Merge Ahead: Mastering the Five Enduring Trends of Artful M&A (Future of Business Series)

233 Pages·2009·2.55 MB·English

by  Gerald Adolph

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ToLeroy and Beryl for their love,
commitment, and sacrifice
G.A.
ToKrista, Trevor, Madeleine, and
Teddy for their love and laughter
J.P.
CONTENTS
1 M&A’S MERGANIC FUTURE 1
2 BIG IS BIGGER THAN EVER 25
3 VELOCITY AND IMPATIENCE 49
4 THE RISE OF NEW BLUES 69
5 PRIVATE EQUITY AND
SOVEREIGN WEALTH 95
6 BUBBLES AND WAVES 117
7 MERGANIC STRATEGY FOR
A HYPERACTIVE ERA 135
8 CRAFTING THE
SUCCESSFUL DEAL 157
ix
CONTENTS
EPILOGUE: A MESSAGE
TO LEADING EXECUTIVES 201
NOTES 205
INDEX 213
ACKNOWLEDGMENTS 225
x
1
M&A’S MERGANIC
FUTURE
PRECIOUS FEW companies outperform
Warren Buffett’s Berkshire Hathaway over the long term.
But Danaher Corporation accomplished this feat for 15
years, between 1993 and 2008. Danaher is a $19 billion di-
versified industrial company, best known in the United
States as the maker of Craftsman brand mechanics’ tools
for Sears. The company did this by expertly developing and
executing three types of activities—mergers and acquisi-
tions, organic growth, and alliances—as one synchronized
growth strategy. Danaher’s leaders are always exploring
ways in which acquisitions, divestitures, new business de-
velopment, marketing, innovation, licensing, joint ven-
tures, and other collaborative alliances can be used, in an
integrated fashion, to achieve its overall short- and long-
term goals.
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MERGE AHEAD
Most companies, of course, use all of these growth
levers at one time or another. But few companies con-
sciously use them in ways that consistently reinforce and
build on each other’s impact. Of course, Danaher is not al-
ways buying companies, forming alliances, and launching
organic growth initiatives simultaneously. Corporate
growth doesn’t have to happen in such a literal-minded
fashion to be effective. Rather, the idea is to keep these
three growth avenues continually active and to deploy
them as appropriate to make the most of varying market
conditions. Any company with an effective growth strat-
egy is always in some stage of merger and acquisition
(M&A) preparation or action, is always assessing and exe-
cuting alliances, andis always innovating and expanding
its existing operations.
Many factors, including the Danaher Business System
(an ingrained management approach based on lean pro-
duction principles), may have helped the company thrive,
but its skill at combining all three forms of growth is an
undeniable asset. The most critical element is to keep all
three levers tightly intertwined. That’s what distinguishes
an integrated growth strategy (or, as it will be called in this
book, a “merganic” strategy—interrelating mergers and
organic growth) from simply having three different ways
to pursue a similar outcome. Just as this strategy has set
Danaher apart from competitors, so has its performance.
While the U.S. hand tools business declined overall be-
tween 1998 and 2008, Danaher achieved overall com-
pound annual revenue growth of more than 15 percent.
(Like most companies, Danaher suffered severe revenue
drops in the fourth quarter of 2008; its growth rate shrank
to 1.1 percent. And it has projected a 10 percent decline in
2
M&A’S MERGANIC FUTURE
annual earnings for 2009. But that still represents highly
successful performance for that time frame.)
Other companies that have adopted integrated strate-
gies to unlock their full potential include such prominent
companies as General Electric (GE), HSBC, InBev, John-
son & Johnson (J&J), and Procter & Gamble (P&G). All of
these companies are known in M&A circles for their
tightly integrated use of M&A, organic growth, and al-
liances to drive above-average growth.
Mergers and acquisitions have been an important fac-
tor in corporate performance and strategy since the 1960s,
and, as this book will demonstrate, their influence is go-
ing to remain strong in the future. But they will no longer
be isolated events; M&A will be increasingly integrated
into every major company’s overall strategy for growth. Fa-
miliar types of M&A strategy, such as the approach taken
by J&J and P&G to extend into adjacent products and ser-
vices for new sources of revenue, are much more effective
when combined with internal innovation initiatives (or-
ganic growth) and partnerships with other companies.
(P&G is even known for its interest in alliances with com-
petitors.)
The financial meltdown of autumn 2008 and its after-
math might seem to challenge the idea of integrated growth
in general and mergers and acquisitions in particular. In
early 2009, the global economy headed into an extended
retrenchment, with tight credit, rising unemployment, a
great deal of uncertainty, and a consensus that the recovery
could be slow and prolonged. It is beyond the scope of this
book, or any book, to predict the outcome in any detail. But
the overall pattern is clear: corporate leaders will need to
marshall their resources, focus their strategy, and build
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MERGE AHEAD
their growth capabilities—not just to survive the downturn
but to emerge stronger.
All indications suggest that as these economic dynam-
ics unfold, consolidation and alliances will be critical. And
an integrated approach to growth may be the cornerstone
of strategy for many successful companies. In this context,
and also based on the history of past downturns, there is
every reason to expect a favorable climate for mergers and
acquisitions as the economy moves forward. The down-
ward pressure on companies and the lowering of valua-
tions will create attractive acquisition opportunities, and
the demand for growth will spur companies to take advan-
tage of them. Similarly, organic growth strategies, when
managed effectively, executed frugally, and designed for
increasingly cost-conscious consumers, will be more vi-
tal than ever. Finally, a downturn produces many new op-
portunities for alliances, with companies having a much
better chance of surviving if they learn to work in tandem.
It is not unusual for many companies to exercise these
three approaches. But the companies that are most likely
to do well during this turbulent period, and to lead their
industries when the recovery comes, are those that can put
them together in an aligned, purposeful manner. Organic
growth alone will not suffice to achieve above-average
growth in the long term—M&A and alliances will be nec-
essary. All three of them will need to be executed with vigor
and in quantity; an integrated growth strategy means more
than the odd acquisition or occasional alliance.
This book is called Merge Ahead because it explores the
role of M&A in corporate growth. At any given moment,
there is a merger or acquisition ahead in the future of most
major companies. Prudent M&A is a powerful instrument
4
M&A’S MERGANIC FUTURE
of renewal and an essential way to remain flexible in the
face of ever-changing industry and economic conditions.
Conventional wisdom might argue that in the past,
M&A has destroyed value more often than it has created it;
this view has understandably led some managers to avoid
M&A altogether. But if you believe that organic growth is
not enough, then the challenges of M&A must be mas-
tered; and the rewards for success are worth the effort. The
ultimate goal of this book is to better the odds of achieving
successful, sustained results and to help executives think
about deals in the context of the larger growth story. In-
deed, when some of the deal-making principles advanced
by Booz & Company—principles that we discuss in greater
detail later in this book—are applied, the success rates of
M&A dramatically improve.
The first step toward bettering the M&A odds is to de-
velop a sound understanding of the forces shaping the
context within which deals take place. By now, most exec-
utives are well aware that the events of the mid-2000s to
the late 2000s—globalization, deregulation, technological
advances, and, of course, the credit crisis of 2008/2009—
have created a radically different business environment
from that of the late 1990s. This environment is evolving
with remarkable speed.
THE FIVE MOST CRITICAL TRENDS
The future of mergers and acquisitions will be shaped by
five ongoing large-scale phenomena that directly influ-
ence the way deals will unfold. As with all long-term
trends, the timing of particular events is unknown, and it’s
5
MERGE AHEAD
not clear exactly how they will unfold, but it is possible to
look at the overall patterns and draw some reliable conclu-
sions about their impact.
Here, then, are the driving forces we can identify with
some confidence, no matter how the economic turbulence
of 2008-2009 plays out. In general, the size of companies
will continually increase, while scale and strategic focus
will become more important. The velocity of capital, busi-
ness, and information will accelerate, and investors and
managers will be ever more impatient in seeking results.
New competitors will continue to rise from emerging
economies, with greater success and influence, especially
in acquisitions and alliances. The influence of financial
buyers will not disappear with the end of the credit bub-
ble; however, the nature of its most active participants will
change. And the economy will generate more frequent and
more significant waves and bubbles.
Trend 1: Big Is Bigger Than Ever
As companies compete and seek the marketplace reach
they need for viability, they will need to get bigger. Mar-
keting, sales, supply chains, and service functions are be-
ing expanded and adapted to a host of geographic markets
and adjacent segments and services. At the same time,
many basic participation costs of doing business are esca-
lating, which means that companies need greater invest-
ment capacity and financial muscle just to stay even or to
thrive. For instance, new marketing technologies allow
companies to create so-called segments of one to reach
customers better, but these are expensive tools. A CEO and
executive team might reasonably ask, “How big must we
6