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strategy and business
 / Summer 2009 / Issue 55(originally published by Booz & Company)


Making the Most of M&A

  • How accurate is our perception of the business environment? What are we assuming about regulators, customers, and competitors?
  • How might those assumptions, often developed from our first impressions, differ from reality? (For instance, will the merger invite new competitors?)
  • What makes us believe that the combined company can succeed any better than the parts would on their own? Is an acquisition the only way to capture these synergies?
  • What capabilities does the acquired company bring, and where are there gaps that could threaten the new company’s success?
  • Can we successfully integrate the operations? What will the talent attrition rate be? Do we have the financial resources that the combined company will need?

If a transaction aligns with the broader growth road map, it may be worth more than its stand-alone value. If it doesn’t fit, or if the warning signals are too daunting, an experienced acquisitions team should be prepared to pull out of the deal.

Johnson & Johnson (J&J) has proven itself adept at this process over the course of roughly 70 acquisitions since the late 1990s. In describing two deals — one a $23 billion offer for Guidant, which J&J decided to abandon when the bidding rose too high, and the other a $16.6 billion deal for Pfizer’s consumer health-care business, which was successfully concluded — CFO Dominic Caruso makes clear that the business cases for the two were different, but equally well thought out.

“We always begin with our strategy,” explains Caruso. The Guidant transaction, he says, offered an “opportunity to add a microelectronics capability that was primarily implemented in our market approach to cardiac rhythm management. But the real underlying capability that existed there was the microelectronics. We went after it as an opportunity to add that new base of technology to the business.

“Pfizer represented a different kind of opportunity; they were strong in certain geographic markets where we weren’t [and vice versa],” Caruso continues. “For instance, we had a much stronger presence in China than Pfizer did. That was good because it meant we could sell more of their products there. Whereas in a market like Mexico, Pfizer had stronger ties than we did. So that turned out to be a nice set of complementary growth enablers.”

Stage 2: Strategic Due Diligence

A traditional due diligence exercise, defined narrowly, is intended to validate, verify, and “stress test” the financial and legal aspects of the business case. But as business cases become more robust, due diligence should become more comprehensive. Strategic due diligence seeks to answer two questions: First, is it reasonable to conclude that the deal will produce an enduring, attractive economic return? Second, can we validate that the participating companies have the skills necessary to deliver on that promise?

To answer those questions, the team must assess such issues as the combined leadership talent, the likely responses of potential competitors, and the risk of technological or cultural incompatibilities between the two companies. Chief Financial Officer Marcus Schenck of the German energy service provider E.ON AG described the company’s strategic due diligence process this way: “Once our people have developed a business plan for a possible takeover target, we ask tough questions to see whether they really have thought everything through. ‘Is there really a market? Are market price assumptions realistic? What do we know about the costs? Will there be regulatory hurdles? How easy will it be to implement this? What will the competitive reaction be?’...Of course you have to have a good grip on the financials, but you also have to have a gut feeling for the things that could go wrong and where to find them.”

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  1. Gerald Adolph and Justin Pettit, with Michael Sisk, Merge Ahead: Mastering the Five Enduring Trends of Artful M&A (McGraw-Hill, 2009): Context, business cases, and practical advice for the growth strategist.
  2. Irmgard Heinz, Jens Niebuhr, and Justin Pettit, “Six Rules for the New CFO,” s+b, Winter 2008: How CFOs can be more effective merger strategists, synergy managers, and business integrators.
  3. Robert Hertzberg and Ilona Steffen, editors, The CFO as Deal Maker: Thought Leaders on M&A Success (strategy+business Books, 2008): In-depth interviews with 15 leading chief financial officers on successful M&A. Source of several quotes in this article.
  4. For more business thought leadership, sign up for s+b’s RSS feed.
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