Strategy and M&A

When I have to talk about strategy and how important it is to the M&A process I am normally greeted with groans, expressions of disinterest, rolling of the eyes and all sorts of reactions that scream out "get on with it" and "hurry up and get to the good stuff!". I happen to think that strategy - understanding it, formulating it, applying it, is by far and away the most interesting component of the M&A field. Whether or not this is a personal quirk i will leave up to you. I mean, no any two firms can merge their practices and hope to create value for shareholders, and the empirical evidence shows us that on average acquirers do not. Developing a strategy to best capture value, therefore, is clearly one of the most challenging aspects of any M&A analysis.

Today more than ever, M&A strategy is more than just a simple diversify or acquire growth choice. Restructuring need not be for the complete business, it may only be partly related, and may involve a number of considerations, such as acquiring and divesting in the same transaction. See the recent Google acquisition of Motorola. Despite Google acquiring the Motorola business, reports already suggest that it will part with the Television set-top box and mobile-phone hardware businesses.  Strategy need also not be as binding. Companies these days engage in a range of "gentlemen agreement" type associations such as joint ventures, strategic alliances, as well as franchise agreements. Furthermore, whereas M&A is typically viewed as an operational decision, firms can obtain financial synergies from it. For example, the spin-off vs. carve-out decision is partly driven by a firm's predisposition to cash. A carve-out may aid a firm's overall financing dilemma and thus be preferred to a spin-off.

What i think the previous paragraph reveals is that M&A has real and long-term implications for firm stakeholders. The goal of M&A is to clearly acquire capabilities and resources to achieve a sustainable competitive advantage and where the ship begins to sail off course and into a storm, use it to change course to be able to achieve this objective.An article featured in today's AFR "Caltex must refine its strategy"  discusses some of the challenges faced by Caltex and its multi-speed business. While its marketing business is a real "bright" spot in the business, its refining and supply has been a let down for several years now owing to an inability to reign in costs due to both operational and macro effects. The firm has reached a point whereby maintaining such a structure, or following the same course, is clearly detrimental to the firm's shareholders. M&A provides an out for companies like Caltex, but requires them firstly to think about the marketplace (competitors, the industry performance), its own operations (firm capabilities and limitations), potential synergies, an alternative options for growth. In a dynamic world, the tools offered by M&A drive corporate renewal.

Although typically trivialised, the expectation of shareholders is just as important, if not more so. Taking the Caltex case study a tad further - during the recently revealed interim results, CEO Julian Segal, outlined the need to explore further external opportunities linked with the firm's existing business. In the current environment, where strong up front cash flows are valued, if such a strategy is perceived to wither away the strong growth in the marketing business then shareholders will vote with their feet driving down Caltex's share price and making the decision to change course all the more difficult. It is for this reason that you find managers (CEO's, CFO's) getting on the front foot when talking about a firm's future direction. To not map your course is to create an asymmetry in the market between those who do know and those who don't. If this gap widens then the stock becomes inherently more risky to hold for the investor and consequently less valuable.