Five M&A Flashing Lights

With global M&A passing the US$3 trillion mark, as reported by the Wall Street Journal last week, and low growth sectors such as insurance and gaming incurring an unprecedented level of recent activity, commentators try to out do each other to explain the rationale – “insipid organic growth”, the dreaded “FOMO” (fear of missing out), “optimum scale” and “diversity of earnings”. Yet, are we in danger of trying to tie the “dots” together in cases that are highly situational and ignoring the more insightful indicators?

After all every business has a unique “past”, and a preferred way of applying their people’s talented to transform their “unique” set of clients’ futures. To put it simply, no two companies provide exactly the same value to their clients or are valued the same by external investors. Hence trying to extrapolate one set or executives’ reasoning to pursue M&A over organic growth or a strategic alliance is fraught with generalisations and danger. Yet markets routinely “mark up” listed companies and “talk up” others in the distinct belief that their situations are exactly the same, different management teams will act like lemmings to keep their shareholders happy and investors will “go shopping” at the same time for the same target. There is very little hard evidence or strong anecdotal evidence to show that this is true. Indeed in cases, where you might argue I am wrong, there is a body of evidence to show many of those deals were value dilutive AOL-TimeWarner, MySpace-News Corp and RBS-ABN Amro.

I would suggest investors and commentators would be better served applying the following logic:

1. Quality of Management (QoM): is there a discernible change (positive or negative) in the capability of management to achieve its’ strategic goals (capital allocation, make good people decisions, embrace innovation and implement business strategy), where a merger, acquisition or divestiture would demonstrably create enhanced value for the firm’s shareholders?

2. Quality of Employees (QoE): is there a discernible change (positive or negative) in the capability of the firm’s employees to achieve its’ strategic goals, where a merger, acquisition or divestiture would demonstrably create enhanced value for the firm’s shareholders?

3. Level of Uncertainty (LoU): is there a discernible change (positive or negative) in the the level of uncertainty around management and its’ employees capability to accomplish its’ strategic goals, where a merger, acquisition or divestiture would demonstrably create enhanced value for the firm’s shareholders?

4. Competition (C): is there a discernible change (positive or negative) in the competitive threat level and the probable impact on management and its’ employees accomplishing its’ strategic goals, where a merger, acquisition or divestiture would demonstrably create enhanced value for the firm’s shareholders?

5. Future Confidence (FC): combined, do the discernible changes in the quality of the firm’s management (QoM) and employees (QoE) today relative to the level of uncertainty within the business (LoU) and the external competitive threat level (C), indicate a merger, acquisition or divestiture would demonstrably create a more impressive future and provide greater peace of mind for the firm’s shareholders?

If you cannot categorically say “YES” to the above, in all likelihood you will be rushing to a judgement that is ill-informed or a deal that is carrying excessive risk.

© James Berkeley 2015. All Rights Reserved.

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