Learning from two of the best M&A deals of 2019.

Subscriber First Name, welcome to the last day of the year and the final edition of NextPerspective for 2019.

Next week our commentary on trade, QE and other seismic forces impacting on WA industry will recommence but today I wanted to look back at 2019 and to some deals which nicely illustrate why “good M&A seldom fails.”

Motivation.

We’ve probably all heard people say that most mergers and acquisitions fail.

In fact, many articles have been written on the subject. They often point the finger at inferior due diligence processes or deal team construction, cultural and leadership style mismatches, rubbery accounting, missing synergies and bad integrations, etc.

Whilst these are important elements they can to a small extent be tolerated if the key deal motivation is properly founded on strategy.

And that’s the real point - the most important difference between M&A success (‘good M&A’) and failure (‘bad M&A’) is strategic motivation.

Good M&A is motivated by and aligned with business strategy and often requires one or more transactions that:

• combine businesses and/or re-house assets in a way that extends and evolves the combined/new business, and/or

• reshape an industry landscape to deliver a sustainable advantage, and/or

• materially add to/improve the capabilities and competencies of the new business.

Bad M&A is motivated by fear, vanity, hubris, chasing non-strategic scale for the sake of size, fees or leadership team incentives, and a range of other motives. More often than not and despite the math-based recommendations of experts, these are rarely in the best interests of shareholders.

In some cases, bad M&A can create dis-economies of scale. For example, significant growth by acquisition or a merger that is non-strategic can sometimes catapult a business into a competitive state that requires a level of ongoing investment and risk that the combined business cannot handle.

If financial and managerial outcomes are the key deal motivators, it is unlikely the new business will be successful over the long-term.

Similarly, bargain hunting deals based on a low valuation multiple, debt stuffing, surplus asset stripping and tax engineering are seldom a sustainable way to build a dominant business over the long-term.

“Bad M&A almost always fails. Good M&A seldom fails.” NextLevelCorporate.

On that note, enjoy this final edition for 2019 and I look forward to seeing you in the 2020 market - tomorrow!

Mike.

Good M&A 1.

In March of this year, Fox sold its Hollywood assets into Disney and spun-off its broadcast media assets into ‘new Fox’. Disney brings funding and distribution to Fox. The Fox assets fill in a large piece of Disney’s digital economy strategic puzzle, including control of Hulu. New Fox now has like for like assets and is easier to manage.

After decades of making money from theme parks, merchandise and movies, Disney started to acquire some big names in the entertainment business. It bought Pixar in 2006, Marvel in 2009 and Lucas Film in 2012 and with the recent purchase this year of the Fox assets, Disney’s value has increased by a factor of 10x in a little over 10 years. A lot of this is due to the competitive positioning the business now occupies, with the rest due to the bloating effects of QE.

Still, Disney is now the global leader in entertainment and a much more credible and potent force to be reckoned with in the streaming wars, across multiple genres and markets.

At the same time, Murdoch has future-proofed the Fox Hollywood assets in a more appropriate and better funded vehicle, while the broadcast and media assets are housed in almost pure-play entities (new Fox and News Corporation).

In this sense, the asset combinations were strategically motivated.

Financially, the 307 million shares in Disney issued to Fox shareholders represents ~17% control of Disney, with Murdoch the largest beneficiary and now potentially the largest shareholder in Disney. The exact percentage is not possible to calculate at this time. However, as a significant shareholder Murdoch gets power and influence in a new and improved Disney (although I would stop well short of calling it a reverse takeover) along with several billion in cash and around 39% control of a more manageable new Fox.

Tap on the ‘Read More’ button below for the detail.

Good M&A 2.

Bezos, Gates and ……Arnault?

Yes, Bernard Arnault is the CEO and controlling shareholder of LVMH. He is one of three members of the $100 billion net worth club along with Jeff Bezos and Bill Gates. Arnault’s wealth did not come from selling technology, it came from selling vanity and luxury experiences.

And, whilst selling vanity is lucrative, LVMH was not motivated by vanity when it recently agreed to spend US$16 billion on iconic luxury brand, Tiffany & Co.

The deal was strategically motivated.

LVMH is similar to Disney in terms of its competitive positioning in its market. It too is a global juggernaut and category leader across many related verticals and is seeking to mix world class content with global distribution to deliver a wider customer experience.

Tiffany & Co will bring LVMH 300 stores and impressive penetration into US and Asian markets (which LVMH wants to grow) along with an ability to better compete with Richemont owned luxury brand, Cartier.

LVMH will bring a global footprint across which Tiffany & Co can expand (noting that only ~20% of Tiffany’s sales are into Europe). If the deal is approved, the combined house of vanity will have a staggering 75+ household name luxury brands in its expanding omnichannel offering.

Financially, the deal is a lot smaller than the US$52.4 billion Fox/Disney deal, weighing in at US$16 billion. It’s also an all cash deal with no ‘family’ succession and control aspects to deal with. This is because Tiffany & Co. is a listed company controlled by institutional shareholders and mutual funds.

The transaction is technically subject to a Merger Agreement, but looks and behaves like an acquisition. It is expected to close in the middle of 2020 and is subject to customary closing conditions, including approval from Tiffany’s shareholders and the receipt of regulatory approvals.

Tap on the ‘Read More’ button below for the detail.

A final note…

The Disney and LVMH multi-billion dollar deals are far from risky bets.

They are necessary investments in the face of seismic generational shifts in fashion, tastes and the way more consumers want to share experiences.

Astute consumer-facing retailers know that standing still in a changing world is pretty much death by a thousand cuts, and doing nothing is where the risk really lies.

Depending on competitive forces and the likely competitive response, sometimes the only option is external M&A.

The other item to note is that whilst the two deals covered in this edition are big, M&A doesn’t have to be big to be good.

Rather, the point is that business leaders need to consider strategic motivation, well before financial and other motives if they want to know what ‘good’ looks like. Sure, financial aspects can be optimised, but only after the strategic stake in the ground has been belted in.

It only remains to be said that corporate buyers need to fully understand motivation at this point in the cycle. This is because:

• US$20 trillion of QE has reset the cost of funding and pushed up equities, valuation multiples and the financial motivation of sellers

• Boomers without trans-generational plans and/or sustainable financing in place are being forced to sell their empires

• Technological disruption is a horizontal movement that is cutting into old industries to create new ones, and this is forcing many marginal/insolvent businesses into combining with others to stay relevant and/or compete - or sell out

With this level of supply, buyers need to be alive to and wary of strategically misaligned and personally motivated deals.

In other words, when strategic motivation is missing/masked by low interest rates, overvalued share prices, bargain hunting and financial engineering like: “the deal after one-off costs, and normalised for xyz, will be earnings accretive immediately,” that’s the time to question whether you’re delivering into your strategy, or someone else’s.

Best wishes, Mike.

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