m&a strategy performance vs. strategic intent ... stelco, monitor, ... marketing & sales cut...

Lessons from Consolidating Industries

M&A Strategy

Ken Smith Dundee Associates Limited [email protected] 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

2 Dundee Associates Limited

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



�  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

Dundee Associates Limited 4

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


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?)


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)


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


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


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


Make the company as valuable as it can be


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

Dundee Associates Limited






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


4. How to be a smart buyer & beat the odds


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







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


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


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%


�  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


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


But don’t over-rely on advisors; success or failure of the program is on you!


�  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 [email protected] 416-662-7700

m&a strategy performance vs. strategic intent ... stelco, monitor, ... marketing & sales cut...

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