I want to tell you a story
There are five dimensions along which an acquisition or a merger can create value for the firm driving the deal. Unfortunately, they also tend to be the levers through which value is most often destroyed. Addressed properly, these are powerful areas in which to focus the analysis that will make the deal decision a good one.
- Strategic Fit
- The style & depth of the integration
- Managing the acquired company
- Impact on the core business
They can corrupt the deal because planning the first two is often to the detriment of the second three.
Why is this, and what is the tension?
Equity Story or Equity Impact?
Think of a deal as having two phases; the "Equity Story" and the "Equity Impact".
Markets and shareholders regard most major deals with scepticism; we've all seen the research that shows that most deals end up destroying value. So the default position is "Guilty until proven innocent". CEO's know this, and so focus their initial energies on selling the deal to analysts and shareholders - the "equity story". Typically this is a focus on the high level strategic fit, while giving some examples of hard cash synergies that might be available.
Fair enough. But problems occur because so much executive attention is placed on "selling the deal", when the focus should be on how best to manage the acquired or merged entity from the day after the deal is done; ie when real value is created - the "Equity Impact". Some would argue that Iraq has fallen - tragically- foul of this tension: planning to win the war and/or planning long-term reconstruction. Was too much of the CEO's attention in this case on selling the "Equity Story" up front?
Classic "Equity Impact" areas that are overlooked - or given best cursory treatment as the deal is being prepared and negotiated are:
- How quickly will integration happen, how deep do we want it to go?
- Can we tolerate a temporary dip in results if the preferred integration style involves significant structural and managerial change?
- How do we keep our eye on the ball on results in the core business as we focus on integrating the new entity? How do we avoid a resource drain arising from that focus?