Mergers & Acquisitions (M&A) — Common Rationale and Failed Bids
The first four months of 2017 have witnessed a number of failed big-ticket M&A transactions, especially when it comes to bids by US conglomerates to acquire their European counterparts. But what are the reasons for these failed bids: Was the price too low? Was there a regulatory hurdle? Or was it something more unique? Before diving into a further analysis, we will first try to understand the dominant rationale of a company’s pursuit of M&A transactions, and then delve into the specifics of two recently failed transactions.
Rationale for Pursuing M&A
At the end of the day, for every corporation looking to make acquisitions, it boils down to improved financial performance and increased shareholder value. When pursuing M&A to achieve this goal, improvements in financial performance could come in several forms. The following forms are the most prominent motives cited in pursuing acquisitions:
Synergy: The combined company expects to reduce its fixed costs by removing duplicate departments or operations, or by lowering costs relative to the same revenue stream, thus increasing profit margins in both instances.
Market Share: A large corporation bids to acquire a major competitor in order to capture additional market share and establish greater pricing power.
Vertical Integration: This occurs when either an upstream or downstream firm acquires the other, or both simply decide to merge to cope with problems such as double marginalization or supply disruptions.
Cross-Selling: A corporation acquires another entity which sells complementary products to benefit from advantages such as bundling and to create more customer value for its product offerings.
Economies of Scale: An acquisition is made to unlock increased order size capabilities and associated bulk-purchasing discounts.
Taxation: A profitable company can acquire a loss leader to turn the target's loss into an advantage by reducing its tax liability.
Diversification or Resource Transfer: An acquisition to hedge risk against a downturn in the event an individual industry fails to deliver value or gain access to scarce resources.
Top Failed Bids of 2017
Kraft Heinz to acquire Unilever for $143 billion ($50 per share) – announced Feb 17
(18% premium over trading price at the time of offer)
Rationale for acquisition: Kraft Heinz had the financial capacity to pull off a large acquisition, and its margin-improving mantra could easily be applied to consumer brand conglomerates. The deal was part of a strategy to become a consumer goods giant.
Reason for failure: Unilever felt the offer fundamentally undervalued the company, and it saw no merit – neither financial nor strategic – for Unilever shareholders.
Unilever’s argument does not appear to be correct given that the offer sent shares of the US-listed stock 14% higher in trading on the subsequent day, while Kraft Heinz shares also rose more than 10%. An alternate reason for the push-back could be due to cultural differences; Unilever is seen as a company focused on initiatives like sustainability, while Kraft Heinz is known for stringent cost-cutting measures.
PPG to acquire AkzoNobel for $28.8 billion – third-time revised offer announced May 8
(50% premium over trading price at the time of offer)
Rationale for acquisition: The deal would result in synergies of $750 million for PPG resulting from economies of scale in production and lower input costs. The combined entity would also become the largest global manufacturer of paints.
Reason for failure: Akzo cited that the offer price was too low, the deal faced antitrust risks, and failed to address concerns related to cultural differences.
Shares in Akzo jumped 6% in trading upon the announcement of the revised offer, an indication that shareholders liked the deal. However, the notion of cultural differences appears to be an important consideration.
A careful analysis of the above-mentioned failed transactions suggests that failure is not a result of concerns related to inadequate value added for shareholders, given there was a significant jump in the share price of the target companies and each acquirer’s offer included a decent premium. At the same time, both deals share another similarity that appears to be a more valid reason for failure: cultural differences. While only two deals do not constitute an exhaustive enough sample to conclude that cultural differences is the primary reason for deal failures, we can safely say that it is one factor that acquirers should pay close attention to when pursuing their M&A ambitions.