.
Thomson Reuters Eikon, a single, centralised source of information and analysis, allows you to be the best informed, as does the firm’s 160 years of knowledge and data accumulated by the world’s best journalists and analysts
For this reason you cannot underplay the importance of being the best-informed individual in the room if you’re eyeing up an acquisition and scrutinising the value inherent in (or absent from) a potential deal. Thomson Reuters Eikon, a single, centralised source of information and analysis, allows you to be that person, as does the firm’s 160 years of knowledge and data accumulated by the world’s best journalists and analysts.
The M&A space will also always have innate cycles and rhythms – it’s the natural way of things. In the wake of the financial crisis, the megadeal went into hibernation. Corporates and their shareholders struggled to value assets, as markets tumbled and economies swooned. In 2008, Mr Saunders Calvert notes, fewer than 20 per cent of US-based companies saw their stock prices jump after revealing their intention to buy or merge with a rival.
But as corporates stockpiled cash and the Western world stepped back from the brink, the mood shifted again. As the United States recovered and China boomed, risk was placed back on the table. The number of US corporates whose shares rise on news of a transaction is now pushing towards 70 per cent and has increased every year since 2010.
This attitude is reflected in Thomson Reuters Going Global survey of more than 250 C-suite executives, employed by corporates ranging from genuine multinationals to thriving mid-sized firms. In the United States, still the world’s biggest and most influential M&A market, 56 per cent of respondents said they would opt to expand into new markets, or broaden their reach and appeal across existing markets, by buying a rival corporate.
That number remained above the 40 per cent mark when corporate leaders in Italy, Germany and Australia were questioned. In Britain, C-suite executives favoured a less acquisitive approach, with 38 per cent proclaiming their intent to invest directly in a new market, rather than buy the shares of a peer. In total, 38 per cent of those surveyed opted for the M&A route with 28 per cent preferring the direct investment route and 14 per cent minded to saddle up with a joint-venture partner.
Mergers and acquisitions tend to be cyclical, with deals either crowding a marketplace or disappearing entirely, for a good reason. They thrive during the good times, when global economic conditions are golden and tail off when the skies cloud over.
“Expansion through acquisition typically tends to happen when a company and its CEO have a high degree of market confidence,” says Mr Saunders Calvert. This is particularly pertinent, he adds, when corporates are considering “going global” – expanding into new arenas and territories. “These outbound transactions tend to involve an additional layer of risk,” he says. “You have added legal and governance complexities to deal with, along with significant cultural challenges.”
Human nature, which is founded on confidence and aspiration (otherwise we would not get up in the morning) also conspires to undermine the M&A cycle during recessions and slumps. In theory, this would be a great time to buy good assets on the cheap. Yet this is a misperception. “Just because an economy is struggling, it doesn’t mean that a seller wants to divest an asset at a knock-down rate,” says Mr Saunders Calvert. The same thinking is at work in the mind of a homeowner hoping to sell, but happy to wait for a good offer.
Buyers also need to ask why they like a potential target. Is it because a market is underexploited, as many are? In the Going Global survey, India was deemed to be the most underexploited major market in the world, according to 10 per cent of respondents, followed by Indonesia and South Africa.
Or is it because C-suite executives see synergy in a deal – an alignment with another corporate whose aims and ambitions may chime with theirs. If they do, and they are right, such transactions “tend to do well, adding significant value to both parties”, says Mr Saunders Calvert.
Deals that are more opportunistic and defensive in nature have a higher tendency to struggle, proving to be value-diluting events. In the survey, 23 per cent of corporate leaders said the primary reason for expanding into a new economy was to keep pace with competitors, which is interesting as organisations that are undertaking acquisitions just because their competitors are doing so might not get the optimal results.
The well-timed and thoughtful deal can also help a company gain greater control of resources or assets that may be key to its future success – the more of an operating system or supply chain you own, the easier it is, in theory, to cut out mistakes and to reduce third-party risk. “I do not think that anyone would advocate buying their entire supply chain, but the more dependence you have on assets or parties that you don’t own or control, the more extraneous risk there is to you being able to deliver quality goods and services to your customers,” says Mr Saunders Calvert.
Ultimately, there are no right or wrong answers. You might plan an M&A deal scrupulously, yet see it blow up at the last minute. A good deal in one quarter might look bad in the next. Economies might contract or currencies depreciate. Sanctions or political upheaval may stymie a country’s short-term growth, if not its long-term potential. Yet the fact that M&A remains overwhelmingly the favoured way to expand further into new or existing markets, among corporates of all sizes, according to the Going Global survey, attests to its continuing allure.
“The lifecycle of an M&A transaction is long,” Mr Saunders Calvert concludes. “A deal may take months to be completed and during that period anything might happen to disrupt it. Post-merger market changes and other corporate actions make it very hard to define, in hindsight, whether a deal was ‘good’ or ‘bad’.”
Mergers and acquisitions will always retain both risk and reward. They typically work well in the good times and struggle in the bad. But the best way to ensure M&A succeed, whatever the prevailing economic environment, is to have the best data, information and market knowledge on your side. With this there is perhaps no better way to grow your business and to realise your company’s ambitions of becoming truly global.
