Clark and Mills, Masterminding the Deal

After a lengthy hiatus M& A seems to be back in fashion. So it’s time to take another look at the often rocky road that companies face when they contemplate acquiring or merging with another company. (Historical data show that “two-thirds or more of takeovers reduce the value of the acquiring company.”) Masterminding the Deal: Breakthroughs in M&A Strategy and Analysis by Peter J. Clark and Roger W. Mills (Kogan Page, 2013) is both a guidebook for corporate boards and executives and a research tool for investors.

The first step to M&A success is to get the merger valuation methodology right. The authors describe four methods: event studies, total shareholder return, value gap, and incremental value effect. None of these is a standalone guarantor of success; in fact, the authors recommend combining the last two discounted cash flow methods.

Value gap “reflects the commonsense notion that for a merger to be successful, post-merger improvements in the combined company—synergies—must exceed the [acquisition purchase premium] paid by the acquirer to secure control of that target.” (p. 92) As the poster child for what not to do, Hewlett-Packard paid stratospheric premiums for each of its three major acquisitions (3Par, Palm, and Autonomy) when Leo Apotheker was CEO.

Incremental value effect looks to the discounted cash flow-based “valuation of the two principals (acquirer and acquiree) on a standalone basis and combined, including consideration of both realizable synergies and a purchase premium adjustment in the latter.” (p. 108)

In their attempt to assess why some mergers succeed while most fail, the authors offer a ranking scheme by merger type. The most successful deals are made by bottom trawlers (87-92%). Then, in decreasing order of success, come bolt-ons, line extension equivalents, consolidation mature, multiple core related complementary, consolidation-emerging, single core related complementary, lynchpin strategic, and speculative strategic (15-20%). Speculative strategic deals, which prompt “a collective financial market response of ‘Is this a joke?’ have included the NatWest/Gleacher deal, Coca Cola’s purchase of film producer Columbia Pictures, AOL/Time Warner, eBay/Skype, and nearly every deal attempted by former Vivendi Universal chief executive officer Jean-Marie Messier.” (pp. 159-60)

More simply put, acquisitions fail for three key reasons. The acquirer could have selected the wrong target (Conseco/Green Tree, Quaker Oats/Snapple), paid too much for it (RBS Fortis/ABN Amro, AOL/Huffington Press), or poorly integrated it (AT&T/NCR, Terra Firma/EMI, Unum/Provident).

Although this book abounds in acronyms (fortunately there is a list of what they stand for at the back of the book), it also has some good turns of phrase, original and borrowed. For instance, banker-dealmakers, whose models depend on revenues from merger activity rather than merger success, are, in the words of Reggie Jackson, “the straw that stirs the drink.”

Masterminding the Deal may subscribe to the view that you can’t manage what you can’t measure, but it does not subject the reader to the nitty-gritty of measurement. It’s a book of principles, not an exercise in number-crunching. A book that more deal-chasers should read.