October 2013Strategy

The Time May Be Right for a Merger — But Are You Ready?


After plummeting in 2009, most experts — including Wharton Accounting and Finance Professor Robert Holthausen — expect this year to finish as a robust one for M&A activity. A combination of available cash and financing, relatively healthy debt markets, and strengthened corporate balance sheets is behind the positive outlook. “It’s not going to be where it was in 2007, at an all-time high, but most people anticipate deals will be in the $2.5-3 trillion range,” notes Holthausen.

Recent transactions, including the third largest M&A deal of all time, Verizon Communications’ $130 billion deal to buy a 45% stake in Verizon Wireless, and Microsoft’s second largest purchase (after buying Skype in 2011 for $8.5 billion) of Nokia's phone unit for nearly $7.2 billion, put that goal within reach. Global M&A activity is now at nearly $1.55 trillion for the year.

But as more companies consider fueling growth and deploying capital through M&A activity, it becomes more important than ever to understand current trends in the marketplace. “The environment is very different than it was just a couple of years ago,” says Holthausen. The faculty director of Wharton Executive Education’s Mergers and Acquisitions program explains, “One considerable difference is who’s buying: as M&A activity rebounds, so have purchases by leveraged buyout groups. That’s important because companies who are bidding against them aren’t always aware of what they’re up against. A few years ago, these groups were in about five to ten percent of the market. Now they represent over 20 percent of all M&A activity, which means they are bidding on even a greater percentage of potential deals.”

Holthausen continues, “It puts pressure on executives to up their bids. If they think they’re bidding against another company in their industry, one that understands the value of the firm they’re bidding on, they’re going to be surprised in some circumstances when they get outbid by a private equity group. The typical response is to end up paying too much. Instead, they need to be armed with the knowledge about who else may be bidding, and be willing to walk away.”

Executives who attend Mergers and Acquisitions learn that there are a host of reasons for why mergers may not create value for acquiring companies. “Failures in areas like valuation, strategy, integration, and due diligence can also cause a company to bid more than the target will be worth to the acquirer. We spend a lot of time [in the program] talking about how those interrelated activities are involved in managing an M&A transaction. Companies that succeed in their M&A efforts have an integrated process that doesn’t treat different teams like separate silos. They communicate well across all groups and facets of the deal, sharing strategy, progress, and findings.

"If their efforts aren’t integrated, it can be a disaster even if they got a good price. Someone from operations, for example, might not even be involved until the day the deal is closed. I’ve seen deals that made sense — the company paid the right price based on the value the merger represented to them. But they didn’t run the integration right, and they never realized the benefits they thought they were going to get.”

Holthausen notes that a failure to understand the current M&A marketplace and best practices isn’t just about missing the opportunity to create value. “About half of all mergers actually destroy value. It’s a complex process, with incredible risks. But having the right knowledge and the right tools can set you up for success.”