Inarticulate ramblings of a management consultant

the day to day experiences of a consultant operating in weird and wonderful client situations

Pray for some divine intervention – M&A may be coming back!

Whisper it quietly but it seems that the M&A market is finally returning to some very decent volumes again (http://ftalphaville.ft.com/2014/04/07/1821102/ma-is-back-ish/). No doubt the headline transactions will be the ones that everyone is focused on, not least because the old scourges of government intervention in the case of Alstom (or pure protectionism by another name) plus aggressive valuation in the case of Astra Zeneca are being played out in public. The pharmaceutical sector in particular seems to be buzzing at the moment.

It’s interesting how the approach to media with regard to what was once a highly secretive activity has changed. Companies and their advisers have worked out that far from maintaining a vail of silence, the ability to influence public opinion in their favour has a genuine impact in the chances of success. So we get this strange dichotomoy where when asked, the participants will deny all knowledge whilst encouraging their advisers to use whatever channels they can to generate a positive news story.

For the larger deals however, the situation remains the same. The average length of tenure for a CEO is now 3 years, the time taken to achieve any sort of return in these transactions is considerably longer than that, particularly in the regulated sectors where approval can take over a year to achieve given the number of jurisdictions where they operate. And don’t think that regulated only means financial services these days, there are many other sectors where tacit government approval is potentially required.

So we have a situation where the ultimate sponsor of a transaction is unlikely to be there when the post mortem begins. It’s interesting how the debate around bankers bonuses has shifted to making sure that these are not paid purely on the basis of one years performance but on the cumulative value or not that the individual has created over a longer period of time. In private equity this has been the case for a long time with the concept of carried interest and a realistic perspective which understands that out of 10 deals, 6 are likely to fail.

In the corporate world, the remuneration committee might suggest that in tying so much of a CEOs compensation to equity performance, there is in effect a similar dampening effect…but I’m not sure. Equity is a pretty brutal performance guide. No, the real measure needs to be based (in terms of deals) that of value created, whether it’s ROI (which one bank I know uses over a 2 year time horizon…tough but certainly maintains a focus), achievement of synergies, sustained and combined market share post completion of the transaction, performance against the initial business case. The reality is that unless we really tie reward and perception of good performance to figures which actually relate to specific deals, we will continue down the path of value destruction and obfuscation in terms of the truth around deals.

Categories: Complex transformation, Mergers & acquisitions, Post merger integration, Transformation

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2 replies

  1. Ben, some great insights that ring true from my experience. A suggestion for encouraging CEOs to be longer-term focused, is to assess the changes in operational risk exposure (ie. those resulting from the day-to-day running of their businesses, as opposed to specific transactional or credit related risks associated with the making of poor decisions). This is akin to a general insurance company or underwriter, assessing the underlying risk of an organisation in terms of the probability that they will end up claiming for a loss incurred during the period of insurance.

    Under the new Basel II and III accords, banks now need to hold capital to cover their operational and market risk exposures, in addition to the longstanding requirement for credit risk capital. It is now well acknowledged that banks can loose significant amounts of capital though operational and market risk events. The same holds true for all organisations.

    So, why not link performance payments to decisions and actions that increase the probability of an organisation’s performance being sustainable over the longer term (ie. a reduction in operational risk ratings), together with achievement of shorter-term gains?

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    • Greg, thanks for your comments…and indeed your stories from earlier. I’m going to contradict myself here (not a unusual occurrence according to my wife!) and I’m with you on the operational risk performance metric, however two issues which I see with this: 1) for publicly listed companies the obsession with quarterly results actively discriminates against longer term success measures 2) I wrote a piece on this blog a while ago around value retention in transactions (http://wp.me/p3e9QT-aH) which talks to shifting an outgoing CEOs attention to short term value preservation.
      But in general, we need to create greater clarity of objectives and achievement at the top of the house…only then will we see the frankly ridiculous trackrecord in M&A start to change, in my view.

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