The M&A Formula

Proven tactics and tools to accelerate your business growth

Peter Zink Secher, Ian Horley

• Publisher: Wiley
• Year: 2017
• Print ISBN: 9781119397960
• eBook ISBN: 9781119397946
• Edition: 1
• Topic: Business
• Subtopic: Corporate Finance
• Index: Business

The formula that transforms the probability of success when growing your business with M&A

The M&A Formula brings together decades of research and case studies from recognised leaders into a model that anybody can use to grow their business using M&A, no matter large or small. Whether you see it as avoiding the painful failure that currently runs at a Global average of over 50%, or stacking the cards in your favour, business model-driven M&Awill definitely help you win by either seizing opportunities from your competition, or failing fast – before it really hurts you.

M&As fail because the thinking surrounding them fails the rigour of scientific examination; by observing the results of conventional processes and positions, the need for new direction becomes apparent. This book presents a new set of tactics based on data from high-profile M&As, constructing a modern map of practical and business model-driventactics that succeed in the real world. Case studies of successful deals illustrate on-the-ground implementation of a new M&A model, and tactics formulated by M&A specialists equip you with the wisdom to avoid common pitfalls and costly errors.

The M&A sector is continuing to grow, and the trend shows no sign of slowing. Business leaders need a robust, business model-driven M&Astrategy for handling these high-stakes transactions, but the usual methods are no longer cutting it. This book provides a new way forward for businesses seeking smart M&A tactics, helping them to:

• Rethink conventional M&A wisdom in light of recent failures.
• Adopt new data-backed tactics that help ensure success.
• Avoid litigation risk and the high cost of failures.
• Examine practical models and illustrative high-profile case studies.

M&A failures have reached global epidemic proportions, with economic impacts to scale. Businesses around the world are in dire need of direction, and as the stakes grow, so do the potential costs of mistakes. The M&A Formula provides sound guidance and a practical new model for successful M&As in the new economy.

Part I
The M&A Formula

1
What Is the M&A Formula?

Everyone thinks that at least 50% of M&A deals end in failure. But nobody really seems to care, as long as they believe that everyone else is working with the same odds.

This is not OK. Every M&A failure costs time and money, but more importantly, by chasing bad deals you are standing in the way of your own company's value-adding growth. Done properly, M&A can be a successful way to efficiently grow a business. Done poorly, it will destroy shareholder value while making your external advisors rich, and at the very least it will make you look foolish, and may even harm your career opportunities.

This at least 50% failure rule has allowed investment banks and M&A advisors to encourage any kind of deal—whether it is appropriate or not—for decades. After all, they get paid either way, so what do they care if the deal goes bust?

This is particularly true when you agree to pay external advisors a success-based fee, as this only encourages them to attempt any deal whatsoever, thereby continuing the high global M&A failure rate. Meanwhile, CEOs, CFOs, and small-business owners are left unable to reach their true potential. If we are going to reduce the M&A failure rate, then someone has to stop doing deals. And the deals they have to stop doing are the ones that will end in failure.

The truth is that M&A doesn't have to be this risky. The best M&A dealmakers in the world have achieved M&A success by following three rules:

• Every single deal has to be business model driven.
• They involve the whole organization through great leadership.
• They do not rely on external advisors for their own M&A success.

It doesn't matter whether you are a corporate executive, an SME owner, a new employee, or a student, if you can understand business model-driven M&A, then you are on the path to success.

The late Robert Merton coined the phrase ‘self-fulfilling prophecy’ way back in 1948, and it is still used today. If you go into a deal believing in the at least 50% rule, then you are already accepting the possibility of failure. It will be obvious in everything you do—your attitude towards the deal, your attention to detail, and your preparation. But if you believe in M&A success right from the very beginning, then you will radiate the confidence that you need to inspire your team and drive the deal forward. This is strong leadership, but it all starts with one transformative decision: you have to decide that you are going to be an M&A success. Make that decision and this book will give you all the tools you need to make the right deals, avoid the wrong deals, and make you look like a deal-making genius. But it all starts with you.

Before the M&A Formula…

If you can sum up the purpose of your business in one sentence, then you have already taken your first steps toward M&A success. Before you start to look at the M&A Formula itself, you have to know what your company does—in other words, what are the key drivers of your business?

Maybe you are driven by creating the cheapest possible product in the market? Or maybe your key driver is to provide an increasing range of customer services?

As soon as you have identified the one or two key drivers of your business, you will be ready to start growing your business.

Information is coming online so fast, and new sectors are popping up everywhere. Some of the biggest companies in the world (Amazon, Facebook, Google, Netflix, Tesla) were hardly known some 10 to 15 years ago, and who knows what new sector will dominate the global marketplace 10 years from now.

Now, you're probably thinking, Apple does very little M&A; didn't they do pretty OK?

Absolutely: Apple's total return to shareholders in our research period is a whopping 940.8%, which dwarfs the total return of the M&A Elite.

There are two ways to grow a business: through organic growth, and through M&A activity. Build or buy. Apple is the ultimate example of an organic growth success story, as it has used its own innovation to create the sort of technology hardware which is craved by the world.

But Apple is unusual in its success. So we started to look for other firms with a high total return to shareholders over the same 10-year research period to challenge our M&A Elite. We got inspired by a publication from Heidrick & Struggles called Accelerating performance.¹ These so-called ‘super-accelerators’ are actually a fascinating mix of ‘build’ and ‘buy’ corporates (plus a couple who do both), which have increased their TRA dramatically over 10 years. The report was probably not intended as an M&A study, but we turned it into one for two reasons. Firstly, and most importantly, we wanted to compare the world's most successful firms to our M&A elite. Was build better than buy? (No) Secondly, did any of these firms actually rely on corporate M&A to become successful? (Yes)

TRA on super-accelerator firms:

• Apple 940.8%
• Google (Alphabet shares) 243.9%
• Comcast* 183.3%
• Softbank Group 252.12%
• Cigna 206.7%
• Gilead Sciences 358.3%
• Starbucks 242.2%
• Danaher* 191.8%
• VISA 526.8%
• Biogen* 476.5%
• Shire* 360.7%
• HDFC Bank* 504.5%
• Intercontinental Exchange 171.5%
• Illumina 551.4%
• Cerner* 316.4%

The Global M&A Elite has delivered TRA varying in the range of about 200–300% (with the exception of ASSA ABLOY at 327.9%). These TRAs are partly driven by M&A transactions, whereas a TRA from the likes of Google (at 243.9%) is the result of a rather genius search machine. The TRA can be expressed in another way—if you had invested $100 in Google 1st January 2007 you would have your TRA+initial investment 1st January 2017 $343.9 (100+243.9)—a similar investment in ASSA ABLOY would have grown to Skr 427.90 if Skr 100 had been invested 1 Jan 2007. What is perhaps even more impressive—the Global M&A Elite has delivered almost the same value (331.4)² to an investor as Google (343.9) in the 10 year research period.

Should You Build or Buy?

If you want to grow your business, you have to either ‘build or buy.’ This is the big conundrum for any CEO, big or small. Do you always have the time (and the resources) to build, and will your company always be more efficient for building as opposed to buying? For most people, the answer is no. That's why M&A is so popular at every level. No one has the time or knowledge to build themselves, so a lot of companies are buying, and it's only going to accelerate.

The highest identified TRA we measured over this period of 10 years belongs to a ‘build’ business model. Still, how many Apples are there in the world? Do we ever hear about what happened to all the companies who didn't succeed like Apple? Do you remember Nokia, Kodak, Xerox? Together with high-fashion clothing, technology firms and biotech represent some of the highest-risk business models, often with a binary outcome: live or die.

We have no long-term measure for all companies in the technology hardware sector, which is Apple's subsector, but in the past 3 years the TRA has been only 85%.

Another highly successful ‘build’ company is VISA, which has a similar monopoly over its sector and a TRA of 526.8%. But over the past 10 years the subsec...

Table of contents

• COVER
• TITLE PAGE
• TABLE OF CONTENTS
• ACKNOWLEDGMENTS
• ABOUT THE AUTHORS
• INTRODUCTION: THE OPPORTUNITY, THE PAIN, AND THE PROMISE
• Part I: The M&A Formula
• Part II: The M&A Formula Applied
• INDEX FOR CASE INSIGHTS & RESEARCH INSIGHTS
• INDEX
• END USER LICENSE AGREEMENT