Mergers and Acquisitions

The following article was written by Dr.Justin Robinson and published in the Business Authority 18 February 2008 issue. The BU family would remember that the Doctor, who lectures at the University of the West Indies (UWI), has parted from his stuffy colleagues by coming to the blogs to educate the Barbadian blogosphere. His article is very relevant at this time given the recent announcement that the barrier to the disputed transaction involving Neal & Massy and Barbados Shipping & Trading has been lifted.

David – BU

Hand Shaking

Mergers and acquisitions (M&A) around the world continue to occur at a dizzying pace. Securities Data Co., Newark, N.J calculates that through mid-December they totaled a stunning $2.5 trillion for 2007. The urge to merge has also hit the Caribbean and Barbados as evidenced by a number of high profile take-over bids in recent years. While M&A remain one of the most popular mediums for corporate growth the available evidence suggests that the vast majority of M&A fail to create significant shareholder value.

Research studies by business academics and management consultants have repeatedly demonstrated that most mergers and acquisitions fail to accomplish their stated goals. In fact, the most common result of mergers and acquisitions is destruction of shareholder value. Depending on the research study being quoted, failure rates range from a low of 50% to a high of 80%. The most comprehensive study to date was published in November 2007 by AT. Kearney Inc., the Chicago-based management-consulting arm of Electronic Data Systems Corp. Having examined 115 multi-billion dollar mergers in manufacturing, finance, utilities, and services in the U.S.A. and thirteen (13) other countries, Kearney determined that 62% of mergers failed to create significant shareholder value. Another widely quoted study is the Boston Consulting Group report, published in June 2007. After analyzing three thousand two hundred (3,200) transactions the Boston Consulting Group concluded that sixty percent (60%) of M&A completed from 1992 to 2006 reduced shareholder value. These recent studies confirm the findings of a number of earlier academic studies and it is now generally agreed that perhaps as many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition.. The consistency of the research findings across a variety of studies is indeed a rarity in Social Science research, and should not be taken lightly.

Some of the failures have been quite spectacular and have involved some household names. The AOL- Time Warner, Daimler -Chrysler and the Boston Scientific – Guidant deals are often quoted as examples of the destructive impact of M&A on shareholder value. The Daimler- Chrysler merger has wiped out 12.6 billion dollars of market value while the Boston Scientific – Guidant deal destroyed about 18 billion dollars of shareholder value. AOL- Time Warner’s market value has declined by 95% since the merger was completed. Of course some get it right and reap spectacular returns. For example, Chevron’s shares have jumped seventy five percent in value since its 44 billion dollar takeover of Texaco. Bank of America shares have climbed 20 percent since the acquisition in 2004 of Fleet Boston Financial shares. Shares of Mittal Steel, now Arcelor Mittal, have risen 50 percent in less than a year after the company’s 38 billion dollar acquisition of Arcelor. Why is success so elusive in M&A? Why do so many get it wrong, and so few get it right? Who really benefits from M&A?

A critical issue is price. Study after study confirms that acquirers often pay too much for the target firms. This tends to happen in situations such as the Barbados Shipping Trading and the Life of Barbados takeovers where there are a number of competing firms. In such situations ego seems to triumph over sound analysis, and in their desire to win the takeover battle the acquirer ends up paying massive premiums to the shareholders of the target firms. Thus, shareholders in acquired firms tend to benefit from M&A. A large number of academic studies show that whenever a merger or takeover bid is announced, the share price of the target firm begins to rise and the share price of the acquirer begins to fall. The stock market thus seems to anticipate a transfer of wealth from the acquiring shareholders to the target shareholders. Despite the wealth of evidence the large deals abound. Ebay paid 2.6 Billion dollars for Skype and Microsoft paid 15 billion dollars for Facebook. One should note that neither Skype nor Face Book have ever made any profits. Investors seem to pay a high price for the hubris of top executives. Of course, the lawyers and investment bankers who advise top management and broker these deals profit handsomely from these deals.

The other major factor is post-merger integration. Many acquirers appear to seriously underestimate the costs and challenges involved in integrating the operations of the various entities involved. Integrating different information technology systems and inventory management systems has been consistently identified as a major challenge in post-merger integration. Reconciling disparate corporate cultures is also a major challenge that few firms seem to navigate well.

What then makes for a successful M&A? Nohria, Joyce, and Roberson of Harvard Business School, in their recent book “What Really Works,” outline the factors that enable the 20% minority of firms to successfully execute merger and acquisition strategies. The three key criteria are a mixture of marketing, product development, and organizational issues.

From a marketing and product development standpoint, the acquisition should either provide a new customer base in which to leverage existing products or provide new products to leverage to the existing customer base. One or both of these marketing or product development criteria must be met.

From an organizational standpoint, the acquiring firm should be able to integrate the new business unit. This is most successfully accomplished when the firm executes multiple small acquisitions rather than a few large deals. Thus, the two organizational criteria for successful acquisitions are that the acquired firm is relatively small and that the acquiring firm utilizes practiced managerial processes to identify and incorporate the new unit.

Carey and Ogden in their best selling book, “The Human Side of M&A, set out to examine the methods for integrating an acquisition that were employed by a subset of acquirers experiencing significant long-term, post-acquisition value increases. They found that these acquirers;

(1) performed careful due diligence not only on the easy-to-obtain financial numbers but also the sensitive and difficult-to-obtain information about people and culture;

(2) avoided acquiring organizations with distinctly different cultures than their own;

(3) created a third strategic vision based on a combination of those (employed/ pursued) by the two merging organizations;

(4) quickly identified, motivated, and retained key managers in the acquired company;

(5) integrated the two organizations deliberately and swiftly, promoting the best managers from each organization;

(6) timed their integration activities to avoid significant disclosure prior to regulatory approval of the acquisition while doing whatever necessary to “survive” a sometimes prolonged regulatory process, and

(7) strengthened their board by selectively drawing members from the boards of both organizations.

Given this backdrop of evidence, most executives and boards would better serve their shareholders, customers, and employees by pursuing organic growth strategies. In the vast majority of cases, M&A reduce shareholder value and only provide benefits for shareholders of target firms and the professionals who advise on, and broker the various deals. On the other hand, the few executive teams that are able to make acquisitions strategies work are able to provide higher returns than the market average.

14 thoughts on “Mergers and Acquisitions

  1. Dear David,

    I will skip over the observation that while you dismiss studies as too theoretical and not relevant to Barbados in areas where the results do not favour your own views, you are eager to hear of them on other areas like this one. (OK, sorry, I just had to…)

    More seriously, this is a well known and fascinating empirical result. Congrats to you for posting it. Let me ask the local question. What lessons are to be drawn from the BS&T “corporate action”?

    If it were not for Ansa McAL making a hostile offer, the company would have been sold to Neal & Massey for around the equivalent of B$5.25 with shareholders apparently happy.

    Today shareholders are far from happy, but they are getting around B$9.04. Back of the envelope calculations suggest that’s an extra B$200m for Bajan shareholders than they were getting before (30% of shareholders are Trinidadian).

    At that price, the new owners of BS&T are going to have to work the assets harder than they were worked before. There will need to be a greater focus on performance.

    All that seems to be a good outcome for shareholders and Barbados, though we have to see where the mind and management of the company goes.

    What will happen to the extra B$200m of spending power in Barbados? Will it be reinvested at home, perhaps pushing up property prices further? Will it be spent, pushing up our current account deficit and inflation rates (though it should boost our reserves).

    Lets hope the government has a plan in place to mop up this liquidity or cost of living and the affordability of homes – two key issues of the election – will worsen.

    I can’t say the incident was a ringing endorsement of the Chairmanship of the Securities Commission. Several months and much legal bills later and we have the same outcome as the Securities Commission should have imposed all along.

    If we want more citizens saving for a pension and doing so by investing in our companies, we need better financial regulation to protect shareholders and guide companies.

  2. The regulatory framework in Barbados must be harmonized and become aligned with global requirements to encourage fair but equitable business growth in Barbados. It is not satisfactory that we continue to offer knee jerk reaction to transactions like the BS&T/Neal & massy deal and not too long ago we had the CIBC/Barclays transaction when Simpson sold some shares in a manner which sparked debate.

    It is time we unleash the power of our knowledge capital which is a product of the educational system for which we are positively known.

  3. The issue isnt so much that our regulation is backward.

    Our regulatory rules are based on (copied?) from the Canadian Companies Act and it is not that far from international best practice.

    Non-discrimination of shareholders is a key part of this regulation. The regulation offered the protection the shareholders needed.

    The problem is the the Securities Commission is short of (a) resources to investigate (b) confidence to act and (c) power/penalty of enforcement. The result is that the spoils go to those who can pay the biggest legal fees. The point of regulation is to avoid that.

    People say that Simpson was up to the same tricks this time around again.


    Were a PDC Government in office, today, Friday, 22st February, 2008, in Barbados, measures would all like now be being put in place by such a government to eventually realize in the medium term the FUNDAMENTAL CONSTITUTIONAL RIGHT AND FREEDOM OF EVERY PERSON 18 AND OVER in this country to wear any head hair or facial hair of theirs ( or of others – in the case of other human or other hair), or to have any amount of head hair or facial hair of theirs ( or of others – in the case of other human or other hair), in any style or manner in any place in which THE PUBLIC has the right to access, assemble or transit. Such a right and freedom being ONLY circumscibed by:

    (1), any choice of that person possessing their own hair ( other human or other hair too) to change ( add or take off other human hair or other hair) or retain or maintain or grow or not any head hair or facial hair ( add or take off other human or other hair) in any style or manner or amount in any place or institution or setting in which THE PUBLIC has the right to access, assemble or transit; circumscribed by such a person permitting, voluntarily, explicitly or implicitly, another to change or retain or maintain or grow or not such head hair or facial hair (add on or take off other human or other hair) in any style or manner or amount in any PUBLIC place or institution or setting or even any PRIVATE place; and,

    2), any reasonable and justified need there is and that is exacted by and clearly proven to be so by any public place or institution or setting that, in so far as it relates to the securing and maintaining of the other relevant rights and freedoms of other persons, that such a fundamental constitutional right and freedom shall be circumscribed on grounds of ensuring and maintaining a clean and healthy environment or on grounds of ensuring and maintaining certain standards and practices within religious and spiritual-based organizations.

    Also, and without prejudice to the immediately above grounds, such fundamental constitutional rights and freedoms would apply whether or not any such persons are of a particular religious or spiritual faith or social, technical, military or professional backgrounds, or would apply whether or not any such persons are likely to be operating within, or are, in fact, already operating within such religious, spiritual, social, technical, military or professional places, institutions or settings . As already seen above, such a fundamental constitutional provision would also incorporate the right and freedom of persons to possesss on their heads other human and other hair extensions and weavings and any other such things and in any styles, manners or amounts thereof.

    Also, there shall be provision in the same Barbados Constitution for serious criminal and civil actions to be taken in the law courts of Barbados by any persons who, in possessing or wanting to possess such head and facial hair ( and other human or other hair) stlyes, manners and amounts, are proven to have had any of these same fundamental constitutional rights and freedoms violated or undermined by any persons, real or artificial, in Barbados.


  5. The share quantity of real estate that BS&T possesses scares me in this deal. Just the quantity of property in Bridgetown and Warrens that would now be controlled by Trinidad is ridiculous. Around the corner from my workplace in town almost every building is SP Musson. Do we really need more real estate out of local hands when we cant even buy land on the south or west coast now.

  6. Dear m316,

    Who is to blame? The Trinidadians for buying it, or BST for doing so little with it that the company was ripe for takeover?

    BS&T owned B$100m (they valued it at B$70m) of land that was tied up for a decade in the “Pierhead Project”. If they couldn’t progress the project they should have sold it to someone who could, thereby benefiting the project, the Pierhead and BS&T shareholders. No responsible company ties up that amount of capital and does nothing with it for so long.

    BS&T also owned a lot of other land, cheaply valued in my opinion. It is said that some of this was sold off to management. I dont know the truth of that, but certainly the “related parties transactions” were quite significant even on the BS&T valuation.

    Now that the Trinidadians have paid a high price for it all, they will have to make these assets work by developing land and businesses or selling them to those who can make a better go of it. This should generate more revenues, taxes and employment. Making capital competitive should make businesses and trade more competitive.

    The status quo was a bad place and for a long while Bajans seemed content to just BS&T be a kind of affable buffoon as an owner. What happened was a consequence of that. Hopefully the threat of foreign take over will galvanise our other companies to use their capital more efficiently.

    Hopefully too, we can find ways of giving poorer Bajans more access to capital ownership (through pensions, co-ops and indirectly through NIS and the tax system) to spread the shareholder benefits more widely.

  7. It is important to recognise too, that the reason why BST ended up being sold for B$675m, rather than the original price of B$395m, was that there was open competition. Competiton caused the increasd in value.

    If we restrict who can buy assets we will lower the value of those assets. The best thing for Barbadians is not to reduce the value of their assets by saying that only Bajans can buy stuff (i.e. only the Williams, Caves and Goddards) but get the highest valuations available and ensure there are as many opportunities as possible to invest the proceeds at home.

  8. TG we are not saying that our legislation is backward. What we are saying is that the Neal & Massey/BS&T transaction shows clearly that existing legislation needs some review and tightening. After many months of speculating and anxiety among shareholders and regulators alike, let us not forget unearned revenues this matter is still to be concluded.

  9. Dear David,

    The existing legislation (Barbados Companies Act) requires buyers of a company to make the same offer to all shareholders and not to discriminate in favour of some, such as the Bourne transaction in Trinidad at B$9.04 when Bajans at home were being offered B$8.50.

    The Barbados Stock Exchange and the Barbados Securities Commission should have insisted that all shareholders benefitted from the highest price paid to any shareholder. Instead they initially kow-towed to legal pressure from Neal & Massey and the rest his history.

    We need more confident regulators rather than different legislation. However, and I think you make an interesting point, perhaps tighter legislation would have made them more confident. In particular the existing legislation does not say much to the sanction against a buyer who does discriminate against some shareholders.

    It is alleged that Simpson was buying up shares on behalf of Neal & Massey at levels above the offer in order to get them over the 50.1% hurdle without Neal & Massey having to up the offer to all 100% of shareholders.
    The existing legislation specifically outlaws “concernt parties” of this order, but the Commission and Stock Exchange do not have the where with all to investigate, discover and penalise this kind of behaviour (no broker wanted to name Simpson).

    Again the issue here is confidence and resources rather than legislation directly. Again, tighter legislation may have helped to bring more confidence, but my experience of our officials that a lack of willingness to upset powerful people is endemic and not really related to the legislation.

    One way of making the Boards of these organisations more prepared to do the right thing irrespective of whether it upsets local powers is to put on the board experienced people from abroad who do not care whether your surname is a Simpson, Williams, Cave or what.

    The DLP election slogan was time for a change and there are indeed many things that all of us believe that it is about time we change. But some of these changes to the “insiders” cannot be left to those who are “insiders” or dependent on their good grace.

  10. Thomas Gresham, I think if the legislation were as clear as you stated, the Securities Commission would have acted with greater speed and confidence. I do agree with you however that the Commission handled the matter badly.

    I am also not clear why you think that “no broker wanting to name Simpson” would have been a major problem. Would brokers always know the ultimate beneficiary of the orders they are placing? The Commission however probably has the power to investigate (by looking at the parties behind specific transactions) but it could be extremely difficult to prove something like what you say was alleged.

    Out of interest, how was Simpson eventually going to transfer the shares to Neal & Massy, without attracting attention?

  11. Areas for improvement in the legislation:

    – rights for minority shareholders to appoint board directors should be stipulated in the Companies Act, at least for listed companies
    – rules about offering the same price to all shareholders in a takeover bid should extend to shares traded on other stock markets (is this even possible?)
    – offerors should not be able to vary their offers to reduce the cash component previously offered (this is what Neal & Massy did after Ansa dropped out; in fact they stated that nothing in the law prevented them from offering a lower price if they wanted to)
    – mandatory valuations for takeover bids launched by an insider (like the Barbados Farms takeover bid) and perhaps for all takeover bids
    – forced disclosure of valuations to all company shareholders (BS&T and Barbados Farms never told shareholders the value of their shares)

  12. Dear Brutus,

    These are important points you raise.

    The Companies Act applies to any company incorporated in Barbados and across its listings of shares on other exchanges, so the law that all shareholders must be offered the same offer, should still have applied to Barbadian shareholders even if the offer was made on the TnT Exchange. The Barbados Securities Commission should have given notice of and applied this law.

    The TnT regulator did not follow the agreed accord which said that they would apply the higher standard of either set of regulations – in this case the Barbados Laws. The Barbados Securities Commission should have said that they would impose sanction in Barbados if the Trinidad trade was not reversed or offered to all.

    Neal & Massey’s claim was that the basis of Ansa McAL’s withdrawal (the coming to light of materially new information with reference to the BS&T purchase of a St Lucian company) allowed them to withdraw as well, and after withdrawal they could have come back with any offer.

    I am a bit ambivalent about mandatory company valuations. Estimates can be made, but there is no standard valuation that would tell shareholders for sure whether they are getting a good deal or not, other than the market price valuation.

    The insider issue is a very interesting one in the Barbados context. The way the legislation is designed to protect here is to say that shareholders owning more than x% (26%?) of shares, if they wish to buy shares should make the offer available to all.

    Tighter legislation will always help, but given the legislation we do have, what we need most of all is confident regulators, prepared to boldly protect minority shareholder rights – the key purpose of takeover legislation – who have the resources to act, enforce laws and impose penalties.

  13. Dear sir,
    I’m working for Eurotunnel ( I am preparing a page which content needs a picture of hands shaking. When I googled to search for a picture, I found your picture. Do you mind if I use it or is it any trouble for you? It’s just a picture to illustrate a simple page.
    Let me know if you disagree with this and I will remove the picture.
    V Delpierre

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