An earlier Post focused
on goodwill Impairments
as a measure of M&A value destruction. Duff & Phelps has released a new
Study
which contains some interesting results:
1) Goodwill impairment surged 76% from the prior
year to $51B.They still remain below the peak 2008 crisis related levels which
were centered in the financial services industry.
2) Buyers paid the lowest premiums in nearly 20
years, less than 20% v a historical 30%+.
3) Impairments were concentrated in industries and
firms undergoing structural change. IT was the industry experiencing the largest
share of impairments. Two firms in that industry, Hewlett Packard (HP) and
Microsoft (MS) had the largest impairments at $13.7B and $6.2B respectively
representing nearly 40% of total annual impairments. HP’s impairment concerned
its Autonomy acquisition while MS’s related to aQuantive.
The biggest source of M&A value destruction is
overpaying. No matter how good the fit, how good the target, how flawless the
integration, or the amount of due diligence, if you overpay, reflected in the
amount of goodwill created or earnings and book value dilution, your
shareholders will suffer.
Conceptually, the target’s pre bid share price plus the
premium equals price paid. The value received is the target’s standalone value
(reflected in the pre bid price) plus any synergies. Thus, the acquirer’s net
value received is synergies less the premium. Premiums are, however, a fact
while synergies are an opinion subject to behavioral bias.
As a rule of thumb, premiums exceeding 40% are prima facie
evidence of overpayment. Think about it, a 40%+ premiums means you have to
improve the target’s performance by over 40% just to breakeven. Unless, the
target was grossly mismanaged, this will be difficult in a low growth highly
competitive market.
The HP and MS acquisitions were grossly overpriced with
premiums of 64% and 85% respectively. Such actions reflect desperate buyers
gambling for redemption (AKA Hail Mary pass). Both HP and MS are former growth
stars experiencing slumping sales growth and eroding margins. Their management
teams, both of which have or will be replaced following their disastrous acquisitions,
believed large transformational acquisitions would serve as a growth elixir.
Unfortunately their shareholders were forced to drink from the poisoned chalice
of value destruction.
j
PS We are approaching the next offering of our Acquisition Finance Course in Amsterdam and that also means approaching the deadline to sign up.
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