The standard explanation for failed M&A deals points to integration as the problem. It turns out that this is more of a problem for companies that are acquiring complementary businesses that they know quite well. That’s because integrating the new business isn’t entirely the story. …
Mergers and acquisitions are two of the most valuable tools a company can leverage. They’re important for building scale, improving performance and fueling long-term, profitable growth. However, approximately 80% of M&A deals fail. So, how can executives defy this statistic and successfully execute M&A against all odds?
At Walt Disney these days, the drama is on the screen—and not in the boardroom. Shareholders can thank Bob Iger for that. In a sector of oversized egos, the humble but high-performing CEO continued to model his unconventionally low-key leadership style through his succession plan, announced yesterday.
Under that plan, Bob Chapek, who runs Disney’s theme park business, will take over as CEO. Iger will stick around as executive chairman—with a focus on the creative side of the business—until the end of 2021.
I talked with Iger about the plan just hours after his announcement. “With assets in place, people and strategy it’s now on to the creative side,” he said. Having reached a performance peak with enterprise stability and triumphant innovation, Iger told me that this as the ideal time for a transition. “We’ve known [Chapek] for almost 30 years and knows us. He is decisive and very authentic with great internal reviews.”
Iger’s ambassadorial—rather than monarchial—approach to transition will likely prove to be the right one. Decades back I authored the first book on CEO exit challenges entitled The Hero’s Farewell (Oxford University Press). Sumner Redstone is emblematic of a type I’ve labeled “monarchs.” They only exit feet first — through a palace revolt or dying in office — and are commonly found in personality-infused businesses such as fashion, technology, media and, of course, Hollywood. Monarchs represent 5 to 6 percent of CEOs across all sectors, but in creative businesses and dynastic family enterprises, they’re closer to 25 percent.
Redstone occupied the throne at Viacom into his mid-90s. Louis B. Mayer (who also started with a New England theater chain) co-founded and lead MGM studios for nearly three decades—before being forced out in 1951. CBS visionary William Paley ran his media empire for more than 50 years and remained involved until his death (at age 89!) in 1990. Lew Wasserman built up MCA Universal out of a talent agency and ran it for roughly fifty years, until sidelined at age 82 by new owner Edgar Bronfman Jr. IMG founder Mark McCormack died at 72, with no clear successor.
The big problem with monarchs is they regularly dispense with those in the succession pipeline whom they see as threats. The palace intrigue that follows their exit imperils their primary mission — an immortal legacy.
That’s why others, such as Bill Gates of Microsoft and Andy Grove of Intel, have opted for the “ambassadorial” departure style, and built empires that outlive them. It isn’t easy—especially for creative founders. Ralph Lauren, Martha Stewart, Phil Knight of Nike, and initially Howard Schultz of Starbucks each left, but returned to battle when their successors slipped.
That seems unlikely with Iger, who already put off succession starting in 2016 to tackle a spate of game-changing moves to remake the company for a digital century. Late this fall, Disney’s stock surged to record highs with the staggeringly successful launch of Disney+, their own entry into the direct-to-consumer world of online streaming. They revealed 10 million immediate subscribers, blunting threats from Netflix and Amazon.
Iger’s purchase and smooth integration of 21st Century Fox followed his earlier acquisition and smooth integration of Lucasfilm, Pixar and Marvel—all while reviving Disney’s own legendary studio and theme parks. Eleven of last year’s top 12 films were Disney’s. The Avengers’ $1 billion opening broke attendance record in 18 countries.
Total shareholder return during Iger’s tenure is 578 percent, compared with 140 percent for the S&P 500. All this while adding 70,000 jobs.
Now, says Iger, it’s time to try something new as executive chairman (“I am a great teacher and will have Chapek by my side for the big creative decisions”) and then, sometime in 2021, he’ll be “liberated.” His model for an exit was not a fellow media mogul, but baseball star Sandy Koufax. As for travel plans, that’s easy: “Disneyland.” And some other things.
I’ve seen my share of acquisitions and had the good fortune to have led a few as well as teaming with others to do the same. While I can’t take credit for the expression, someone once wrote that when romancing a company you seek to acquire, you look for all the reasons it will be a perfect marriage and then during due diligence, you look for all the reasons it won’t. This is about the latter.
Accountants and attorneys play an invaluable role in protecting a buyer, first in the due diligence phase and then in penning a final contract. Unfortunately, from what I’ve experienced and others have shared, buyers sometimes overlook a few extra steps either because of trust, expense or raw confidence. It’s easy to evaluate equipment and facilities being acquired and almost as easy to determine the quality and strategic importance of the customer base; what’s not so easy is uncovering undocumented practices and assessing the value of key management being asked to stay on.
From my archives, here are four of the more painful discoveries made along the way.
• “Hidden costs” – a manufacturing company was successfully acquired and the selling founder retired as part of the transaction. Two months after new ownership took control labor productivity dropped like a rock. It took a while, but eventually the new management team discovered that the previous owner would walk through the plant at month end and hand out crisp $50 bills. Once he was gone, and no one passed out cash at the end of the first month, the work slowdown began.
• “Past practice” – a successful acquirer had an awkward conversation with a major customer. Apparently there had been some verbal arrangements the previous ownership had made with the customer and the customer became concerned when those arrangements seemingly had been abandoned.
• “Background” – a sales executive was asked to continue with the acquiring company and offered an improved compensation agreement to do so. He eagerly signed on. Six months after the change of control, he was arrested for driving while intoxicated (DWI), while driving a company vehicle. Sadly, this was a second violation; he was sentenced to weekends in jail and his license was suspended for a year.
• “Foreground” – a CEO borrowed more than $1million from peers he knew through a professional organization to fund the acquisition of a much larger company than the one he managed. The target was in a dynamic market with some related technology—but barely breaking even. It didn’t take long; the combined entity began to bleed cash, to the point that its commercial lender put it into workout.
In the first case, an audit would not have found the practice of $50 cash bonuses; it might have found “disbursements” to the owner at month end, but there the trail would have gone cold. Persistent questioning of the CFO and the production manager about off balance sheet transactions, unrecorded perks and the like may have surfaced the practice.
This same approach may have yielded results in the second case – e.g., “is there anything we should know about special arrangements you have with specific customers?” At least here, if there was denial, there would be the potential to recover through escrows set up for such purposes.
The matter of the sales executive with the DWI is the most disturbing and yet, had the highest probability of being avoided. In my opinion, due diligence should always include comprehensive background checks of executives being invited to stay on under new ownership; to do so, their written consent is required. Had such a check been done here, the sales executive would not have been hired and possibly, the company not acquired.
As to the company put into workout, the due diligence process had accurately reported the acquisition’s condition and the associated risks. What the private lenders failed to do was comprehensively assess the skills of the acquiring CEO and his abilities (and plans) to manage an entity so much larger than his own.
We get one chance to look under the sheets, to find the flaws, to discover the unspoken practices and understand the true character of the leaders included in the acquisition. After that, we bear the brunt of what we missed. Turn every stone, persistently question many, not just one, and question again. Above all, if what you find sinks your probability of success, have the courage to walk.
By various measures, M&A activity in 2019 was not as high as in previous years, but the pattern of deals is revealing and, in some aspects, new. Many reflect industrial consolidation and digitization trends dating back decades. But there were also signs that the 2020s will usher in new trends in how we manage the power of technology. And we learned again that climate change is no joke, though we don’t know yet how businesses will respond. In time, business deals will reflect the transformation of our energy mix too.
Unlike the earth’s climate, the climate for business deals remained stubbornly unchanged in 2019 — or did it?
Business deals are both a lagging and a leading indicator of economic transformations. Some reflect past conditions; others signal emerging trends. A review of the past year’s most remarkable deals (and non-deals) can tell us where we have been and where we are going.
By various measures, M&A activity in 2019 was not as high as in previous years, but the pattern of deals is revealing and, in some aspects, new. Many of this year’s deals reflect industrial consolidation and digitization trends dating back decades. But there were also signs that the 2020s will usher in new trends in how we manage the power of technology. And we learned again that climate change is no joke, though we don’t know yet how businesses will respond. In time, business deals will reflect the transformation of our energy mix too.
Among the already established trends, Big Pharma this year continued to bulk up and smarten up. Since the 1990s, pharmaceutical companies have been consolidating to raise their bargaining power in the health care chain. They have also been hoovering up innovation from biotech startups. In 2019, Bristol-Myers Squibb acquired Celgene ($74 billion), Takeda acquired Shire ($62 billion), and Sanofi and Novartis both acquired companies in the $10 billion range. These deals do double duty — they bring new technologies to the big firms, and they also maintain a concentrated industry structure. At the same time, the big insurance mergers of yesteryear (CVS-Aetna and Cigna-Express Scripts) began the work of integration, though the jury is still out on their benefits for consumers.
Media and telecom companies also followed the well-established script to build market power. Three big mergers were finalized this year — Sprint and T Mobile ($26 billion), AT&T and Time Warner ($85 billion), and Disney and 21st Century Fox ($71 billion). Disney’s acquisitions in the last few years are fueling its aggressive offerings in streaming video. The streaming war between Disney, Netflix, Hulu, Amazon, Apple, and HBO had been brewing for a while, and is now being joined in full. This ecosystem will eventually lend itself to consolidation too, but we are not there yet. For now, it is a free-for-all to capture a new generation of media consumers moving off cable.
Industrial producers, too, played out a story that started a decade ago – the breakup of conglomerates. Dow broke itself up into three this year, as promised when it merged with DuPont two years ago. This two-step involved a merger to consolidate businesses, followed by spinoffs that enhanced focus in each business, while still maintaining their market power. In fact, the story of de-conglomeration was often two steps forward, one step backward. Danaher slimmed down only to bulk up again by buying General Electric’s biopharma unit ($21 billion). And GE, even after this sale, appears to be doubling down on its health business. In the aerospace and defense industry, United Technologies, which had broken itself into three, turned around and joined Raytheon in a merger of equals worth some $135 billion.
These were all big deals, but they were business-as-usual. What deals may be previews of the 2020s? In a curious way, the lack of certain kinds of deals is the biggest thing to watch.
Emerging trends in tech
There was renewed effort this year to contain the growth of tech. The idea that firms like Google, Facebook, and Amazon were getting too big and intrusive in our lives continued to gain ground in Washington. Google faced antitrust investigations in 50 states and the FTC head suggested it could pursue others. In mid-December, the FTC was reported to be considering an injunction against Facebook to stop it from integrating Instagram, WhatsApp, and Messenger – just in case the antitrust authorities decide later to break-up the company. These efforts may lead nowhere. But it would be surprising if the pressure didn’t cause big tech to shy away from large acquisitions. One large tech deal did close this year (IBM-Red Hat, $34 billion) and Salesforce acquired Tableau ($16 billion). But Apple, Google, and Amazon were relatively restrained, considering their hordes of cash — none of them spent more than $3 billion on a deal since 2017.
A related trend that gained ground in 2019 was the re-bordering of tech – the rise of a virtual wall between the Chinese and American spheres of influence in technology. Chinese investment in the United States dropped 90% in the last three years. The trade war started this, but the trend is fueled by a mutual suspicion between the countries’ elites and ruling regimes. Both sides believe that new industries such as artificial intelligence, cybersecurity, and social media are critical to national security and to the governance of society. In unprecedented fashion, the FCC banned Huawei from the U.S. market this year, citing data security concerns. Google already left China a decade ago over censorship. And anyway, Chinese companies dominate Chinese markets, and American firms, American markets. Technology firms famously enjoy network effects, but it looks like their networks will stop at the new border.
What do these old and new trends say about the transformation of our energy mix? Sadly, not much.
And yet, there was also trouble in the oil patch. Occidental acquired Anadarko ($38 billion), but the new company right away began to shed oil fields abroad to pay for the deal. And activist investor Carl Icahn is advocating for a reversal of this merger, arguing that it jeopardized the company’s value — this comes after he succeeded in helping scuttle the ill-fated merger of Fuji Film and Xerox. Occidental’s shareholders have not been happy, nor have shareholders of other oil companies: Exxon, Shell, and BP strained to pay dividends this year, and some are revaluing their assets in an environment of low prices and societal pressure. Aramco’s long awaited IPO did not help lift spirits of fossil fuel investors; its IPO valuation target was downgraded and it was listed only in the Riyadh market. Even so, it raised more money than any other IPO in history – a testament to the enduring power of oil.
The biggest deal news of the year was in fact not a deal at all, but a proposal for one. The proposal for a Green New Deal introduced in the U.S. Congress this year called for urgent government action to decarbonize our economy in a way that boosts employment and does not harm the weakest in society. This proposal in effect asks us to rethink what philosophers call the social contract between business, government, and society. That contract had already been cracked by the wealth and income gaps that have been widening since the 1980s. The threats of climate change have made this rethinking of the social contract even more urgent. No wonder, then, that in 2019 even the Business Roundtable proclaimed a new set of metrics for business that aims to balance the interests of shareholders and other stakeholders.
In 2019, we saw our planetary predicament more clearly than ever before. The business deals of the next decade will signal how we will respond. Some will reinforce existing habits, and more, one hopes, will transform our economy for the better.
Building a viable company from the ground up is challenging enough, but what if the business plan involves consolidating existing businesses into a new unified entity? This task presents a unique set of hurdles—but being aware of what is involved can help ensure the process goes smoothly, remains on plan and results in a strong, well-run organization focused on building shareholder value. Here are four key steps:
• Analyze the strengths of your existing assets. Before you can ever think about raising money, attracting investors and/or partners, or making acquisitions, you must first rigorously assess the core building blocks that you have on hand. This requires immersing yourself in the potential of your existing assets and establishing answers to a series of questions. Do these assets form the core of a sound operating model? Can they be grown organically in a way that will preserve their value? How easy will it be to integrate them with future acquisitions? Is the security structure conducive to bringing in new investors and raising money for current and future initiatives? When I opted to take the reins of a biotech company at the start of 2017 with a legacy portfolio of diabetes and immuno-oncology assets, medical devices and diagnostics, these questions were among the first that I took it upon myself to ask and answer. I determined there was a ripe opportunity to reconfigure the company and recast it into the mold of a unique managed services organization (MSO) with end-to-end solutions for patient centric care.
• Communicate your vision effectively. Once you’re convinced of the value of consolidating a number of organizations that provide a range of different products and/or services into a single entity, it is time to share your vision with others. To successfully achieve this goal, it is essential to communicate your vision to address the needs of all of your stakeholders. You must be able to tell an engaging story—one that will be easily understandable and that will capture the interest of the investment community. And second, you must ensure that those to whom you are speaking are in a position to help you realize your vision, either financially or logistically or both. Third, it is important to refine your message over time. Over the past three years, I have spoken to a large number of audiences to explain the advantages of building the kind of company that we have envisioned, a company that provides integrated end-to-end solutions from drug development to new healthcare delivery models designed for physicians and patients—and doing so has paid off handsomely.
• Consult with the experts. As in any endeavor with multiple moving parts, it is crucial to obtain as much guidance as possible along the way. This means creating and maintaining relationships with key players across the various business sectors that you are aiming to partner with and/or integrate into your company. Knowing the right people can require years or even decades of experience working in these sectors. Building up the level of trust between yourself and those in a position to help guide you along the path to success, is not something that can be realized overnight. But with planning and insight, those to whom you turn will appreciate your integrity and your vision. In my case, I am fortunate to have established ties with executives in the financial sector, the end-user healthcare sector and the pharma/medical device sector. Their collective insights and experiences have made it significantly easier for me to build up my company and help me shape the company in the ways I’ve envisioned.
• Execute, execute, execute. Once you’ve formulated your strategy, it’s time to start executing on that plan. Beginning the process will help to build confidence in the eyes of those in a position to help you. Conversely, if you stop executing—or if you lose sight of your vision—people will stop believing in you very quickly. When you keep up a steady pace of execution, you may just find that the quality of your acquisitions will steadily improve, and instead of having to woo potential partner companies, investors and other stakeholders, they may start to seek you out—because they want to be a part of the vision you created. A steady track record of execution can help ensure that your business is constantly growing to the next level. This is how it has transpired for my company; after bringing in an amazing team, we were able to articulate a vision, get a buy-in from all constituencies and embark on our acquisition strategy.
Following these steps isn’t a guarantee of success—but it can boost your odds. It can also be the difference between a company whose components don’t mesh well, and a smooth-running entity that provides needed products and services while generating a healthy long-term revenue stream.