m&a strategy performance vs. strategic intent ... stelco, monitor, ... marketing & sales cut...
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Lessons from Consolidating Industries
M&A Strategy
Ken Smith Dundee Associates Limited KenSmith@DundeeStrategy.com 416-662-7700
Common drivers of industry consolidation
Disruptive technologies
De/Re-regulation
Competitive set redefined
New bases of competitive advantage; new industries
Ever changing scope for value creation
Competitive scale and scope redefined
Key Market Changes…. … Driving Industry Restructuring
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Restructuring spreads upstream/downstream
Players affected
Impact Examples
Suppliers Reduced supplier power; changed customer requirements
Nuclear component manufacturing
Competitors Competitive scale or scope redefined
US banks from state to national/international
Customers Change in buyer power/cost to serve/alternatives
Need for telecom providers to unify global platforms
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Lessons from Consolidating Industries
� Sellers usually create value for their shareholders
� Buyers usually destroy value for their shareholders
However:
� The biggest losers are the naïve sellers
� The biggest winners are the smart buyers
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Agenda
1. Why sellers usually create value
2. Why buyers usually destroy value (it’s not what you think)
3. How to avoid being a naïve seller
4. How to be a smart buyer and beat the odds
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1. Why sellers usually create value
Public companies
� Shareholders won’t sell without a premium over market
Private companies (including crown entities)
� It’s the owners choice to sell or not
� The rational owner will seek more than the “as is” DCF value (else why sell?)
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Price Premium vs. Buyer Performance
2. Why buyers usually destroy value: – Price is not the most important factor
Source: The Art of M&A Strategy 7 Dundee Associates Limited
All deals are high risk for buyers – about half fail to create value for shareholders
42%
52% 54%
US Europe Canada
Post-Deal Buyer Performance (% outperforming individual industry index on 3-year total return)
Source: The Art of M&A Strategy 8 Dundee Associates Limited
Consolidation driven deals fail more often than growth plays
50
64
* NA: N=4 Unrelated Diversification Deals, Canada Source: Dealogic, Bloomberg, Hoovers
US Europe Canada
36
48
33
49
70
25N/A*
Consolidation
Related Diversification
Unrelated Diversification
50 64
Buyer Performance vs. Strategic Intent (% outperforming industry 3-year total returns)
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Why Consolidation plays fail most often
� Potential cost savings are transparent
� Competitive M&A markets drive prices to “fair value” including the cost savings
� It is always harder, requires more investment and takes longer than planned to achieve the cost savings
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Don’t be a Holdout:
� Rare cases – find defendable niche; e.g. specialty paper companies, Blackberry?
� Usual case – ultimately sell; e.g. Inco, Alcan once leaders could not compete in mining consolidation end game
� Worst case – become an unattractive target in an indefensible niche: Stelco, Monitor, Blackberry?
3. How to avoid being a naïve seller
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Even sellers need to be proactive
M&A strategy for sellers:
� Know how value will be created in the consolidation
� Make your company as valuable as it can be
� Find the buyers that would value your business most favourably
� Put the governance and advisors in place to make it happen
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Make the company as valuable as it can be
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1. Current market value
2. DCF value “as is”
3. Value with Internal improvements
4. Value with improvements & disposals
5. Value with improvements, disposals & growth Restructuring
Pentagon
Don’t leave the value gap for others
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Perception gap – know the value
Performance gap – perform
to potential
Skills gap – sell assets
worth more to others
Growth gap – pursue growth opportunities
Total gap – keep as much
for your shareholders
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1. Current market value
2. DCF value “as is”
3. Value with Internal improvements
4. Value with improvements & disposals
5. Value with improvements, disposals & growth Restructuring
Pentagon
Prioritize buyers to approach
Partner Characteristics • Performance • Quality of
management
• Product/market focus
Value Creation Potential • Fit with M&A strategy • Restructuring potential • Synergies between
companies
Highest
Highest Lowest
Lowest
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4. How to be a smart buyer & beat the odds
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Don’t Do • Be left behind • Plan to acquire better
performance • Fear the big guys • Think you can do it
alone
• Get started • Know all the sources
of value • Build the team –
board, management, advisors
• Build momentum and skills as you go
Make the company as valuable as it can be - Builds capabilities & capacity for M&A
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1. Current market value
2. DCF value “as is”
3. Value with Internal improvements
4. Value with improvements & disposals
5. Value with improvements, disposals & growth Restructuring
Pentagon
Four principal sources of value in M&A
Source of value
Definition Application
Managing Differently
Value derived without integration
The main source of value of PE companies
Cost Synergies
Derived from scale economies
Like businesses with scalable functions
Revenue Growth
Derived from new revenue due to merger
One company expands product market through other’s channels
Strategic Options
Merger creates new (but uncertain) opportunities
E.g., ability to do next deal based on scale economies or skills from the last one
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Value chain
Consolidation Benefits
Examples Issues/risks
R&D Project rationalization/diversification
Pharma; Technology
Culture integration
Operations Operations consolidation; Sourcing clout;
Banking; Manufactur-ing
Benefit transparency; time & cost
Marketing & Sales
Cut redundant channels; Pricing
Consumer goods
Customer attrition; Lower pricing
Administration & back-office
Consolidate management; shared services
Mergers of similar businesses
Benefit transparency; Time & cost
Source: The Art of M&A Strategy, Smith & Lajoux 19
Cost synergies along the value chain
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Develop competencies throughout the M&A Process
M&A
Strategy Deal
Development Post-deal
Implementation
Key Steps
8. Transition to operational post-deal structure
9. Implementation of value creation measures
10. Learning for next deal
Key Steps
4. Relationship development
5. Deal logic, valuation, IOI
6. Financing, pricing, LOI
7. Due diligence, negotiations, close
Key Steps
1. M&A strategy formulation
2. Sources of value & Risk; Screening Criteria
3. Candidate Search & Screen
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Post-deal skills & discipline most important
Typical Post-Acquisition Implementation Results (% of proposed value)
Actions taken; synergies realized
Actions ill-conceived or failed
Actions atrophied;
Potential value ignored or forgotten
15% 55%
30%
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� Duty of care demands much of directors in M&A � High stakes involved � The complexity of strategy, finance, legal, and
operational issues � Extends from strategy considerations to post-
deal implementation risks
� Rethink board composition and role � Recruit required skills & experience � Get the board engaged in M&A strategy,
relationship development, deal oversight
Build & leverage your board
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Develop advisor team
M&A
Strategy Deal
Development Post-deal
Implementation
Typical advisors
• Management consultants
Typical advisors
• Facilitators
• Investment banks
• Management consultants
• Lawyers & auditors
Typical advisors
• Strategy consultants
• Investment banks
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But don’t over-rely on advisors; success or failure of the program is on you!
Lessons from Consolidating Industries
� Sellers usually create value for their shareholders
� Buyers usually destroy value for shareholders
However:
� The biggest losers are the naïve sellers
� The biggest winners are the smart buyers
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Questions? Ken Smith Dundee Associates Limited KenSmith@DundeeStrategy.com 416-662-7700
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