Cranfield School of Management
Interview: Professor Sudi Sudarsanam
Creating Value from Mergers and Acquisitions
SM
Now Sudi I would like to ask you what prompted you to write your
book Creating Value for Mergers and Acquisitions?
Sudi
Two things – one is this is a subject which has organisational wide
implications and it also has implications for two organisations
because it involves merging two organisations and there are different
groups of people within organisations who get to be involved in doing
mergers and acquisitions. There are the corporate development
people, the strategy guys, who conceive the strategy and then they
look at M&A as a way of implementing that strategy. There are
people who are involved the lawyers, the accountants, the strategy
people, the tax people and so on, they are also involved. So some
people within the organisation are involved in a support role, and
there are people who are involved in implementing the mergers and
acquisitions after the deal has been done. And while the deal is
being done, there are people who are involved who have an interface
with the external players like investment bankers, regulators and so
on.
So you can see that this is a transaction which does not involve a
small set of people within a small part of the organisation, it’s a
transaction which involves a wide range of functions at the different
stages. And from my research I found that there are researchers
who look at separate aspects of this process, but not as a whole. So
my view was if things are going wrong or going right, then all these
parts must hang together, so people handling these different parts of
the transaction or the M&A deal must be able to work out what this
deal means – work together. So there must be an integrated
perspective, so I found that this integrated perspective was missing.
You get fragmented perspective. You can read journals or
newspapers on strategy, you can read about the finance, you can
read about regulation and you can read about the human resource
aspect of the merger – but I found that you need to have a more
integrated, more cohesive, unified framework to analyse this process.
M&A is a very important process, it involves trillions of dollars these
days, so companies spend an awful lot of money buying other
companies – so if they don’t get the deal right, they don’t do all the
stages right, then they are going to lose money, destroy value.
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Professor Sudi Sudarsanam
So that is one motivation for writing this book. This is, I think in
contrast to many other text books, this is a book which focuses on
this unified integrated framework.
And the second thing that motivated me was when I examined the
evidence, over a long period of time, about how successful the M&A
deals are there has been accumulating evidence that the majority of
the deals don’t work. They destroy value, rather than create value.
So, on the face of it, an M&A is a high risk transaction, right? But
the important question is, where does this risk reside? At what
stage of the process? Is it that they get the strategy wrong/right, or
is it that they implement it – they don’t integrate it properly? Or is it
because they overpay, because the investment bankers advise them
to overpay, so they don’t step back and question whether they are
overpaying or not.
For example, the Vodafone deal for Hutchison in India. This
company was being valued for $12 billion about six months ago, now
Vodafone has paid $19 billion in six months. So how do you explain
that $7 billion of value have been added, at least in the opinion of this
company? So how do these companies measure this value that
they are going to create and could they go wrong in doing that? And
even if a deal looks great on paper, it could go haywire when you
come to the execution stage. So you have to look at the concept
stage, the deal making stage, the implementation stage together, so
that you can identify exactly where the risks are – where the risks are
greatest and where the risk can be better managed. So that was the
motivation. To be able to get a handle on identifying the sources of
risk in M&A deal making and implementation. So what I have done
in the book is to do exactly that – divide the M&A, treat it as a
process, not as just a deal. It is a process for which the organisation
must be ready, both before the deal is done and after the deal has
been done. So that is why I have developed this process based
view of M&A.
SM
Do I get the impression that M&A is becoming more and more
important to managers?
Sudi
It has been important for the last forty years – it has been important
and we have had waves of mergers and the disillusionment sets in
once the deal has passed. There is a euphoria when you do the
deal, but when it comes to the nitty gritty and actually implementing,
then it is a huge challenge and many of the companies fail to do that,
so they regret having done a deal. It doesn’t stop them from doing
the next deal, but there is always a regret at the end of it. It doesn’t
deliver the promise that you expect from this kind of deal making. I
mean suppose $1 trillion are spent on M&A and 60% of the deals
don’t make money – that is a huge waste of corporate resources.
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SM
Yeah. Now, we have touched already, but I would like to explore
more this five stage model that you propose. What are the key
principles that lie behind this?
Sudi
The fundamental principle which runs through is value creation.
How do you create value from a merger or an acquisition? So the
important question to ask is what is a merger or an acquisition
supposed to deliver? How does it create value? It can only create
value if it is a means of delivering corporate objectives, corporate
strategy objectives. So the starting point is corporate strategy –
what do you want to achieve by doing a merger with another
company? Why can’t you survive on your own? What makes it
impossible for you to survive on your own? What makes it desirable
for you to merge with another company? What do these two
companies bring in that will enhance your collective competitive
advantage? So that is the starting point.
The next thing is even though you may have a good strategy, it
doesn’t mean that you are well prepared to handle the different
aspects of M&A, so you need organisational resources and
capabilities – to do a good strategic evaluation, to do a good deal,
negotiate a very tough deal, that you don’t overpay and then
subsequently integrate. And you also have to have the capability to
learn from the past deals, you know the disasters, as well as the
triumphs.
So you have to be able to learn from all of these, but organisations
are very poor at learning for a variety of reasons. They don’t have a
good organisational learning process and if you don’t do that you
tend to repeat the same mistakes. So, you can’t avoid failing M&A.
So that is the motivation – how do companies conceive M&A as an
instrument for delivering corporate strategy and how do they proceed
once they have identified M&A as an instrument, how do they go
about picking the right target, paying the right price and doing the
right integration so that at the end of the day, say two or three years
down the road, you can say, yes that was a great deal and we did a
great job? Not only in picking the right target, but in getting the two
companies to work together and delivering corporate objectives.
And creating value for stakeholders.
SM
Would you pick out one of these stages as more important than the
others?
Sudi
The stages are all equally important – they differ in terms of whether
they are conceptually based, or whether they are execution based.
The degree of difficulty may differ from one stage to another, but if
you get any of these stages wrong then you are going to mess up the
whole process. For example, if the strategy is not good, the
acquisition should not be done because you don’t need it for your
business model. However good the target is, however excellent the
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management of the target is, or its own competitive positioning is, it's
not going to help you. Suppose you are looking for a certain
capability to enhance your competitive advantage and the target
doesn’t have that capability or you misjudge its capability and you go
and buy that then it is not going to work – it's not going to deliver. So
each of these stages is important, but they require different
capabilities to evaluate the risk at each stage.
SM
Is it asking a lot of managers to be able to handle all of these stages?
Sudi
Well, it is an imperative that they handle all of these stages
effectively. There is no option here. You have to do all these
stages right, but whether the same team of managers, for example,
the operational managers may be involved in the conceptual part and
then in the implementation stage - they might not be involved through
the entire five stage process. So you need a great deal of
coordination of these different stages and preserving continuity is
very, very important because it is a vision, corporate vision, which
drives the strategy, which drives the M&A. But that vision has to be
communicated to the people, to the operational managers, to the
shop floor, to the assembly line and so on. So they must all buy into
this vision.
So what happens in practice is that different people come into this
process at different stages, they do their bit and go away and maybe
they get involved in another deal, so they probably have some kind of
guideline, a statement of vision and mission and so on, but it is all on
paper – it's not communicated with the same passion and accuracy
that the original artist had in mind. So the continuity is missing in
these different stages.
SM
So what are the implications then for practising managers of what you
have discovered over the years?
Sudi
I think that the implication is that they have to think through why they
are doing a merger or an acquisition. This is not the only option.
Sometimes it is very sexy to do a deal because you are seen to be a
mover and a shaker, there is this gung-ho attitude to doing deals – or
you think that you are a wimp if your rivals see a deal and you don’t
do it. The City folks might think that you are wimp. This happened
in the case of GEC – Lord Weinstock – he never used to do a lot of
deals, he was very careful with his money, but he got a bad press
because the City was comparing GEC with all the other competitors
and saying well these competitors are doing great deals, why are you
not doing any? You are sitting on £3 billion of cash in your balance
sheet – what are you doing with that money? So there is this kind of
competitive rivalry in deal making. That is a danger – you don’t do a
deal just because somebody else does it, you do it for the right
reasons. That just because you have identified that you have some
gaps in your resources, in your capabilities, in people, in products or
marketing network and so on, so you have identified a gap and you
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think that another organisation has those compensating capabilities
and you can merge to fill the gap. So that is what should drive deal
making.
So managers have to be very, very careful in establishing a good
case for doing deals and if they are doubtful, they should wait or they
should abandon doing deals. Sometimes they do deals in the hope
that it will work out, but very often you buy companies without having
full knowledge of what those companies are worth, what makes them
tick – you don’t even know who the key people are in the
organisations. In your own organisation you might not know, but leave
alone in another organisation. So there is a very big information gap.
So deal makers have to be very, very careful in thinking of M&A as a
solution to the problem and then once they have decided that M&A is
a good way of going about it, then they have to build up these
capabilities within the organisation – they have to have the
competencies to do a good deal, to execute the implementation
and ensure that they are on the right track, that the deal is
delivering the corporate objectives.
SM
So how do you develop managers to get to the point where they
have got the competencies to know a good deal from a bad one, to
follow it through, make sure it works?
Sudi
I think that the first step is very good introspection – you have to have
a very good understanding of your own company: what your
company is, what are its great strengths and weaknesses, and where
are the weaknesses, and whether you can eliminate those
weaknesses through M&A. So that is the first step. You have to
have a very good model, competitive model. How are you going to
compete? What resources do you need to compete? And whether
you have those resources. The first option is to develop them
organically. Some companies think it is a very safe option,
compared to say buying these resources from another company.
But it may not always be the case because you may not have the
necessary supporting structure to develop resources organically, so
you have to buy in – but when you buy in you may drive up the
prices. You have to have a good understanding of your own
company, its strategy, where it is going, where it wants to be and
what it needs to do in order to get to be there, and what sort of gaps
exist in resources and capabilities – and then look for the right target
company. You have to do a lot of research about the target
company. Sometimes the companies come into play because
another company has thought about making an offer and then you
get into the act because you don’t want to be left behind. So in a
sense you are being bounced into an auction.
You know the recent case is the Corus case. There is the Indian
company Tata and there is a Brazilian company. Initially nobody
thought that there would be an auction and the price has gone up
about 50% because of this auction. So, it is not as though nobody
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knew about Corus about a year ago. Timing is also very important.
SM
And what would be the advice you would give to that 50% or so that
fail. They don’t set out to fail clearly.
Sudi
No, they don’t set out to fail – to give them credit, I think they want to
be winners. I think they don’t assess the risk appropriately, and they
don’t allow for that risk. Either the timescale involved, or they might
have misjudged the target in terms of capability – so that is the kind
of risk which comes out. There are two kinds of risk basically: one
is, you don’t know what you are buying; two is, even though you
know what you are buying you are not implementing the integration
properly, so you extract the necessary value from what you have
brought. So you could be wrong on either count. You could be
buying the wrong company, thinking that it is a great company, or
you buy the company and the key people walk out, there is no way
you are retaining them, then that is it – the value has walked out the
door. So, how do you really keep them in? What kind of incentives
do you offer? This is part of the negotiation framework – you have
to negotiate the right incentives for people to stay and contribute.
So I think the essential lesson is that you have to do a very good risk
evaluation and develop the risk management competencies.
SM
So, I would like to look to the future of this and say come the next
edition of this book, what do you feel has emerged that you would
say I wish I had put more of that in, and where is the direction of your
own interest going in this area in the way of research?
Sudi
My interest – I mean it follows the developments in the market, in the
M&A market. Now the M&A market has become very global, cross
border mergers and acquisitions have become a very important part,
a lot of action is going to happen in the newly emerging countries.
M&A deals will still happen in developed economies, but they will be
of a more restructuring kind, not a path breaking kind, not breaking
into new markets, in new products, new technologies and so on. So
the cross border mergers will become a very important part, and then
there are lots of players – new players – in this game. The private
equity players have become very dominant, the hedge fund managers
have become very dominant – they are able to play a critical role in
swinging the takeover battle one way or the other. Sometimes they
favour the target company, sometimes they favour the bidding
company, sometimes they manipulate the situation in their favour.
So there are new players in this game – they will have a big impact
on how the deals are done, what premium is paid and so on. So
companies must be very, very careful when they get into this kind of
situation.
Originally, a few years ago, the bidders would think that they can
swing all the speculators in their favour, but now it is the speculators
who are swinging them round. So the power has shifted to some
extent. So this is a very interesting area, and another area that I am
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researching is the compensation issue. Are there wrong incentives
for managers to make deals? Do they get penalised for doing the
wrong deals or do they get rewarded for doing incompetent deals?
So that is a big issue now – the executive compensation and how it
influences deal making. This brings in the corporate governance
issue – how good is the corporate governance? In some cases in
companies, the non executive directors say you can’t do this deal,
you can’t sell this company to a private equity firm because the price
is not high enough. So the quality of corporate governance is
becoming a very important factor in the quality of M&A. So that is
going to be a big issue now, so that is an area that I am researching.
SM
OK – thank you.
Transcript prepared by Learning Services for the Knowledge Interchange
www.cranfield.ac.uk/som
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