On this blog previously, David discussed some of the issues surrounding the AOL-Time Warner merger.  Given that the ten year anniversary of the merger was recently marked, I wanted to re-visit the ill-fated deal to explore it a little more in-depth.

AOL and Time Warner merged to create the “world’s first Internet-age media and communications company” for an all-stock combined value of $350 billion. The merger announcement stated that the new company “will be uniquely positioned to speed the development of the interactive medium and the growth of all its businesses. It will provide an important new broadband distribution platform for AOL’s interactive services and drive subscriber growth through cross-marketing with Time Warner’s pre-eminent brands”… which doesn’t include the laundry list of growth opportunities captured in the remainder of the announcement covering everything from music to telephony.

Instead of delivering on these ambitious promises, the merger imploded, translating into about $100B in lost shareholder value. The new company was plagued by many issues such as: short-term thinking, bad technology, bungled product development, and a risk-averse culture more prone to imitation than innovation. Most importantly the vision and passion the deal champions Jerry Levin and Steve Case established in 2000 were not effectively translated and executed by their people.

Yes, there were external pressures such as regulators and Wall street that increased merger difficulties – but I believe it all comes back to a clear vision that sets the strategic direction that the rest of the organization can understand and execute against. To that point – AOL’s original vision was “to build a global medium as central to people’s lives as the telephone or television… and even more valuable”. The company accomplished this vision prior to the merger. Eventually they replaced the statement in 2006: “to serve the world’s most engaged community”, which is nondescript and applicable to many businesses.

Recently, Jerry Levin, former CEO of AOL-Time Warner, and Steve Case, co-founder of AOL were on CNBC reflecting on the merger (see the video below). Levin apologized for the merger, “I presided over the worst deal of the century… I’m really very sorry about the pain and suffering and loss this has caused.” Levin and Case’s observations included:

• Leaders need to be compassionate and understanding of the significant tension due to a merger’s disruptive nature and cultural differences
• AOL TW was to be a ‘supermarket’ but instead was a ‘mall’
• Vision is nothing without execution in which people are key
• Too much focus on internal politics and wall street instead of customer needs

Technorati Tags: Acquisition Strategy, acquisitions, AOL, business acquisitions, Capstone, David Braun, External Growth, failed acquisitions, Gretchen Johnson, M&A, M&A News, m-and-a, mergers, Mergers and Acquisitions, Time Warner

Bloomberg recently reported that:

“Chief executive officers are so sure the economy will keep recovering they’re agreeing to prices that are 37 percent higher than the average since 2001, when Bloomberg started compiling data. While stocks in the S&P 500 are trading at the most expensive valuations in seven years compared with profits in the last 12 months, buyers are looking out to 2011, when analysts say earnings will have risen 52 percent.”

While I agree with the premise, I think the numbers can be a little misleading.  Specifically, which earnings are they taking the numbers from?  As we all know the past 12 months have been disastrous financial period for almost every business - except perhaps bankruptcy professionals and financial advisors.  If you took the multiples and based them on past averages or against projections for the next 24 months it is probably in line with past year’s valuation multiples.

The news here though, is that CEOs are back to buying, because they feel the future will be brighter than now.  I continue to believe that for the next 12-16 months it is a market for strategic buyers who have cash.  The credit markets are dormant and CEOs remain reluctant to use debt. So with the increase in the stock market and confidence that the markets have hit bottom and are now improving, many CEOs are getting back into the M&A market.  I predict that in late 2011 you will see a frothy M&A market - so sharpen your strategic focus and carefully evaluate your growth plans!

Multiples are down, debt is historically cheap, financial buyers are on the sidelines, the market is widely expected to improve so… (you know the phrase) if not now, when?

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, David Braun, External Growth, Integration, M&A, mergers, Mergers and Acquisitions

According to the Wall Street Journal,  November 2009 was the biggest month in over a year for deals involving consumer products and food and drinks firms, with $12.54 billion in acquisitions.  And it doesn’t look like this momentum will be stopped.  Kettle Chips, Just for Men and Grecian Formula hair-coloring products, Aqua Velva cologne, Brylcreem hair gel, Vagisil feminine products and Ambi Pur brand are all reported to be on the block.  It is interesting to me that such well known brand name companies would sell in a down market. I believe the consumer product industry continues to have seismic changes as younger people are less tied to brands, while at the same time distribution channels like Wal-Mart have strengthening power over their suppliers and continue to expand their private label products. I anticipate more product consolidation as companies like P&G have to remain relevant to their customers and maintain some economies of scale. Perhaps at the end we will have some consumer product companies “too big to fail.”

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, consolidation, David Braun, External Growth, M&A, M&A News, Mergers and Acquisitions, P & G

Our buy-side clients at Capstone are seeing the same trend that a recent Reuters article reported: “Companies are making moves to divest assets that are not essential to their operations, while stronger firms, nudged on by their boards and shareholders, are looking to grow and position themselves for the recovery.”  This leads to numerous “orphan” non-core product lines and/or business units.  This is resulting in increased deal flow, with more silent auctions and calls coming in from around the globe.  Further, JPMorgan noted: “We are seeing a pickup in serious strategic discussions that would give us more optimism for 2010.”  Capstone’s pipeline is strong and growing as proactive external growth requirements are driving leaders to “come out of the woodwork” looking for strategic assets that will offset their deficits on the organic growth side as they refine their 2010 budget forecasts.  Do you need to fill a gap? Consider that technologies and product lines are “on the market”.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, divestitures, External Growth, John Dearing, M&A, M&A News, mergers, Mergers and Acquisitions

Over and over on this blog, I have strongly advocated external growth to complement organic growth.  Today the largest 500 non-financial American firms have nearly $1 Trillion in cash and short-term investments on their balance sheets.  That’s Trillion with a ‘T’! This represents roughly 9.8% of their assets.  What does that tell me?  Companies are continuing to hoard cash.

I believe this accumulation of cash will continue for some time because credit still remains scarce, CEOs are anxious about economic pressures and companies are unsure where government regulations are headed.  Given all of this, strategic buyers have a unique window of opportunity for the next 12-16 months to make bold moves.  My philosophy remains “If Not Now, When?”. You’ve seen us say it before.  I’m convinced that sound companies with strong balance sheets, capable management, and a solid plan for growth have an unprecedented opportunity to make strategic acquisitions.

Technorati Tags: Acquisition Strategy, acquisitions, Capstone, cash, David Braun, External Growth, M & A News Acquisition Strategy, M&A, m-and-a, mergers, Mergers and Acquisitions

The M&A statistics for the third quarter of 2009 are in and show the vast majority of the deals getting done are strategic.  The economic crisis and concerns over deal financing continued to significantly hold down the number and value of deals when compared to the same period last year.  Today, a Wall Street Journal article by Peter Lattman reports that leverage is out and equity is in.  Although these numbers are grim, there is reason for hope.  A number of big name deals, such as Kraft-Cadbury and Disney-Marvel, have injected the market with some much needed optimism.  These types of deals are evidence that strategic deals are going to lead the way to recovery with private equity to follow – not the other way around.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Cadbury, Capstone, cash, David Braun, Disney, equity value, External Growth, Integration, Kraft, M&A, M&A News, Marvel, mergers, private equity

A story in the news last week caught my eye - U.S. antitrust enforcers are planning to revamp merger guidelines.  This isn’t surprising news - there have been expectations for quite awhile that the Obama administration was going to take a closer look at large corporate mergers.  It also won’t affect the vast majority of you (or our clients) - antitrust enforcement generally only relates to the biggest of the deals (like the potential Kraft - Cadbury transaction mentioned in the article). What stood out to me, though, was at the bottom of the page:

The move to revamp the guidelines… comes as tentative signs emerge that the mergers and acquisitions market is recovering… In the three months from June to August, global M&A rose 29 percent compared to the preceding three months. In the second quarter, M&A was up 15.2 percent compared with the first quarter…

This has been exactly what we have been seeing with our clients in recent months.  Deals are getting done in new ways:  more creative deal structures are being used and more options are on the table.  Deals are viewed as strategic partnerships to make two companies stronger and help them weather the storm together.  Is increased government scrutiny actually an indication that we are finally starting to see clear skies in the distance?

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, David Braun, FTC, government oversight, Growth, M&A, M&A News, mergers, Mergers and Acquisitions

Three recent deals are being heralded as “the revival” of the M&A market.  Although the linked article captures some of the larger buy-side deals (for example Disney’s $4 billion purchase of Marvel) that are now beginning to emerge, we here at Capstone are seeing a similar trend in the area of the market where we mainly focus: smaller to mid-size ($25 to $200 million) transactions. Firms are beginning to react to the apparent improvement in economic conditions (according to some indicators, but not all - see today’s unemployment numbers), and wish to capitalize on lower prices and expectations before a full recovery occurs.

Technorati Tags: Acquisition Strategy, acquisitions, Capstone, M&A, M&A News, mergers, Mergers and Acquisitions, wes teague

PWC released its second quarter report on M&A activity in the industrial products sector.  Two items from the report stood out for me.  First, M&A activity in the second quarter actually rose compared to the first quarter of 2009 (although still down significantly compared to last year).  This could be a sign that some of the fear that has gripped the marketplace is beginning to subside.  Second, the following quote struck me:

Strategic buyers continued to act as the main investors in the majority of deals in all segments of the industrial products industry as financial investors remained on the sidelines because of continued tight credit markets and a lack of liquidity.

Cash continues to be king.  Companies that have cash are using it to snap up weak competition and make strategic moves to strengthen themselves for the future.  They are making small, targeted acquisitions to calibrate their business.

At Capstone, we are continuing to push our clients to be active buyers in this market.  Our mantra remains: “If not now, when?”

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, External Growth, Growth, John Dearing, M&A, mergers, Mergers and Acquisitions

There was an excellent profile in last weekend’s Wall Street Journal of Cisco Systems and its CEO, John Chambers. Cisco is a company that “gets it”.  In some of the most difficult economic conditions of our lifetime, Cisco is not hiding its head in the sand.  Here is Chambers’ philosophy:

Even in this downturn, we intend to be the most aggressive we’ve ever been.

That is saying something for Cisco.  Since Chambers took over as CEO in 1995, Cisco has been a bold acquirer.  As the article says:

Cisco’s growth plan has combined audacity in acquisitions and attacking new markets with strict, even ruthless control over costs.

The result of this growth plan?  I could lay it out in words, but you know that a picture says it better - look at Cisco’s performance against the major stock indices since 1990:

Cisco is represented by the blue line.

Pretty impressive.  Being aggressive during down times and constantly calibrating with targeted acquisitions have paid off big time for Cisco and its investors.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, Cisco, David Braun, External Growth, M&A, m-and-a, mergers, Mergers and Acquisitions