During the cross-disciplinary program Mergers & Acquisitions at the Amsterdam Institute of Finance (AIF), top expert Tim Galpin took the participants on an exciting tour through the dynamic M&A landscape. One of his key messages throughout the course was: “Value is only projected during the transaction. Value is created after the deal is done.”
• The 4.5-day program Mergers & Acquisitions at AIF offers a complete, in-depth view of M&A capabilities across the entire M&A process: strategy, valuation, due diligence, negotiations, legal and regulatory aspects, and the post-deal integration of people, processes, and systems are all discussed by Timothy Galpin and other experts.
• Most dealmakers focus primarily on getting the deal done but pay insufficient attention to post-merger integration.
• Combining experience and a clear M&A methodology enhances deal performance, yet many firms lack a comprehensive end-to-end M&A process model.
On the second day of the program, leading M&A expert Timothy Galpin discussed deal strategy, the language of M&A and what creates success in takeovers. The majority of the fifteen participants worked for corporates and have found themselves getting more involved in the dealmaking process and wanted to boost their knowledge and skills.
How to create value in acquisitions
Deals should come with an official warning:
“Acquisitions can result in serious damage to your corporate health, up to and including death”
- Alan Lewis and Dan McKane, L.E.K Consulting
Being successful in M&A is far from an easy feat. Galpin showed the participants one of the many studies that have been done on the high failure rate of mergers and acquisitions. An analysis of 2,500 deals found that more than 60% destroyed shareholder value. Moreover, almost half (49%) of another study’s survey respondents indicated that their company needed ‘merger repair’.
“It makes sense that deals can quickly become messy”, says Galpin. “There are many moving parts: finance, HR, operations, supply chains, legal, technology, et cetera. M&A is like an MBA on steroids.”
Another factor contributing to the high failure rate of deals is that often not enough attention is paid to post-merger integration (PMI). “All the corporate finance and valuation activity preceding the acquisition is merely a projection”, according to Galpin. “It is where value is projected, but not where value is created. The value of the deal must be created after deal closure. To make this work, building relationships in addition to financial models is the most crucial factor. M&A is all about relationships.”
Early in his career, the big consulting firms did not yet offer post-merger integration (PMI) services. Galpin saw a definite need for PMI within companies, so he started advising companies on the PMI aspects of their deals. Nowadays all the big consulting firms do it and PMI has become a multibillion-dollar industry. “PMI is everywhere. Even so, dealmakers are still mostly looking at the transaction only”, according to Galpin.
Building M&A muscle
Unless you are a private equity investor, M&A is not a strategy. A strategy is to grow in certain markets or with certain products. To do this, M&A can be a tool to execute a chosen strategy. M&A can go well, or it can become a performance drag.
Your first task as a member of a deal team is deciding if a potential target is right for you. Are you the natural owner of a target? A natural owner is the one who can – over a certain period of time – extract the most value (cost and/or revenue synergies) from an asset. The natural owner might be your firm, a competitor, or even the current owner of the asset.
Out of the many M&A cases discussed during the program, Galpin picked out the infamous acquisition of Twitter by Elon Musk as an example to illustrate his point. “Musk is clearly not the natural owner of Twitter. He is not the right person to monetize it. He would be better off selling the company now while he can still get some value out of it.”
Galpin discussed several types of deals companies can engage in, such as joint ventures, equity alliances (like Microsoft and OpenAI), and non-equity alliances. The more ownership control increases, the higher the risk. Therefore, acquisitions are at the top of the spectrum as the riskiest transactions. Research shows that programmatic (also called serial) acquirers achieve better M&A results because they are doing multiple smaller deals and have developed a repeatable M&A capability. “Doing deals once in a while is riskier, and the highest risk is doing a transformational deal where the stakes are much higher”, says Galpin. “Furthermore, a study by McKinsey of over a ten-year period found that programmatic M&A is the most effective approach to deliver the highest total returns to shareholders.”
Challenges in the current market
M&A deals happen in waves. In the past year, the deal market went down after a strong period of growth. As the economy is growing again, so is the M&A market. A key difference is that the interest rates have gone up considerably. “I love that”, said Galpin. “Money was free for a long time. Private equity has profited from that enormously. But now the financial engineering is mostly over, and PE must address the actual operations again.”
It is currently a challenging time for doing M&A deals. Not only because of the higher interest rates, but also because many companies are ‘retrenching’ rather than spending. Also there is increased regulatory scrutiny in many regions. To succeed in this environment, you will have to get several things right. It starts with defining a clear M&A strategy. “Be very clear about how M&A will help achieve the company’s goals”, Galpin advised the participants.
Subsequently, it is all about building experience and creating a systemized, well documented and repeatable M&A process to improve success. Galpin explains why these factors matter so much:
• An analysis of 228 bank mergers found that combining two key factors, experience and a clear M&A methodology, enhances deal performance.
• The first factor, ‘tacit knowledge’, consists of M&A experience and exists largely in the minds of executives, managers and employees.
• The second factor, ‘codified knowledge’, consists of a “playbook” that documents a company’s standards, procedures, tools and templates, which guide actions and decision-making throughout the M&A process, both pre- and post-transaction close.
Galpin: “While a clear M&A process has been shown to improve deal success, research has found that almost 60% of surveyed executives indicated that their firms do not have a comprehensive end-to-end M&A process model.”
A final word of advice on this second day of the program: “Get your hands dirty! You often need specialized knowledge to participate in the process of dealmaking, but only experience will enable you to really create value”, Galpin concludes.
Learn more about AIF’s Mergers and Acquisitions program here