M&A: What Asia's CFOs Can Learn From the West

by Paul Simpson, KPMG Agenda Magazine, 17 February 2012

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topics:
Management

tags:
Mergers and acquisition

Patrick Bateman, the anti-hero of American Psycho, Bret Easton Ellis’s cult novel, works in mergers and acquisitions on Wall Street or, as he jokingly calls them, “murders and executions”.

The gag is far from accidental. Ever since a group of wealthy American entrepreneurs, including oil magnate John D. Rockefeller, went on the acquisition trail in the late 19th century – earning collective infamy as the ‘robber barons’ – the media and public perception has been that the M&A business is driven by greed, self-aggrandizement and chicanery.

CEOs haven’t always helped their cause. For every Rupert Murdoch and Bill Gates, whose acquisitions seem driven by strategic vision, there are many other bosses – such as the late tycoon Robert Maxwell – who seem to live for the deal or use takeovers in a smoke-and-mirrors show designed to mask their business’s underlying underperformance.

Economic historians talk of five waves of acquisitions, starting with deals between monopolies in the 1980s and ending with the equity-driven deals of the 2000s that were fueled by globalization, deregulation and booming stock markets.

But two themes recur throughout: the varying attitude of governments (which have been supportive or hostile and almost every nuance in between), and a concern about whether these deals deliver value.

The last stock market bubble killed or stalled many deals. For Laurence Capron, The Paul Desmarais Chaired Professor of Partnership and Active Ownership at INSEAD Business School, that is no bad thing: “This is the perfect opportunity for companies to rethink their M&A strategy and the process they have been using to buy companies,” he says.

“M&A deals in past decades have, on average, destroyed value for the acquirer’s shareholders. Now is a good time to step back to better understand the market for corporate control.”

John Kelly, Head of Transaction Services at KPMG in the UK, echoes Capron’s call for boards to take a reality check: “In 2006 and early 2007, with cheap money and markets encouraging management to be aggressive, acquisitive companies were given the benefit of the doubt – even when they didn’t deserve it. Nobody was pointing out that, in many cases, the emperor had no clothes on.”

There is another way – as these eight steps to rethinking deal-making demonstrate.

One: Don’t start with the deal

With every acquisition in the balance until it’s completed, the temptation is not to risk wasting resources by deferring any study of how you will extract value from a deal until the last minute.

Yet most managers, analyzing their purchases in KPMG’s 2010 M&A study, wished they’d started their integration planning sooner. If the bidder doesn’t understand what and where value can be obtained, how can they be sure they are not paying over the odds? And how can they decide how best to unlock the value they acquire?

This planning process goes far beyond crunching data. The bidder needs to understand the mechanics of how synergies can be obtained, what cultural challenges they face and how compatible their IT and reporting systems are.

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