Corporate acquirers pursue a different strategy for building their acquisition teams. Unlike financial buyers, they tend to hire people with less deal-making experience, preferring to develop their own talent. Corporate investment professionals generally possess fewer advanced degrees and come from less prestigious schools. They are paid significantly less than their counterparts at financial firms.
Unlike financial buyers, where both senior and junior staff evaluate the desirability of an acquisition, corporate buyers typically have senior executives make those decisions. Staff associates are limited to structuring the deal, negotiating it, and working out legal and accounting issues.
The prospect of fast-track promotion serves as the key motivator for corporate investment professionals, rather than the decision-making autonomy and financial rewards offered by financial buyers. Do corporate acquirers lose anything by not hiring the same type of people as financial buyers do?
Many companies today find themselves with a surplus of cash and a shortage of places to use it profitably. We believe that most companies can benefit from the nonsynergistic approach to acquisitions we have described.
However, cash-rich companies should consider carefully the magnitude of change that will be required. This approach is most suited to those companies that already have the right frame of mind—those that are entrepreneurial and growth oriented and that already follow many of our key operating principles.
Most likely such companies are currently running highly autonomous operating units, sometimes with separate legal structures, albeit with close ties to the parent corporation. Here most changes will be evolutionary rather than revolutionary and will be geared to bringing acquisition and management techniques in line with best practices.
Companies thinking of developing in-house acquisition capabilities will need to screen potential acquisitions, structure sophisticated deals, and monitor portfolio companies effectively. In addition, they will need to develop individualized performance-based evaluation and compensation systems.
Specifically, we recommend that headquarters allow each subsidiary to pursue its own long-range strategy, have a separate management compensation plan, and pursue acquisitions in its main line of business. Nonsynergistic acquisitions and spin-offs, however, should be managed by the parent company, as should selection and removal of high-level subsidiary managers. Many multibusiness or single operating companies, especially those that are highly centralized or have strong corporate cultures, would find this approach the most appropriate for them.
Companies that wish to copy the operating practices of successful acquirers must be confident that they have or can find the skills necessary to run an independent acquisition program within the guidelines suggested here.
At various times, some public companies, including General Electric Company and Hanson Trust, have set up or spun off operations to allow for the autonomy and flexibility needed to invest in businesses outside their core businesses. At Chemical Bank, Chemical Venture Partners was established as an autonomously managed partnership, yet the bank is the only limited partner and the employees are Chemical Bank employees. A company without an experienced team of advisers can hire outside assistance.
If a company uses investment bankers, for example, it must realize that the way deal fees are structured makes completing a transaction the highest priority of such advisers. The risk: overpayment on price, hurried due diligence, overly simplistic contracts, and little premerger planning. Another option exists for those whose corporate climate is suited to partnerships.
A company wishing to make nonsynergistic acquisitions can benefit from a partnership with a financial buyer experienced in nonsynergistic deals. For example, Oak Industries, a manufacturer of consumer components, formed a successful partnership with Bain Capital in to acquire Gilbert Engineering, a specialty-connector manufacturer for cable television. Our respondents found that they did not have to stay in their core businesses but could grow within their field of knowledge.
Any CEO who wants to implement our guidelines in his or her own company must ask, Am I confident that I can buy into new businesses and generate maximum returns from my investment dollars? Ultimately, for a company to become a successful acquirer, executives must think in ways that are unorthodox and uncomfortable to them. Each of the successful acquirers in our study made purchases where others failed to discern a path to success. Yet the acquirers in our survey did succeed in exporting their knowledge to new businesses.
It really means a company should grow within its field of knowledge. Our sample of acquirers did just that. William F. Long and David J. Margaret M. Blair Washington, D. When one company takes over another and establishes itself as the new owner, the purchase is called an acquisition. On the other hand, a merger describes two firms, of approximately the same size, that join forces to move forward as a single new entity, rather than remain separately owned and operated.
This action is known as a merger of equals. Case in point: Both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. Both companies' stocks were surrendered, and new company stock was issued in its place. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. Unfriendly or hostile takeover deals, in which target companies do not wish to be purchased, are always regarded as acquisitions.
A deal can be classified as a merger or an acquisition based on whether the acquisition is friendly or hostile and how it is announced. In other words, the difference lies in how the deal is communicated to the target company's board of directors , employees, and shareholders. In a merger, the boards of directors for two companies approve the combination and seek shareholders' approval.
For example, in , a merger deal occurred between the Digital Equipment Corporation and Compaq, whereby Compaq absorbed the Digital Equipment Corporation.
Compaq later merged with Hewlett-Packard in Compaq's pre-merger ticker symbol was CPQ. In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or alter its organizational structure. An example of this type of transaction is Manulife Financial Corporation's acquisition of John Hancock Financial Services, wherein both companies preserved their names and organizational structures.
Consolidation creates a new company by combining core businesses and abandoning the old corporate structures. Stockholders of both companies must approve the consolidation, and subsequent to the approval, receive common equity shares in the new firm.
For example, in , Citicorp and Travelers Insurance Group announced a consolidation, which resulted in Citigroup. In a tender offer, one company offers to purchase the outstanding stock of the other firm at a specific price rather than the market price.
The acquiring company communicates the offer directly to the other company's shareholders, bypassing the management and board of directors. Though the acquiring company may continue to exist—especially if there are certain dissenting shareholders—most tender offers result in mergers. In an acquisition of assets, one company directly acquires the assets of another company. The company whose assets are being acquired must obtain approval from its shareholders.
The purchase of assets is typical during bankruptcy proceedings, wherein other companies bid for various assets of the bankrupt company, which is liquidated upon the final transfer of assets to the acquiring firms. In a management acquisition, also known as a management-led buyout MBO , a company's executives purchase a controlling stake in another company, taking it private.
These former executives often partner with a financier or former corporate officers in an effort to help fund a transaction. For example, in , Dell Corporation announced that it was acquired by its founder, Michael Dell. Mergers can be structured in a number of different ways, based on the relationship between the two companies involved in the deal:. Mergers may also be distinguished by following two financing methods, each with its own ramifications for investors.
As the name suggests, this kind of merger occurs when one company purchases another company. The purchase is made with cash or through the issue of some kind of debt instrument. The sale is taxable, which attracts the acquiring companies, who enjoy the tax benefits. For those opportunities that seem to be feasible, a preliminary request is address the company for additional information. This additional information should be used to further evaluate the potential acquisition.
Normally, the financial statements are examined without prejudice to others. First offer, normally non-binding but usually setting out the guidelines for the transaction. Once the initial offer is submitted, the companies start the negotiations in a more detailed manner. Due Diligence is a comprehensive process that begins once the LOI has been accepted.
The objective is to confirm or correct the evaluation that the acquirer has made on the company to be acquired. Transformational mergers are rare, however, because the circumstances have to be just right, and the management team needs to execute the strategy well.
Transformational mergers can best be described by example. But this merger was much more than a simple combination of businesses: under the leadership of the new CEO, Daniel Vasella, Ciba-Geigy and Sandoz were transformed into an entirely new company.
In every area, there was no automatic choice for either the Ciba or the Sandoz way of doing things; instead, the organization made a systematic effort to find the best way. Across all departments and management layers, Novartis created a strong performance-oriented culture supported by shifting from a seniority- to a performance-based compensation system for managers.
In our experience, however, such opportunities are rare and relatively small. Nonetheless, although market values revert to intrinsic values over longer periods, there can be brief moments when the two fall out of alignment. Markets, for example, sometimes overreact to negative news, such as a criminal investigation of an executive or the failure of a single product in a portfolio with many strong ones.
Such moments are less rare in cyclical industries, where assets are often undervalued at the bottom of a cycle. To gain control of a target, acquirers must pay its shareholders a premium over the current market value. If several companies evaluate a given target and all identify roughly the same potential synergies, the pursuer that overestimates them most will offer the highest price. Since it is based on an overestimation of the value to be created, the winner pays too much—and is ultimately a loser.
Since market values can sometimes deviate from intrinsic ones, management must also beware the possibility that markets may be overvaluing a potential acquisition. Consider the stock market bubble during the late s. Companies that merged with or acquired technology, media, or telecommunications businesses saw their share prices plummet when the market reverted to earlier levels. If and when prices are artificially high, large improvements are necessary to justify an acquisition, even when the target can be purchased at no premium to market value.
By focusing on the types of acquisition strategies that have created value for acquirers in the past, managers can make it more likely that their acquisitions will create value for their shareholders. Never miss an insight. We'll email you when new articles are published on this topic.
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