Mergers and Acquisitions—Come Together
Monday, May 12th, 2008 by Reuben Advani
The mergers and acquisitions market (M&A) is on fire. Despite the economic slowdown this year, M&A activity remains robust with some of the largest deals in history in the pipeline. Each time I hear a new deal announcement, I think to myself that an anthem marking these remarkable events should be played. Perhaps the Beatles’ song “Come Together” would prove an effective score. While the lyrics are a bit esoteric, the title conveys a central theme as relevant in the world of music as it is in the world of M&A. Although the title implies corporate unity and harmony, the M&A process is anything but that. The fact is most of the largest mergers are driven less by economics and more by other, less definable forces. And what continues to amaze me about this activity is that managers, analysts and investors continue to believe that some sophisticated methodology exists to value these opportunities and structure the final deal.
Most of the time, the motivations to merge are explained by a concept MBA graduates love to pepper their conversations with: synergy. I once sat through a management consulting interview and counted 25 instances in which the interviewer used that term during the 30 minute session. At the end of session, I had no idea what he was talking about. He did, however, sound quite impressive. Synergy is best defined by the equation 1 + 1 = 3. In other words, by combining two parts, a new whole is created that is substantially greater than the sum of the two parts. The bigger question is: how is synergy created? CEO’s like nothing more than to promise the creation of synergy but generally face challenges when trying to create it.
Consider the ongoing saga of Microsoft’s acquisition of Yahoo. Analysts and investors have remarked consistently that Yahoo stock should be trading in the mid teens. Yahoo management believes the stock should be trading near $40. And Microsoft CEO Steve Ballmer believes the stock is worth $33 when combined with Microsoft. So who is right? Analysts, Yahoo or Microsoft? Few deny the need for the two companies to combine in order to slow the Google juggernaut. But would the combined company be worth more than the current sum of the two parts? Ultimately, no one knows the answer to this because M&A valuation is about predicting the future. Invariably, the discussions regarding valuation offer a technical explanation for the underlying deal elements. In reality, the discussions stem from one thing above all else: ego. Yahoo’s management is reluctant to turn their entire company over to Microsoft while Microsoft is unwilling to bail out a beleaguered search engine for anything more than the offer price.
So where does that leave us, the shareholders and consumers? We need to understand that:
- Valuation is more art than science
- Management ego is perhaps the most important factor in M&A deals and
- The Beatles said it best: “One and one and one is three.”
Forget about trying to value synergy.