The Art of M&A Strategy: A Guide to Building Your Company's Future through Mergers, Acquisitions, and Divestitures (The Art of M&A Series) - Hardcover

SMITH

Hardcover

ISBN 10: 0071756213 ISBN 13: 9780071756211

Publisher: McGraw Hill, 2011

Synopsis

Seize the competitive advantage with today’s most powerful strategic tool―M&A

“Given the influence of technology, globalization, and regulatory change, M&A will continue to shape our industries. For most companies, therefore, the consideration of M&A in strategy is now fundamental.”
–from the Introduction to Part I

The Art of M&A Strategy is exactly what you need to build mergers, acquisitions, and divestitures into your overall business strategy―to make M&A a competitive advantage and avoid landing on the long list of M&A failures.

Experts in the field of M&A, Smith and Lajoux demystify this otherwise complex subject by taking you through the types of M&A strategy and the key steps to successful M&A strategy development and implementation. The Art of M&A Strategy is conveniently organized into three sections:

• Part I presents a range of possible corporate strategy situations and provides the role and rationale for M&A in each, such as building and managing a portfolio, participating in industry consolidation, spurring corporate growth, and using acquisitions to create “real options.”
• Part II outlines how to determine the role of M&A in your strategy―taking into consideration industry context, competitive imperatives, and strategy options―and explains how to find and screen partners, decide whether to buy or sell, and engage the board of directors in M&A decisions.
• Part III covers M&A as a sustained corporate program, particularly in the context of international growth, outlining the most strategic aspects of post-merger integration, describing how to use advisors throughout the process, and examining core competencies required for successful M&A programs.

The authors illuminate the purpose and process of applying M&A with real-world success stories involving Cisco, GE, Google, and many other companies that have leveraged M&A for strategic success. Use The Art of M&A Strategy to create a powerful strategy position for success in today’s changing business environment and to seize and hold competitive advantage.

About this title

About the Author

Ken Smith has practiced as a strategy consultant for more than 25 years, initially with McKinsey & Company and most recently with SECOR Consulting, where he was also a managing partner and chair. He is an associate professor at the University of Guelph and associate dean of executive programs in the university’s College of Management and Economics.
Alexandra Reed Lajoux, chief knowledge officer at the National Association of Corporate Directors (NACD), has three decades of experience in business information and has served as editor for Directors & Boards, Mergers & Acquisitions, and Export Today. She is the author or coauthor of all books to date in McGraw-Hill’s acclaimed Art of M&A series.

From the Back Cover

Rapid globalization, technological advances, and dramatic changes in public policy have made industry restructuring the “new normal.” In order to compete, M&A must be part of your overall business strategy.

Written by practicing experts in the field of mergers, acquisitions, and divestitures, The Art of M&A series of professional guides is the number-one resource for anyone seeking practical, hands-on advice for planning for and executing successful deals.

Now, The Art of M&A Strategy breaks new ground by providing the tools and techniques to design a business strategy using M&A as a key element. It takes you through all the steps for making optimum use of M&A for corporate success.

Excerpt. © Reprinted by permission. All rights reserved.

THE ART OF M&A Strategy

A Guide to Building Your Company's Future Through Mergers, Acquisitions, and Divestitures

By Kenneth Smith, ALEXANDRA REED LAJOUX

The McGraw-Hill Companies, Inc.

Copyright © 2012 The McGraw-Hill Companies, Inc.
All rights reserved.

ISBN: 978-0-07-175621-1

Contents

PREFACE
ACKNOWLEDGMENTS
PART I HOW M&A CREATES VALUE IN STRATEGY
Chapter 1 Building and Managing a Portfolio of Businesse
Chapter 2 Consolidation: Value in Cost Synergies
Chapter 3 Expansion Strategy: Value in Revenue Growth
Chapter 4 Real Options in M&A
PART II DEVELOPMENT AND EXECUTION OF M&A STRATEGY
Chapter 5 M&A in Strategic Planning
Chapter 6 Searching, Screening, and Selection
Chapter 7 To Be a Buyer or a Seller?
Chapter 8 The Director's Role in M&A
PART III WHEN THE M&A PROGRAM IS CENTRAL TO STRATEGY
Chapter 9 Global Industry Restructuring
Chapter 10 The Role of Postmerger Integration in M&A Strategy
Chapter 11 Building a Sustainable M&A Program with the Help of Advisors
Chapter 12 M&A as a Core Competence
CONCLUSION
Appendix I.1 On the Success and Failure of Major Deals
Appendix II.1 Suggested Readings in Strategy and Strategic Planning 
Methodologies
Appendix II.2 Wheel of Opportunity/Fit Chart with Illustrative Delphi 
Scoring
Appendix II.3 Information Sources and Tips for Target Screening
Appendix II.4 NACD Guidance on the Board's Role in M&A and Strategy
Appendix III.1 Public Policy and Corporate Growth: Selected SECOR 
Consulting Case Studies Regarding the Role of Public Policy in 
International M&A
INDEX

Excerpt

CHAPTER 1

Building and Managing a Portfolio of Businesses

Even then, we will make plenty of mistakes.

—Warren Buffet

For most companies, M&A activity is optional. For a multibusiness portfoliocompany, however, it is quintessential. Acquisitions drive portfolio companiesas their path to value and sometimes their reason for existence.

A portfolio company is an enterprise composed of multiple corporate entities andinvestments. These "holdings" have usually been acquired, but some may haveresulted from the division of a prior business. This chapter focuses on thoseportfolio companies that maintain these entities as separatebusinesses—these portfolio companies look to add businesses to theportfolio and occasionally sell businesses from the portfolio. Some singlebusiness companies comprise multiple legal entities but are managed as oneoverall company—these are not the subject of this chapter.

We also distinguish portfolio companies from passive investment funds. Portfoliocompanies for our purposes hold all or a majority interest in many of thecompanies in their portfolios, either alone or with partners. As such they(perhaps with partners) effectively control the businesses in the portfolio. Weexclude for our purposes funds that make equity investments but not controllinginvestments (not even with partners). Such companies buy and sell stock and playa passive role in the companies in which they have invested, whereas theportfolio companies buy and sell companies and are often in a position, eitheralone or with partners, to control the companies they hold. (Portfolio companiesmay have such passive investments as well as corporate holdings, but thischapter is concerned with only the latter.)

As noted in the introduction, it is the portfolio companies that dominated M&Ain earlier decades and that have drawn much criticism. In particular, some suchcompanies earned a so-called conglomerate discount from the capital markets.This dubious distinction meant that the market assessed the whole (the portfoliocompany) as being worth less than the sum of the parts (the sum of the market'svaluations of the holdings). In other words, such portfolio companies wereadding negative value.

This raises important questions about the role of corporate centers in theseportfolios, how they can add value, and the role of M&A. In fact, many portfoliocompanies are highly successful and remain a major force in the M&A markets. Wewill use a characterization of management approaches for portfolio companies tolook at how M&A can add value.

ROLE OF THE CORPORATE CENTER

How can portfolio companies add value?

A portfolio company can create value in excess of the value of the individualcompanies in many ways, including the following:

* Reducing risks to the shareholders by diversifying assets

* Improving returns on investments through superior selection of acquisitioncandidates

* Optimizing across holdings the use of tax credits, loss carry forwards, debtmanagement, and other forms of "financial engineering"

* Exploiting skills and synergies available between businesses

* Consolidating assets as in an industry "roll up."

However, how the portfolio company adds value depends on the role andcorresponding skills of the corporate center or parent company. In a portfolioof businesses, the corporate center can add value either by improving theperformance of the units or by making changes to the portfolio. The latter isclearly the role of M&A&—that is, the portfolio can be changed by sellingunits or buying new units.

However, the former also has a bearing on M&A strategy. Unit performance can beimproved by changes in strategy, management disciplines, staff, or access toskills or resources—all of which can be influenced by what else is in theportfolio and/or how the portfolio is managed.

A typology of business portfolio companies can be defined by the differing rolesof their corporate centers.

What roles can the parent company play in a portfolio of businesses?

The roles of portfolio parents—or corporate centers as they areincreasingly called—can vary widely. Michael Goold of the AshridgeStrategic Management Centre and Nathaniel Foote of McKinsey & Company definedfive scenarios for the corporate center based on the degree of businessintegration and the type of parent company intervention. Each scenario suggeststhe strategy to create value.

The controller role applies to a diversified portfolio in which theparent company does not intervene in the individual business, other thanexercising its fiduciary duties on any boards of its holdings, including settinggoals and budgets. The parent company's role is essentially to grow and allocateshareholder capital, usually within defined risk-return parameters. This is donethrough buying and selling of companies or shares of companies and throughmonitoring performance. Berkshire Hathaway Inc. and some of the large pensionfunds are examples.

The coach role may also apply to a diversified portfolio, but there is agreater direct role of the parent in the businesses of the portfolio. The coachaims to help the companies in the portfolio perform better through bettermanagement tools and processes. The application of Six Sigma across the holdingsof General Electric Corporation is a good example. The role of coach alsoapplies to a portfolio of businesses for which similar skills are required tomanage, for example, businesses in a single industry, such as the newspaperchains.

The role of orchestrator applies to a portfolio of businesses that sharesome aspects of their business systems. The evolution of media serves toillustrate the nature of this role over that of the coach: with the prevalenceof digital media, many of the former print media chains, such as Time Inc., arenow managing content centrally and are bundling print and digital product forsale to consumers and advertisers. Thus each magazine remains a separateproduct, but elements of its business system may be shared or intertwined withothers.

The first three roles are variants of holding companies with a defined basis forthe corporate center to add value. The last two roles, the surgeon andthe architect, apply to transformational interventions, such asturnarounds. The surgeon role applies to diversified holdings, but unlike thecontroller, the surgeon will be directly involved in the transformation. Someprivate equity firms, hedge funds, or "corporate raiders" are in the surgeonrole.

The architect is also implementing transformational change, but in a portfolioof businesses with common skills or potentially shared business systems. Thetransformation of Thomson Corporation from essentially a newspaper chain intothe Thomson-Reuters information services company illustrates an architect atwork in the selection and disposal of assets and the integration of the newportfolio of businesses, clearly distinct from the work of the surgeon onunrelated companies in a portfolio.

There is, of course, some gray area between these five roles. Some parentcompanies may also change roles due to a change in strategy. Nonetheless, mostportfolio companies fit into one of these types at a given time. Thecorresponding role defines, in part at least, their M&A strategies.

ROLE OF M&A FOR HOLDING COMPANY CENTERS

What is the role of M&A if the parent is in the "controller" role?

The parent as controller uses M&A to buy, hold, or sell. Thistype of portfolio is best illustrated by some large investment funds, such asBerkshire Hathaway Inc., and many of the large pension funds, such as the CanadaPension Plan Investment Board (CPPIB). These companies have developed superiorskills for the selection and sale of assets. They are active investors only tothe extent that they sit on the boards of the companies in which they invest andexert influence as directors, but they rarely determine the strategies or getinvolved in the operations of acquired companies.

Berkshire Hathaway Inc. is a holding company owning subsidiaries that engage ina number of diverse business activities, including property and casualtyinsurance and reinsurance, utilities and energy, freight rail transportation,finance, manufacturing, services, and retailing. Some well-known holdingsinclude GEICO, the third-largest private passenger auto insurer; General Re, oneof the largest reinsurers in the world; MidAmerican, an international energyholding company owning a wide variety of operating companies engaged in thegeneration, transmission, and distribution of energy; Burlington Northern SantaFe Corporation (BNSF), one of the largest railroad systems in North America;Benjamin Moore, a formulator, manufacturer, and retailer of architectural andindustrial coatings; Johns Manville, a leading manufacturer of insulation andbuilding products; and Business Wire, the leading global distributor ofcorporate news, multimedia, and regulatory filings. Berkshire Hathaway holdsinvestments in companies as well as whole companies.

The founder and chairman Warren Buffet (known as the Oracle of Omaha) and thecompany Berkshire Hathaway are legendary. Berkshire Hathaway has posted a 20.2percent compound annual return since 1965, outperforming the S&P 500 by 10.8percent over the same period.

The approach to M&A is buy and hold; sell only if necessary:

Regardless of price, we have no interest at all in selling any good businessesthat Berkshire owns. We are also very reluctant to sell sub-par businesses aslong as we expect them to generate at least some cash and as long as we feelgood about their managers and labor relations.

The corporate center's role as controller is reflected in its acquisitioncriteria, as stated in the 2009 annual report:

We are eager to hear from principals or their representatives aboutbusinesses that meet all of the following criteria:

1. Large purchases (at least $75 million of pre-tax earnings unless the businesswill fit into one of our existing units)

2. Demonstrated consistent earning power (future projections are of no interestto us, nor are "turnaround" situations)

3. Businesses earning good returns on equity while employing little or no debt

4. Management in place (we can't supply it)

5. Simple businesses (if there's lots of technology, we won't understand it)

6. An offering price (we don't want to waste our time or that of the seller bytalking, even preliminarily, about a transaction when price is unknown)

While the foregoing criteria filter out some industries, Berkshire Hathaway'sholdings nevertheless cover a wide breadth—financial services, railroads,manufacturing, media, and so forth.

The development of CPPIB, founded in 1997, makes for a good illustration of apublic sector portfolio for which the parent is in a controller role. On itscorporate website, the CPPIB sets out its role and risk tolerance:

The CPP Investment Board is a professional investment management organizationbased in Toronto. Our purpose is to invest the assets of the Canada Pension Planin a way that maximizes returns without undue risk of loss. The CPP Fund was$127.6 billion at the end of 2010. Canada's Chief Actuary estimates that CPPcontributions will exceed annual benefits paid through to the end of 2021.Thereafter a portion of the CPP Fund's investment income would be needed to helppay CPP benefits.

The latter point clearly identifies obligations that imply a lower risktolerance than typical private sector funds.

The mandate is set out in legislation:

* To invest in the best interests of CPP contributors and beneficiaries

* To maximize long-term investment returns without undue risk, taking intoaccount the factors that may affect the funding of the Canada Pension Plan andits ability to meet its financial obligations

* To provide cash management services to the Canada Pension Plan so that theycan pay benefits.

The CPP Investment Board cannot conduct any business or activity that isinconsistent with these objectives.

Initially managed entirely through external fund managers, CPPIB has graduallydeveloped deep asset selection skills in house, sector by sector. For each ofthe industry sectors in which CPPIB chooses to hold assets, finance expertisespecific to the sector has been hired from industry or from the investmentcommunity. The sector team then seeks asset classes, regions, and eventuallyspecific targets that are either undervalued or show significant potential forgrowth.

Although CPPIB has participated in many major acquisitions, it has usuallysyndicated large acquisitions so that the assessment, accountability, andexposure are shared by other capable investment managers. For example, their bidfor BCE, a legacy Bell company, in 2008 was as the leader of a consortium thatalso included Caisse de dépôt et placement du Québec, the Public Sector PensionInvestment Board, and seasoned buyout firm Kohlberg Kravis Roberts & Co. (Theconsortium was ultimately outbid by a $35.2 billion offer from another pensionfund, this one led by the Ontario Teachers' Pension Plan. Following a series oflegal rulings the deal was abandoned.)

However, CPPIB does own majority interest in numerous real estate holdings andin 2010 made its first large-scale investment as the sole investor with theacquisition of Macquarie Communications Infrastructure Group.

The large pension funds are a major force in the acquisition market. Companieslike CPPIB and CALPERS (California Public Employees' Retirement System) have anendless supply of funds and are in a relentless search for safe and attractiveinvestments. The sheer size of these funds makes them formidable competitorsdomestically and internationally.

There are, of course, many smaller public and private holding companies thatfall into this category. There are differences in the risk-return profile ofthese companies and the focus of their investments by size, industry, andgeography, for example. However, in each case they aim to deliver a return totheir shareholders through superior selection of assets, as opposed to superiormanagement. The role of the parent company is to buy, hold, and sell assets, sothe strategy of the company is de facto its M&A strategy, and the role ofacquisitions and divestitures is fundamental to value creation. The strategy ineach case involves the selection of the sectors, the markets, and ultimately thecompanies that will deliver superior returns at a defined level of risk.

Note that virtually all of these companies list among their acquisition criteriathe quality of the management of the target company. In other words, they arechoosing good management because they choose not to manage. This is the primarydistinction of the strategies of portfolio companies in the controller role.

What is the role of M&A if the parent is in the "coach" role?

The parent in the coach role uses M&A to buy, develop, or sell.This second type of holding company is also diversified and holds each assetseparate. However, the coach seeks to add value directly through its ownership.General Electric best illustrates this type of portfolio company. Like the firstgroup, coaches seek good management. However, GE fully intends to add value toacquired companies through its management.

Three examples serve to illustrate the coach role in the case of GE. First isthe legendary management training. The GE Way, as it is called, is a system ofmanagement development that includes training in the company's own ManagementDevelopment Institute, rotating through many jobs, and teaching a range ofproductivity tools. GE's leaders are so valued that, after Jack Welch'sretirement, the potential successors that didn't get the top job were floodedwith offers to go elsewhere.

Second, the spread of productivity tools at GE, best illustrated by Six Sigma,shows the coach at work. GE began moving toward a focus on quality in the late1980s with the GE Work-Out, a high-involvement review of work practices that cutthrough bureaucracy to find better ways of operating. This created an openenvironment in which Six Sigma could be highly effective. Six Sigma is focusedon quality: to achieve Six Sigma quality, a process must produce no more than3.4 defects per million opportunities, where an "opportunity" is defined as achance for nonconformance, or not meeting the required specifications.

GE's company website describes the parent company's role with respect to SixSigma:

Six Sigma is a vision we strive toward and a philosophy that is part of ourbusiness culture.... Ensuring consistent, predictable processes to Six Sigma, inturn, is embedding quality thinking—process thinking—across everylevel and in every operation of our Company around the globe.

Finally, under Jack Welch, GE adopted the portfolio development strategy ofgrowing each holding to be first or second in its industry or GE would exit.This is based on a belief that industry leaders have market advantages throughbrand strength and cost advantages through scale. GE has acquired companiesbelow this threshold but seeks to build an industry leader position over time.As current CEO Jeff Immelt said of the 2007 acquisition of Smiths Aerospace:

Smiths Aerospace is a world-class business and a great extension of our Aviationbusiness. GE and Smiths fit together well because our product offerings arecomplementary, and because we have similar customers and deep domain expertisein this industry.... With this buy, GE Aviation brings a number of associatedmonitoring and component systems in-house, strengthening its control over allaspects of their engines and also gaining a premium position.... This is what GEAviation President and CEO Scott Donnelly means when he talks about "greaterproduct scope and value to our customers.

(Continues...)

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Edition details

• Publisher: McGraw Hill
• Publication date: 2011
• Language: English
• ISBN 10: 0071756213
• ISBN 13: 9780071756211
• Binding: Hardcover
• Edition number: 1
• Number of pages: 368