Good article to share: The five types of successful acquisitions

I love this article merely because it really inspires intuitive thinking.

There is no magic formula to make acquisitions successful. Like any other business process, they are not inherently good or bad, just as marketing and R&D aren’t. Each deal must have its own strategic logic. In our experience, acquirers in the most successful deals have specific, well-articulated value creation ideas going in. For less successful deals, the strategic rationales—such as pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio—tend to be vague.

Empirical analysis of specific acquisition strategies offers limited insight, largely because of the wide variety of types and sizes of acquisitions and the lack of an objective way to classify them by strategy. What’s more, the stated strategy may not even be the real one: companies typically talk up all kinds of strategic benefits from acquisitions that are really entirely about cost cutting. In the absence of empirical research, our suggestions for strategies that create value reflect our acquisitions work with companies.

In our experience, the strategic rationale for an acquisition that creates value typically conforms to at least one of the following five archetypes: improving the performance of the target company, removing excess capacity from an industry, creating market access for products, acquiring skills or technologies more quickly or at lower cost than they could be built in-house, and picking winners early and helping them develop their businesses. If an acquisition does not fit one or more of these archetypes, it’s unlikely to create value. Executives, of course, often justify acquisitions by choosing from a much broader menu of strategies, including roll-ups, consolidating to improve competitive behavior, transformational mergers, and buying cheap. While these strategies can create value, we find that they seldom do. Value-minded executives should view them with a gimlet eye.
Five archetypes

An acquisition’s strategic rationale should be a specific articulation of one of these archetypes, not a vague concept like growth or strategic positioning, which may be important but must be translated into something more tangible. Furthermore, even if your acquisition is based on one of the archetypes below, it won’t create value if you overpay.
Improve the target company’s performance

Improving the performance of the target company is one of the most common value-creating acquisition strategies. Put simply, you buy a company and radically reduce costs to improve margins and cash flows. In some cases, the acquirer may also take steps to accelerate revenue growth.

Pursuing this strategy is what the best private-equity firms do. Among successful private-equity acquisitions in which a target company was bought, improved, and sold, with no additional acquisitions along the way, operating-profit margins increased by an average of about 2.5 percentage points more than those at peer companies during the same period.1 This means that many of the transactions increased operating-profit margins even more.

Keep in mind that it is easier to improve the performance of a company with low margins and low returns on invested capital (ROIC) than that of a high-margin, high-ROIC company. Consider a target company with a 6 percent operating-profit margin. Reducing costs by three percentage points, to 91 percent of revenues, from 94 percent, increases the margin to 9 percent and could lead to a 50 percent increase in the company’s value. In contrast, if the operating-profit margin of a company is 30 percent, increasing its value by 50 percent requires increasing the margin to 45 percent. Costs would need to decline from 70 percent of revenues to 55 percent, a 21 percent reduction in the cost base. That might not be reasonable to expect.
Consolidate to remove excess capacity from industry

As industries mature, they typically develop excess capacity. In chemicals, for example, companies are constantly looking for ways to get more production out of their plants, while new competitors continue to enter the industry. For example, Saudi Basic Industries Corporation (SABIC), which began production in the mid-1980s, grew from 6.3 million metric tons of value-added commodities—such as chemicals, polymers, and fertilizers—in 1985 to 56 million tons in 2008. Now one of the world’s largest petrochemicals concerns, SABIC expects continued growth, estimating its annual production to reach 135 million tons by 2020.

The combination of higher production from existing capacity and new capacity from recent entrants often generates more supply than demand. It is in no individual competitor’s interest to shut a plant, however. Companies often find it easier to shut plants across the larger combined entity resulting from an acquisition than to shut their least productive plants without one and end up with a smaller company.

Reducing excess in an industry can also extend to less tangible forms of capacity. Consolidation in the pharmaceutical industry, for example, has significantly reduced the capacity of the sales force as the product portfolios of merged companies change and they rethink how to interact with doctors. Pharmaceutical companies have also significantly reduced their R&D capacity as they found more productive ways to conduct research and pruned their portfolios of development projects.

While there is substantial value to be created from removing excess capacity, as in most M&A activity the bulk of the value often accrues to the seller’s shareholders, not the buyer’s.
Accelerate market access for the target’s (or buyer’s) products

Often, relatively small companies with innovative products have difficulty reaching the entire potential market for their products. Small pharmaceutical companies, for example, typically lack the large sales forces required to cultivate relationships with the many doctors they need to promote their products. Bigger pharmaceutical companies sometimes purchase these smaller companies and use their own large-scale sales forces to accelerate the sales of the smaller companies’ products.

IBM, for instance, has pursued this strategy in its software business. From 2002 to 2009, it acquired 70 companies for about $14 billion. By pushing their products through a global sales force, IBM estimates it increased their revenues by almost 50 percent in the first two years after each acquisition and an average of more than 10 percent in the next three years.2

In some cases, the target can also help accelerate the acquirer’s revenue growth. In Procter & Gamble’s acquisition of Gillette, the combined company benefited because P&G had stronger sales in some emerging markets, Gillette in others. Working together, they introduced their products into new markets much more quickly.
Get skills or technologies faster or at lower cost than they can be built

Cisco Systems has used acquisitions to close gaps in its technologies, allowing it to assemble a broad line of networking products and to grow very quickly from a company with a single product line into the key player in Internet equipment. From 1993 to 2001, Cisco acquired 71 companies, at an average price of approximately $350 million. Cisco’s sales increased from $650 million in 1993 to $22 billion in 2001, with nearly 40 percent of its 2001 revenue coming directly from these acquisitions. By 2009, Cisco had more than $36 billion in revenues and a market cap of approximately $150 billion.
Pick winners early and help them develop their businesses

The final winning strategy involves making acquisitions early in the life cycle of a new industry or product line, long before most others recognize that it will grow significantly. Johnson & Johnson pursued this strategy in its early acquisitions of medical-device businesses. When J&J bought device manufacturer Cordis, in 1996, Cordis had $500 million in revenues. By 2007, its revenues had increased to $3.8 billion, reflecting a 20 percent annual growth rate. J&J purchased orthopedic-device manufacturer DePuy in 1998, when DePuy had $900 million in revenues. By 2007, they had grown to $4.6 billion, also at an annual growth rate of 20 percent.

This acquisition strategy requires a disciplined approach by management in three dimensions. First, you must be willing to make investments early, long before your competitors and the market see the industry’s or company’s potential. Second, you need to make multiple bets and to expect that some will fail. Third, you need the skills and patience to nurture the acquired businesses.
Harder strategies

Beyond the five main acquisition strategies we’ve explored, a handful of others can create value, though in our experience they do so relatively rarely.
Roll-up strategy

Roll-up strategies consolidate highly fragmented markets where the current competitors are too small to achieve scale economies. Beginning in the 1960s, Service Corporation International, for instance, grew from a single funeral home in Houston to more than 1,400 funeral homes and cemeteries in 2008. Similarly, Clear Channel Communications rolled up the US market for radio stations, eventually owning more than 900.

This strategy works when businesses as a group can realize substantial cost savings or achieve higher revenues than individual businesses can. Service Corporation’s funeral homes in a given city can share vehicles, purchasing, and back-office operations, for example. They can also coordinate advertising across a city to reduce costs and raise revenues.

Size per se is not what creates a successful roll-up; what matters is the right kind of size. For Service Corporation, multiple locations in individual cities have been more important than many branches spread over many cities, because the cost savings (such as sharing vehicles) can be realized only if the branches are near one another. Roll-up strategies are hard to disguise, so they invite copycats. As others tried to imitate Service Corporation’s strategy, prices for some funeral homes were eventually bid up to levels that made additional acquisitions uneconomic.
Consolidate to improve competitive behavior

Many executives in highly competitive industries hope consolidation will lead competitors to focus less on price competition, thereby improving the ROIC of the industry. The evidence shows, however, that unless it consolidates to just three or four companies and can keep out new entrants, pricing behavior doesn’t change: smaller businesses or new entrants often have an incentive to gain share through lower prices. So in an industry with, say, ten companies, lots of deals must be done before the basis of competition changes.
Enter into a transformational merger

A commonly mentioned reason for an acquisition or merger is the desire to transform one or both companies. Transformational mergers are rare, however, because the circumstances have to be just right, and the management team needs to execute the strategy well.

Transformational mergers can best be described by example. One of the world’s leading pharmaceutical companies, Switzerland’s Novartis, was formed in 1996 by the $30 billion merger of Ciba-Geigy and Sandoz. But this merger was much more than a simple combination of businesses: under the leadership of the new CEO, Daniel Vasella, Ciba-Geigy and Sandoz were transformed into an entirely new company. Using the merger as a catalyst for change, Vasella and his management team not only captured $1.4 billion in cost synergies but also redefined the company’s mission, strategy, portfolio, and organization, as well as all key processes, from research to sales. In every area, there was no automatic choice for either the Ciba or the Sandoz way of doing things; instead, the organization made a systematic effort to find the best way.

Novartis shifted its strategic focus to innovation in its life sciences business (pharmaceuticals, nutrition, and products for agriculture) and spun off the $7 billion Ciba Specialty Chemicals business in 1997. Organizational changes included structuring R&D worldwide by therapeutic rather than geographic area, enabling Novartis to build a world-leading oncology franchise.

Across all departments and management layers, Novartis created a strong performance-oriented culture supported by shifting from a seniority- to a performance-based compensation system for managers.
Buy cheap

The final way to create value from an acquisition is to buy cheap—in other words, at a price below a company’s intrinsic value. In our experience, however, such opportunities are rare and relatively small. Nonetheless, though market values revert to intrinsic values over longer periods, there can be brief moments when the two fall out of alignment. Markets, for example, sometimes overreact to negative news, such as a criminal investigation of an executive or the failure of a single product in a portfolio with many strong ones.

Such moments are less rare in cyclical industries, where assets are often undervalued at the bottom of a cycle. Comparing actual market valuations with intrinsic values based on a “perfect foresight” model, we found that companies in cyclical industries could more than double their shareholder returns (relative to actual returns) if they acquired assets at the bottom of a cycle and sold at the top.3

While markets do throw up occasional opportunities for companies to buy targets at levels below their intrinsic value, we haven’t seen many cases. To gain control of a target, acquirers must pay its shareholders a premium over the current market value. Although premiums can vary widely, the average ones for corporate control have been fairly stable: almost 30 percent of the preannouncement price of the target’s equity. For targets pursued by multiple acquirers, the premium rises dramatically, creating the so-called winner’s curse. If several companies evaluate a given target and all identify roughly the same potential synergies, the pursuer that overestimates them most will offer the highest price. Since it is based on an overestimation of the value to be created, the winner pays too much—and is ultimately a loser.4

Since market values can sometimes deviate from intrinsic ones, management must also beware the possibility that markets may be overvaluing a potential acquisition. Consider the stock market bubble during the late 1990s. Companies that merged with or acquired technology, media, or telecommunications businesses saw their share prices plummet when the market reverted to earlier levels. The possibility that a company might pay too much when the market is inflated deserves serious consideration, because M&A activity seems to rise following periods of strong market performance. If (and when) prices are artificially high, large improvements are necessary to justify an acquisition, even when the target can be purchased at no premium to market value. Premiums for private deals tend to be smaller, although comprehensive evidence is difficult to collect because publicly available data are scarce. Private acquisitions often stem from the seller’s desire to get out rather than the buyer’s desire for a purchase.

iPhone 4 change the way of mobile commerce?!

Undeniably, iPhone changes the world. It heals the hearts of computer idiot. No kidding. It is really the value proposition of iPhone.

What brings along iPhone is a change of mobile usage habit and eventually an evolution of mobile commerce. What should we keep in mind? An article leads us the way.

Why iPhone 4 will change mobile commerce as we know it

Industry experts said that the new iPhone 4 is going to change the face of mobile commerce, and both brands and retailers need to adjust their strategies accordingly.

The technology behind the new device is based on the same operating system powering Apple’s iPad tablet, which has already reinvented the mobile commerce experience. With mobile commerce sales reaching $1.2 billion in 2009 and projected to almost double to $2.2 billion this year, retailers need to take advantage of the new iPhone and make their mobile experiences more gripping.

“There are two things that the iPhone 4 is going to do,” said Scott Dunlap, CEO of NearbyNow, Mountain View, CA. “First, this is an HD phone. The clarity of the screen, plus the ability to take high-resolution pictures and HD video, is going to raise the bar on the mobile visual experience.

“I think it is finally at a point that even the Rolexes and Tom Fords of the world will be pleased with how the quality of their products will be represented,” he said. “Second, the iAd network that comes with iOS 4 is about to change everything we know about mobile advertising, and in turn, mobile commerce.

“The ads themselves are as powerful as apps, and can be mini-networked games, video channels and location-based trivia contests. You could even make a purchase directly from an ad. It's the first mobile ad network to have both reach and rich ad units. Mobile banner ads will instantly become archaic, and all of us will have to rethink mobile engagement.”

HD display
Apple’s new Retina display is the highest resolution display ever built into a phone, resulting in super-crisp text, image and video.

In addition, iPhone 4 features a 5-megapixel camera with LED flash, HD video recording, Apple’s A4 processor, a 3-axis gyro and up to 40 percent longer talk time — in a beautiful all-new design of glass and stainless steel that is the thinnest smartphone in the world.

IPhone 4 comes with iOS 4, the newest version of what is undoubtedly world’s most advanced mobile operating system, which includes more than 100 new features and 1500 new APIs for developers.

Creating buzz
As we all know, Apple is a master at creating buzz around its new devices.

Walking by SoHo’s Apple store on June 24 was absolutely impossible. There was a huge mob of people waiting to get in to pick up their phones.

Apple reports that it received 600,000 pre-orders for the device on just the first day alone. That is 10-times more than it did on the first day the iPhone 3GS became available for pre-order.

The slogan that Apple is using for the iPhone 4 is, “This changes everything. Again.” Most industry executives agree, especially in the case of mobile commerce.

“It’s not only the device that will alter mobile commerce, it is the underlying iAd platform which allows for in-app purchasing,” said Neil Strother, Kirkland, WA-based practice director at ABI Research. “Assuming this process is as seamless as promised, and consumers can easily make purchases within apps, then this could be an important step forward for mcommerce.

“Given Apple’s ability to deliver a high-quality user experience and attention to detail, it’s a good bet this will work well,” he said. “It’s important to remember too that this purchase capability will extend to other devices running iOS 4, such as iPads and iPod touch devices.

“So, mcommerce should not only get a boost from users of the latest iPhone version, but also from users of these other devices as well.”

iPhone-driven improvements
Marci Troutman, founder/CEO of Siteminis, Atlanta, said that three quick iPhone-driven commerce improvements will be:

1. Better quality social media interactivity, which will improve ad marketing revenue

2. More sophisticated OS and screen resolution, which will improve the gaming and entertainment experiences, leading to more revenue through download and content purchases

3. More APIs and developer tools, which will improve quality and the number of new applications available for downloads creating revenue through the download and use of iAds through the applications

“Longer term impacts are OS speed, ability to multi-task, battery life improvement, camera quality and higher screen resolution will lead to faster emergence and adoption of technologies such as augmented reality, bar code scanning and near field communications - which all create revenue streams,” Ms. Troutman said.

“Of course, the caveat is that this is all for just iPhone users,” she said.

Apple’s iPhone OS 4’s new multitasking feature offers users a new way to quickly move between applications. It provides developers seven new services to easily add multitasking features to their applications as well.

New services include background audio, so applications such as Pandora can play music in the background.

Additionally, the VoIP service lets applications receive a VoIP call even when the iPhone is asleep or the user is running other applications.

Not everyone's impressed
Gary Schwartz, founder/CEO of Impact Mobile, New York, feels that Apple is too focused on applications and that mobile commerce growth is going to depend on more than just apps.

“The iOS 4 continues to focus on app domination,” Mr. Schwartz said. “IOS 4 offers app productivity features such as app multitasking, which allows for services to run in the background while the shopper navigate secondary apps. No surprise Apple’s focus is still on 200,000-plus apps which are, in great part, Apple’s marketing communications strategy.

“Other players in-market are focusing on the super-app, the mobile browser, which, with HTML5 allows for rich app-like functionality,” he said. “Steve Jobs talks about apps and the HTML5 browser as two separate platforms – Apple continues to focus all of its energy on apps and in-app iAds.

“Commerce enhancements such as iOS 4’s peer-to-peer app gifting is a self-serving feature. Ultimately, Apple will have to let go of this smorgasbord approach to the phone-top and focus on centralized browser functionality for mcommerce.”

Mr. Schwartz said that shoppers need a one-stop impulse click.

“The shopper needs integrated SMS activation and retention hooks,” he said. “Focusing on the browser with integrating location APIs and rich media caching will enable the browser to behave more like a downloaded app and drive more commerce adoption long-term.

“HTML5 will ultimately be the demise of the app as a mainstream commerce medium. Apple knows this and is reticent to push in-browser functionality which would cannibalize its app-dom.”

Not everyone agrees.

Bringin' sexy back
Just as brands and marketers flocked to the App Store for the iPhone and its successor, the iPhone 3GS, the same will hold true for the new iPhone 4.

Let’s face it. There is something sexy about an iPhone application. And as the iPhone gets smarter, the whole application concept becomes ever-more appealing.

Retailers and brands recognize this, as already mobile commerce giant eBay has revamped its iPhone application for the new iPhone 4.

With a new look and feel, the eBay application is even more compelling.

“Apple's first iPhone was revolutionary to the smartphone market, and as it continues to release more sophisticated and user-friendly devices, mobile commerce will become more and more a part of consumers' every day routines,” said Nick Taylor, president of Usablenet, New York.

From a retail perspective, the iPhone 4 is a new opportunity to increase sales.

The phone will fuel smartphone adoption, which will drive mobile commerce activity.

“The new iPhone 4 provides more fuel for consumer smartphone adoption, at a time when distribution rate growth is already more than impressive,” said Kevin Ranford, director of Web marketing at 1800Flowers, Carle Place, NY.

“The iPhone 4's functionality specifically favorable to mcommerce is the multi-tasking functionality so that shoppers can make a purchase while still engaged with another app, and the sharp Retina display making merchandise images pop,” he said.

收購合併好事嗎?

早前，為一間國際級機構香港及大中華區寫稿，跟多位香港區的高級見面詳談，由榮譽主席到分區經理皆有心人，希望可以保著公司的核心價值，不要被收購後遭受淹沒。各人說話裡，總帶點苦澀味，怕往後日子不好過。

說真的，我身同感受。因為我曾經在香港電訊工作，經歷香港歷史上最失敗的收購合併事件，最終成為電訊盈科人，受盡人家白眼。公司進入毫無管治的年代，自己以「落荒而逃」的敗局終結。

M&A，在我的經驗上，只有失敗的味道！史上，亦有很多很多M&A失敗的個案，為何還要做呢？

理論上，M&A有五大訴求：
1. improving the performance of the target company; 提高目標公司的效能
2. removing excess capacity from an industry; 從一個產業去除多餘的容量
3. creating market access for products; 為產品打開市場
4. acquiring skills or technologies more quickly or at lower cost than they could be built in-house;　更快速地或以較內部低的成本掌握技能或技術　
5. picking winners early and helping them develop their businesses; 預早挑選優勝者和幫助他們發展業務

原來，回望前塵，當年電訊盈科的收購合併，並未符合任何一個法則，難怪全都失敗。