Visualizing M&A Future Moves

I love well-designed business development infographics. Infographics that portray a past story and suggest future direction. M&A infographics particularly excite me. Show me what a company has recently acquired, illustrate the product or service gaps that now exist, and then suggest future M&A activity.

Here's an example -- What's next for HP M&A? This infographic illustrates HP M&A activity for the past ten years by sector and by deal size. Then the author suggests future deals that might fill in gaps.

Of course, predicting future moves is tricky business, especially when it comes to M&A activity. Gap analysis, as useful as it is, is not the only motiviation for M&A. Sometimes management wants to consolidate existing markets -- think AT&T and T-Mobile. At other times, a company may want to move into new markets -- think Berkshire Hathaway and Burlington Northern. Other motivations abound.

Predicting M&A action is no easy chip shot. But visualizing the past provides context. And increases your odds at mapping the future.

Breaking up is hard to do

One of the terms that convinced T-Mobile to accept the offer from AT&T rather than other bidders was the large ($3 billion) breakup fee that accompanied AT&T's $39 billion bid. At 7.7%, this breakup fee is huge by typical deal standards -- such fees tend to be in the 2-3% range. For example, Lubrizol, the industrial lubricants company that recently agreed to be bought by Warren Buffett's Berkshire Hathaway, will pay $200 million (2.2% of the $9 billion deal) if the break the acquisition agreement.

If there is a breakup (termination) fee in a deal structure, more often than not it goes to the acquirer if the target walks away from the deal. This fee is intended to reflect the direct and opportunity costs the acquirer incurs such as advisory expenses and executive time spent on the deal. In one study of 1,100 acquisition agreements, 55% of deals included a target breakup fee, whereas only 21% of the deals had breakup fees for both target and acquirer. Targets apparently have greater incentive to break contracts and seek other "lovers".

Technically the fee to be paid by AT&T (acquirer) to T-Mobile (target) upon deal collapse is deemed a reverse breakup fee. The $3 billion sum is not the largest such fee in history in absolute terms. For example, reflecting the difficult credit environment in 2009, Pfizer would have had to pay Wyeth $4.5 billion if it could not get necessary loan approvals to get the deal done. And AOL was on the hook for $5.4 billion if the company walked away from the Time Warner deal. (Time Warner had a reciprocal breakup fee of $3.9 billion on this deal -- in hindsight Time Warner should have bolted and paid this sum to loose itself from AOL's grip.)

However, on a percentage basis ATT's 7.7% breakup bounty tops both the Pfizer and AOL fees. T-Mobile will walk away with this largess (plus some AT&T spectrum) if regulatory authorities such as the DOJ or FCC nix the deal. AT&T's legendary regulatory team will be put to the test as it attempts to convince a hardened antitrust administration that this deal has merit. T-Mobile executives can be more relaxed as they win no matter the outcome.

M&A integration: not one size fits all

Near the end of Cisco’s acquisition binge of the 1990’s, CEO John Chambers once remarked: “In a merger you can't blend resources and cultures--only one can survive." At that time Chambers’ approach to M&A integration involved pure absorption. The Star Trek/Borg axiom “resistance is futile, you will be absorbed” played center stage. Cisco’s culture would dominate.

By the time Cisco bought Scientific Atlanta (SA) in 2006, Chambers attitude toward M&A was changing. This acquisition would extend Cisco’s domain, not merely strengthen it. And Cisco saw there were certain management processes (including supply chain management) where it could learn a lot from SA. Cisco’s integration approach for this deal would move from absorption to alchemic.

Kent Kresa, former CEO of Northrup Grumman and architect behind many noteworthy Northrup acquisitions, likes to compare M&A integration to New York City in the late 1800’s. While immigrants from countries such as Ireland and Italy would be absorbed into the City, an alchemic process was also working whereby the best of each culture would be amalgamated into a new New York. So it is with M&A combinations where the best of each company should be put forward.

There’s a time for M&A absorption to prevail, especially where the need for autonomy in the target is low while the need for strategic interdependence high. But there’s a time for alchemy to govern, especially where both acquirer and target have distinctive advantages that should be blended.

Furthermore, there’s a time for preservation to triumph, especially where the culture of the target should be allowed to remain intact lest a “buy and crush” dynamic destroy the organization elements that made the target attractive. For example, Warren Buffett’s Berkshire Hathaway is famous for preserving (and then nurturing) its acquisitions.

Finally, hybrid integration approaches at times will be the most effective. Consider Cisco buying a networking component company to complete a solution stack it can offer Cisco customers. While tight product integration demands absorption of the target, there might be a “center of excellence” within the target (say software development) that Cisco should preserve and even enlarge. In this case, both absorption and preservation are employed.

Successful M&A involves the art of integration. But there is not one master template for this art form. Value capture that derives from M&A integration is not a one-size-fits-all proposition.

M&A at a torrid pace

The summer months have certainly not dampened Google's M&A appetite. By my count, the company has done 18 acquisitions this year, with three deals already done so far this August. With the IPO market still somewhat cool, Google is providing a one-stop exit shop for the technology sector. In fact, Google's 18 acquisitions just about equal the number (22) of technology/software companies that have gone public so far this year!

For an infographic of Google 2010 acquisitions, see http://www.trivergence.com/market.asp?MarketID=4087

Apple and Google: head-to-head competitors

Apple and Google have become the Coke and Pepsi of mobile advertising, digital devices, and related markets. And their competitive furor is clearly reflected in the companies' recent merger and acquisition activity. From mobile ad systems to music services, Apple and Google are engaging in blow-by-blow M&A combat.

And strange dynamics are resulting from the AppGoog competition battles. For example after a six-month investigation, the Federal Trade Commission on May 21 approved Google's acquisition of AdMob. The commission stated that its fears that Google would dominate the mobile advertising market were allayed by Apple's emergence as a competitor in this space. Not hard for Google to "love its enemy" for at least one day.

Here are three examples of the heated tit-for-tat dealmaking:
1) Social Search

• February 2010 -- Google acquires Aardvark for some $50 million. Aardvark is a social search solution that allows users to ask questions and find information from people in their network through instant messaging and email. (Afternote: in September 2011, Google shut down the Aardvark initiative, as the search group concludes Q&A will not play a major role in search.) 
• March 2010 -- Apple acquires Siri, a developer of a mobile search and virtual personal assistant that utilizes voice recognition technology. Apple’s acquisition of Siri is not only part of its strategy to become more involved in the search market, but also a response to Google's buy of Aardvark. Apple values Siri’s voice recognition technology and will likely keep it out of Android, Google's mobile device.

2) Semiconductor efficiency

• March 2010 -- Apple acquires Intrinsity for $121 million. Intrinsity enhances mobile processors to improve performance and battery life by making faster processors that use less energy. Intrinsity engineers partnered with former PA Semiconductor engineers to design of the A4 chip. Apple is using the A4 microprocessor in the iPad and future iPhones.
• April 2010 -- Google acquires Agnilux, a a stealth chip design company founded by former employees of PA Semiconductor. (PA was acquired by Apple in 2008 to build custom chips for iPod, iPhone, and other mobile devices.)

3) Mobile advertising systems

• November 2009 -- Google plans to purchase mobile advertising start-up AdMob for $750 million in stock. AdMob sells ads that appear on Web sites geared for cellphones. The company was a first-mover in developing technology to deliver ads on Apple's iPhone as well as on devices that use Google's Android mobile operating system.
• January 2010 -- Apple acquires Quattro Wireless, a mobile advertising company for a reported $275 million. Apple’s acquisition of Quattro is part of their strategy to play in the mobile advertising market. Apple will add its own advertising system (iAd) to its next version of iPhone and iPad sofftware. Importantly, the Quattro acquisition is also a response to Google’s plan to buy AdMob, a mobile advertising company that Apple was interested in purchasing.

Want to pitch a company to sell to Apple or Google? Convince Jobs (or Schmidt) that a response to his arch competitor is critical. See http://www.trivergence.com/market.asp?MarketID=4090

Renu Senjalia contributed

Kill the pill?

Billionaire investor Ron Burkle wants to kill a pill – or at least diffuse it. I’m talking about a poison pill put in place by Barnes & Noble last November limiting an outside shareholder to a 20% stake or else face a watering down of his position by the issuance of cheap stock to other shareholders.

Euphemistically called a shareholder rights plan, poison pills have fallen out of favor in recent years as this hostile takeover defense is in place in only about ½ as many U.S. publically traded companies as ten years ago. (Many investors would like to see any and all offers come a company’s way.) However, the board of Barnes & Noble passed the provision after Burkle announced that he held about 18% of the company through his investment vehicle Yucaipa. Mr. Burkle also raised questions about the propriety of the company acquiring Barnes & Noble College Booksellers from Leonard Riggio, Barnes & Noble’s founder and Chairman.

And why, asks Burkle, does the pill not apply to the Riggio family should they happen to acquire even more shares? (Leonard Riggio and his family currently own about 35% of the company.)

Meanwhile a case between Versata Enterprises and Selecta involving the unprecedented triggering of a poison pill is slowly working its way through the Delaware Chancery Court. (Until Selecta/Versata the poison pill had only served as a nuclear deterrent, but never had exploded.) While poison pills have been blessed by Delaware courts, the Selecta pill (designed to preserve a net operating loss) may have been trumped up using questionable rationale. Burkle could be hoping this case provides an opening that helps defuse the Barnes and Noble bomb.

Disney:Marvel::P&G:Gillette?

Warren Buffett called the acquisition of Gillette by Procter & Gamble a “dream deal” that would “create the greatest consumer products company in the world.” Buffet felt so strongly about the deal that he agreed to acquire additional P&G and Gillette shares so that he would own 3.9% of the combined company upon deal completion. A P&G and Gillette combination seemed to be highly synergistic: the two companies’ products were strong in different regions of the world and focused on different genders. P&G = women ("Tide gets your clothes whiter than white"), while Gillette = men ("The Best a Man Can Get").

Disney's character portfolio, which appeals to pre-teen girls and includes the likes of "Hannah Montana" and "Disney Princess", was infused with a Gillette-like synergy when Disney announced a $4 billion plan to acquire Marvel Entertainment. Marvel has developed marvelously dark characters such as Spiderman, Captain America and X-Men, all of which are just the thing for pre-adolescent boys.

Both P&G and Disney paid "full and fair" price for their acquisitions. But both enjoy real synergy. And just as Gillette had its champion in Mr. Buffett, Marvel's creative legend Stan ("The Man") Lee, creator of many Marvel characters dubs the acquisistion: "a terrific deal that will be extremely beneficial to both companies..." It also helps that John Lasseter, chief creative officer at Pixar/Disney animation, can vouch that the Disney culture under Bob Iger is talent-friendly.

For deal details, see http://www.trivergence.com/market.asp?MarketID=4085