What makes for an “extraordinary” acquirer? What explains the inconsistent returns of private equity funds? Four dealmakers weigh in on the results of M&A research.
Vintage question > A study in the Journal of Financial Economics titles “Extraordinary Acquirers” indicated that certain companies have consistently great M&A outcomes, whereas it is more difficult to identify specific aspects of deals that make them great. The study argues that qualities of these companies, such as organizational knowledge and integration practices, account for these exceptional M&A returns. What do you think, are there more “extraordinary acquirers” than there are “extraordinary deals”?
Rob Goldstein > My general view is there are more extraordinary acquirers than there are extraordinary deals. I do both public M&A and private equity, and my experience over the last 21 years is that the best-prepared acquirers in both arenas are the most likely to have success. I’ve been very impressed by certain clients who are extraordinarily diligent when it comes to learning about and understanding an industry, a product line, and a geographic sector before they even start zeroing in on specific targets.
At the same time, I don’t think there are hard and fast rules to this. I have seen plenty of acquirers who were not “extraordinary” or who weren’t the most prepared but got fortunate with finding a terrific asset and made a great return. There are also plenty of great acquirers out there who have bought lemons. Nobody bats 1.000. And it’s the same for the best private equity firms – I’ve represented some very smart private equity clients, and even they don’t bat 1.000.
As far as what makes an “extraordinary acquirer,” I think there can be overwhelming advantages to having a large organization in which you can draw upon the resources of industry experts and financial experts who bring a wealth of knowledge and experience to the table. When you are better prepared, know the market better, know what your objectives are, and in most cases adhere to rigid pricing characteristics, these acquirers are more likely to be successful than those who aren’t as disciplined and diligent. I have one client I worked with that had an incredible stable of talent to analyze all angles of a deal, and if they didn’t have some capability in-house, they would not hesitate to go to a market leader in the industry and get further information to validate their investment thesis.
One other thing I’ll mention is that success can depend on an acquirer’s ability to learn about complex industries – or stay out of them altogether. Healthcare is a major focus for us at McDermott Will & Emery, as well as a very active market generally for both strategics and private equity. And healthcare is a sector where you really have to know what you’re doing to succeed in M&A. I’ve had clients who were not experienced in the space who I think have been hesitant to get into it because it requires a tremendous amount of industry knowledge. On the flip side, I’ve seen a number of instances where people who are heavily into the healthcare market and understand the industry, the trends, and the regulatory side of things may well be willing to pay a higher multiple than they otherwise would because of their specialized knowledge.
Jim Rosener > As a legal advisor, my role pretty much ends at the closing of a deal, but I think the differentiator between a good transaction and a bad transaction starts the day after it closes. So in that way, I would say that post-closing execution is crucial. At private equity funds, that means having clear integration plans, cost control strategies, and a great understanding of what the next steps are on both standalone and tuck-in acquisitions. They need to have a really good understanding of all of the things that make a particular company run well.
That said, you have to buy something with reasonably good bones, such that you know you can do the work afterwards to make it great. And that’s why you need strong evaluation of a transaction, good modeling, and to some degree a negotiation of the allocation of risks that is done in creating the purchase agreement. These elements determine in part whether the deal you’ve done has the potential to be extraordinary. So there’s obviously a lot of work that goes into the evaluation of a target and the due diligence regarding a target. But ultimately, I think the ability to turn a target into a great acquisition depends most on the post-closing execution.
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Michael Meyers > Truly extraordinary transactions are ultimately created by extraordinary acquirers in the post-transaction, and are further enhanced through cross-selling synergies of a product, process or service. I believe that the combination of proactive and visionary leadership in the C-suite, merged with the experience and expertise from different functional areas within a company, creates potent opportunities and successful transaction results. I’d also say that while financial metrics and process are important, I believe that highly skilled BD professionals can match these variables with gap analysis with respect to their process and integration skills. Experienced and thoughtful business development leadership considers organizational variables as a key component of their due diligence process, which increases the probability that integration will result in the anticipated accretion or exceed it.
One confounding variable relates to the legal limitations that are often present with respect to integration activities. As a result of this factor, the potential for integration needs to be well understood in advance. Ultimately, the vital integration drivers need to be identified and considered by the acquirer’s senior leadership and business development team. And carrying out integration in a multi-disciplinary way – across various functional areas of an organization — is critical. It entails a great deal more than a visionary CEO with a mandate from the top down.