Читать книгу Semi-Organic Growth - Geis George T. - Страница 8

M&A success rates for corporations are generally considered poor, although just how poor has been the subject of some disagreement. Some studies report the rate at which acquisitions fail to create value range to be 40 to 60 percent, while others assert a failure rate within an even higher range of 70 to 90 percent.8

Abstracting from a wide range of studies, Robert Bruner concluded: “The buyer in M&A transactions must prepare to be disappointed. The distribution of announcement returns is wide and the mean close to zero. There is no free lunch.”9 (Announcement returns involve event studies that examine abnormal returns to shareholders in the period of time surrounding transactions.) Bruner went on to further assert that negative performance post-merger is troubling, but suggested that more rigorous testing is necessary to draw firm conclusions about the returns after an acquisition is completed.

M&A activity performance has been studied extensively, with various schools of thought emerging.10 First, the financial economic school measures value creation and stock market returns around the time of a transaction. These studies are prominent in academic thinking, but are of limited use when the acquirer is private or when the acquirer engages in a small transaction (or series of small transactions) relative to its market capitalization. And such small acquisitions have long dominated for Google and other leading technology companies, as reflected in the practice known as acqui-hiring. Acqui-hiring, in general, involves the process of acquiring a company to recruit its talent, with or without being interested in the target's technology, products, and services. We'll examine various forms of the acqui-hiring phenomenon in Chapter 13.

A second school of thought involves evaluating the effects of strategic relatedness on M&A performance. Traditionally, this line of thought has argued that acquisitions enjoyed a higher likelihood of success if they were in some way related to the acquirer's current products or markets. Significant evidence has been presented that acquisitions involving unrelated diversification commonly result in lower financial returns than nondiversifying deals.11 Peter Lynch, well known as a mutual fund investor, went so far as to coin the term diworsification, implying that an organization that diversifies too widely risks destroying its original business, given the management energy and firm resources that are diverted from core activities.

The concept of strategic relatedness is highly relevant to our study of Google's M&A activity. While many of the company's targets have been related to its core ad-tech activities, other deals, such as Google's $3.2 billion acquisition of Nest Labs in 2014, offering smart home products such as smart thermostats and smoke alarms, might be considered as taking Google afield from its advertising center.

Not all companies that have used M&A to diversify have failed in this effort. For example, Berkshire Hathaway has been a notable success. We'll evaluate the likely performance impact of Google's diversification deals as we explore its expanding market footprint.

A third school of thought used to evaluate M&A effectiveness involves organizational behavior. Here, a host of questions are asked. What role do organizational variables such as acquisition experience play in M&A results? How can cultural distance between two companies be measured, and what is the impact of cultural distance on M&A success? What are the styles of post-acquisition integration, and how quickly and to what degree should the target be integrated?

As mentioned earlier, conventional wisdom argues for rapid integration. After all, the sooner positive cash flow from cost or revenue synergies is realized, the higher the present value to the acquirer. However, consider Facebook's $2 billion acquisition of Oculus, a developer of virtual reality technology. Immediately following the announcement of the acquisition in 2014, Oculus founder Palmer Luckey was astounded at the outpouring of negativity received by the company and stunned that some employees had even received death threats. Luckey was forced to respond to dozens of questions involving privacy concerns now that his company would be owned by Facebook. Rapid integration was not likely to work well for this deal!

As we've illustrated, Google employs a range of integration speeds and styles in its acquisition program. And the company continues to learn from integration successes and failures as it attempts to build a strategic core competency in the organizational behavior domain. In order to succeed, the organizational behavior practices of any acquirer must involve active knowledge management.

Target Financial Performance

Overall M&A target performance has varied across the decades. For example, average abnormal returns (above what an investor would expect to return given comparable risk level) averaged 25.1 percent during the 2000s, up from 18.5 percent during the 1990s.12

Furthermore, in any given period, the range of premiums paid to acquire a company has a large variance. For example, Bloomberg reported a spread of premiums paid to shareholders of target firms for a sample of deals during the second quarter of 2013. Of these, 49 deals had premiums between 0 to 10 percent, 54 had premiums between 10 and 25 percent, 52 carried premiums between 25 and 50 percent, and 19 enjoyed premiums of 50 to 100 percent. Finally, 13 had hyper-premiums of greater than 100 percent.13

Also, the trend for premiums paid can be increasing or decreasing. In 2013, U.S. companies were paying on average a premium of only 19 percent above their target's trading price one week before the deal was announced.14 This reflected the lowest takeover premium since at least 1995, according to Dealogic. Given the uncertainty of macroeconomic conditions, executives and corporate boards were being cautious.

Nevertheless as suggested earlier, wide variance across deals in premiums typically occur, especially when the premiums paid to rapidly growing private high-tech companies are included. (Private company premiums are harder to measure than those associated with public companies, but are often based on the most recent private valuation.) Using another metric, WhatsApp's $19 billion price tag implied a multiple of approximately 100 times revenue and a huge premium over previous valuations.

It's not always possible to know the premium paid for an acquisition, For example, we'll see in Chapter 9 that Google discloses the valuation and terms for only a small number of its deals. Third parties provide estimates for a larger set of Google acquisitions.

The bottom line? M&A pays for almost all targets across industries. But in hot technology areas, the payoff can be off-the-charts.

Acquirer Financial Performance

As we've seen, classic research findings suggest that acquirers on average do not have much room for optimism, given that the distribution of announcement returns has a mean close to zero. Thus, a pressing question facing an acquirer is: How can my company do better than average?

More recent research involving large-scale samples provides a little more room for optimism. Abnormal returns to acquirer shareholders are modestly positive (about 1 percent) if large public company deals and deals involving stock-for-stock exchanges are filtered out.15

Post-merger returns typically analyze cash flow or operating profit over a period of time (typically three-to-five years) after an acquisition. However, there's a major problem with these analyses. The longer the period of study, the greater the likelihood that confounding factors (extraneous to the deal) impact financial performance.

In addition, it is not possible to analyze how the company would have performed had it passed up the acquisition. In an attempt to address this problem, some studies compare the performance of two similar companies, only one of which made an acquisition. But here again, confounding variables swamping the M&A dimension can enter into play.

Complexity in the M&A performance analysis is taken to an even higher level when a company is a serial acquirer or focuses on smaller acquisitions that are rounding errors in its market capitalization. Google is a prime example of such a company.

The bottom line is that research studies on acquirer performance face substantial methodological hurdles. With this caveat in mind, one study of studies analyzed 26 studies of post-merger performance, 14 of which showed a decline of operating returns, 7 showed positive (but not significant) returns, and 5 showed positive (statistically significant) returns.16 This is hardly a confident, conclusive picture of M&A performance results.

Numerous studies show acquirers of privately owned firms realize positive returns of 1.5 to 2.6 percent.17 Such higher returns are generally attributed to factors such as a limited number of bidders and the relative illiquidity of private companies, resulting in an associated liquidity discount. But such discounts may not apply to venture-backed companies that Google attempts to acquire – ventures where other deep-pocketed bidders may also be in pursuit. For example, reportedly both Apple and Facebook were interested in Waze's crowd-sourced traffic technology.

Some evidence exists that high-tech firms realize positive value by acquiring small, but related ventures to fill in gaps in their product offerings.18 This is one likely reason why successful high-tech companies persist in being very active deal makers. There will be more about this in our next chapter.

Several studies have shown that publicly traded acquirers using cash for transactions tend to do better long term than those that use stock.19 One rationale for this observation is that executives tend to use stock when they believe their shares are overvalued.20 Hence, it's not surprising that the acquirer's share price drops after the acquisition. (AOL's stock-for-stock merger with Time Warner is often cited as a classic example of this phenomenon.)

On the other hand, a company may genuinely believe its stock is an attractive currency (certainly not overvalued) and use the appeal of its shares to woo a target and close a deal. Consider Google's stock-for-stock acquisition of YouTube, where Google's shares were likely to have been regarded by both acquirer and target as a very desirable currency.

Acquisitions such as the Google purchase of YouTube argue against the superior acquirer performance when doing cash deals. Herd and McManus21 further support this argument in stating, “Historically, acquirer may have been keen to use equity to finance a deal when they've believed their equity was overvalued. But during the last decade, they've come to realize that equity is often more dear than cash in an era of plentiful and cheap credit.”

Given all of this, we can conclude that the motives for using equity in an M&A transaction vary across acquirers. Equity can be used when the purchaser feels its currency is Weimar-Republic hyperinflated. However, the use of equity may also signal a deal's importance if the acquirer is demonstrating to the target a willingness to use a tender that both believe has significant potential to appreciate.

When Berkshire Hathaway uses it stock, the company signals that it views the acquisition as having special value. As Warren Buffett quipped at a shareholders meeting about issuing stock in a transaction: “Charlie [Munger] and I like using stock about as much as preparing for a colonoscopy.”

Perhaps here's the key takeaway regarding M&A financial performance for acquirers. Average returns across all companies may not be all that exciting. But the real issue is, how does a company outperform these averages? How does a company move into the top quartile of performers? How does a company build a core strategic advantage via M&A? Throughout this book, we'll explore what we can learn about these questions from Google.