Summary:Bigger does not make better, rather better makes bigger, Leslie Biller stated, and with that they opened the discussion on why and how best to execute a merger.
Ideal Drivers of Mergers
The question of "organic" growth versus acquisitive growth should be addressed, Mark Sirower suggested, by determining whether the value of merger synergies are greater than the premium paid; that is, whether or not the combined entity beats the implied trajectory that already exists per the global market valuation. Biller added that outperforming the pre-merger trajectories can be particularly difficult among the chaos of product and culture shifts that come with a merger.
Further, Kathryn Swintek pointed out that attention should be paid to the source of a company′s growth before the merger and whether this growth is repeatable or just a one-time phenomenon, using as an example a popular beverage producer whose growth during a national product rollout was used by an acquirer to determine the longer-term trajectory of the company′s top-line growth.
Central to a manager′s decision of whether or not to merge should be acceleration of EPS growth by the redeployment of excess operating capital, said Biller. And what′s unique to a merger as a form of investment, Sirower commented, is the greater risk from paying the entire investment up front, the need to exceed the expectations of both the target and the acquirer already in place — quantified by the 30-40 percent premium typically paid in an acquisition — and the high exit costs should the investment fall short of the raised expectations. By definition, the acquiring organization "pays more than anyone else in the world," Sirower noted, and as such new ideas should be brought to the table in order to extract the value needed to justify the merger.
Additional focus should be paid to total relative shareholder value, Biller proposed, and that a premium should be put on top-line growth — as cost cutting is limited to zero — and years beyond the typically studied three-year horizon.
Historical Drivers of Mergers
Waves of mergers have not been driven by the presence or lack of opportunities, i.e. good or bad fits, but rather the changing regulatory and market environment over time, Trimbath noted.
Biller added that justification for mergers has changed over time. Regulation promoted mergers of the early 1980s (e.g. protections of banks in the southeastern U.S. from acquisition by banks of other regions), financial problems fueled the merger surge in the late 1980s as mergers were in effect bailouts from the savings and loan crisis, and in the mid- to late-90s, mergers resulted from high P/E multiples and the will of target companies to accept this "confederate currency."
As the merger train gathers speed, CEOs not involved in deals look around and feel that they must do something, said Sirower, and their reactive approach "injects inexperience into the markets." Paul Reilly agreed that such environments promote loose pocketbooks and bigger bets, as managers want to compete with leaders, though he contested Sirower′s assertion that this "country club effect" is primarily at work, adding that other factors, such as cheap capital, play a large role.
Separately, Reilly pointed out that greater size and responsibility, and not EPS growth, drive many managers to acquire.
As efficiency and the cost to generate revenue are used to measure the effectiveness of mergers, potential targets for such acquisitions are typically those with the greatest potential for improvement. Though they may be, as Swintek calls them, "low hanging fruit," the fact remains that the "most cost inefficient companies are targets," said Susanne Trimbath.
Experience at Work
Finally, Biller discussed his own merger experience with Wells Fargo and the effect of the attitude of those lowest in the company who often act as the customer interface. He chose to not announce layoffs through the press, as many companies do, so as to not create undue anxiety among employees who are largely the face of the firm; the result, he found, was that informed but confident employees, not stirred by press spin themselves, reassured customers, thus minimizing revenue degradation due to customer defection.
"Heart-share plus mind-share equals market share," he stated.
