2016 20 JUNE

A MarketPoint Whitepaper

Mergers
and Acquisitions
Mergers and Acquisitions

2015 was a record year for mergers and

acquisitions, as the global M&A volume
exceeded $4.25 trillion U.S. dollars (Statista).
Dealogic, a subsidiary of the Carlyle Group, $79 billion
posited an even higher figure of $4.9 trillion
Charter Communications
(Graham). And if they’re right, that’s enough merges with Time Warner
to run the entire federal government for 15 Cable (Graham)
months (Congressional Budget Office).

It was a year in which computer giant

Dell bought EMC for $67 billion, in what
TechCrunch called “the largest tech deal
in history, by far” (Miller). That same year, $47 billion
Pfizer and Allergan merged in a $191 Qualcomm merges with NXP
billion deal (the second-largest M&A deal Semiconductors (Shen)
on record); Anheuser-Busch InBev bought
brewer SABMiller for $120 billion (cornering
one-third of the world’s beer supply); Royal
Dutch Shell acquired British Gas for
$81 billion; broadband provider Charter
Communications merged with Time
Warner Cable in a $79 billion deal; and $81 billion
Dow Chemical and DuPont merged in a $68
Royal Dutch Shell acquires
billion deal (Graham). British Gas (Graham)

But these deals are far from the biggest.

You may recall the 2000 acquisition of Time
Warner, by AOL. That deal went down for
a whopping $181 billion (Sutel). Before it
fizzled. Nine year later, Time Warner spun
off its acquisitor. $48 billion
Anthem merges with
Cigna (Graham)

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So, what exactly is
a trillion dollars?
“Trillion.” It’s such an easy word to say – but few people
stop to consider its size. Think of it this way: If it cost
one dollar to go back one minute in time, a trillion
dollars would take you back 1.9 million years – about
the time humankind began to walk upright.
If one dollar could take you back one minute
in time, a trillion dollars would take you back
1.9 million years!
(You Are Here)
Let’s try another example. If you were to stack one
trillion crisp U.S. dollar bills atop your kitchen table,
your stack would reach well over 63,000 miles above
the earth’s surface (IHTD) – where water boils at 37
degrees Centigrade, or body temperature (FAA).
[Don’t try this at home.]
Or, think of this: Each dollar bill weighs approximately
one gram. One trillion grams would weigh as much as
The Golden Gate Bridge (Robinson). And to extend
that metaphor, 4.25 Golden Gate Bridges would
weigh about 3.7 million tons – the aggregate weight
of California’s 2015 wine grape crop (Turrentine
Brokerage). [Now we’re talking.]
$26.2 billion
Microsoft
rosoft acquires
acqui LinkedIn, paying a
50% premium over share price, making it
the third-largest acquisition in the history
of the tech industry (The Economist)
Earlier this year, Microsoft paid $26.2 billion
– a generous 50% premium over share price
– for professional social network LinkedIn, a
figure The Economist calculates is equivalent
to “$260 for each monthly active user” of
LinkedIn (The Economist), making it the third-
largest acquisition in the history of the tech
industry. That’s right, $26 billion – for data.
$68 billion
Dow Chemical merges
with DuPont (Graham)
Clearly, there’s something in the corporate
water.
And it’s not that the acquiring companies
can’t afford the deals. In America alone,
corporations are sitting on about $1.9 trillion
in cash. Alphabet, Google’s parent company,
is sitting on $80 billion alone – that’s enough
to buy Goldman Sachs outright. Apple holds
more than a third of its total value in cash, and
General Motors nearly half (Davidson). When
it comes time for acquisitions, that’s a lot of
negotiating power.
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And the beat goes on

T
he first half of 2016 hasn’t been quite
as monumental as 2015, but the M&A
trend isn’t exactly over, either. London-
based drug manufacturer Shire made
a $32 billion, cash-and-stock offer for Baxalta;
Abbot Laboratories tendered $31 billion in
cash and stock for St. Jude’s Medical; Johnson
Controls merged with Tyco International in a
$17 billion deal; Marriott International bid $14
billion in cash and stock for Starwood Hotels,
to become the world’s largest hotel chain;
and TransCanada (the company behind the
Keystone XL pipeline) offered $13.2 billion in
cash for Columbia Pipeline Group (Shen). Other
notable household names swallowed up in 2016
acquisitions include ADT and Valspar.

A Mug's Game

M
ergers and acquisitions are considered successful if their combined performance
(shareholder value) does better after the conjoining event than it would have likely
done without the union (Rigby). Or, more colloquially speaking, “Should we marry,
would it be for better or for worse?”

Not So Fast
80%
– 80% of Acquisitions Fail (and here’s why)

Sadly, according to the Harvard Business Review, “M&A is a mug’s game, in which typically 70%–90%
of acquisitions are abysmal failures” (Martin). Experts cite various reasons for the failure rate:

1. Acquiring companies overestimate the potential return on acquisitions and simply pay too much
(Christensen).
2. Acquiring companies fail to understand the markets of their acquisition targets; examples may
include Microsoft (which wrote off almost all of the $7.9 billion it paid for Nokia), Google (which
bought Motorola’s handset for $12.5 billion only to sell it for $2.9 billion), HP (which lost more
than $8.8 billion on its acquisition of Autonomy), and News Corp (which bought MySpace for
$580 million and sold it for $35 million) (Martin).

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3. Executives often fail to distinguish between deals that might improve operations and those
that could dramatically transform the company’s growth prospects. And so, they either pay too
much, or they fail to integrate appropriately (Christensen).
4. Senior managers are often so caught up in the moment that they become spread thin and ignore
their core businesses (McClure).
5. Cultures of the two organizations collide, causing resentment and lost productivity (McClure).
6. Companies focus so much on cutting costs after the merger that they lose revenue momentum
(McClure).
7. Companies may walk away from potentially transformative deals, thinking they are overpriced
(Christensen).

1 2
Acquiring companies fail to understand the markets
Acquiring companies
of their acquisition targets; examples may include
overestimate the potential
Microsoft (which wrote off almost all of the $7.9 billion
return on acquisitions and
it paid for Nokia), Google (which bought Motorola’s
simply pay too much
handset for $12.5 billion only to sell it for $2.9 billion),
(Christensen).
HP (which lost more than $8.8 billion on its acquisition
of Autonomy), and News Corp (which bought MySpace
for $580 million and sold it for $35 million) (Martin).

3 Executives often fail to distinguish between deals that might improve operations and
those that could dramatically transform the company’s growth prospects. And so,
they either pay too much, or they fail to integrate appropriately (Christensen).

4 Senior managers are often so caught up in the

moment that they become spread thin and
ignore their core businesses (McClure). 5 Cultures of the two organizations collide,
causing resentment and lost productivity
(McClure).

6 Companies focus so much on cutting

costs after the merger that they lose
revenue momentum (McClure). 7 Companies may walk away from
potentially transformative deals, thinking
they are overpriced (Christensen).

On the Other Hand...

Not all acquisitions fail. Warren Buffett’s rolling the cornerstone of Berkshire Hathaway. And
acquisition of GEICO, for example, took 45 years Buffett is now one of the wealthiest men in
to complete. But in the end, GEICO became America (Martin)

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 But Then Again… (Martin)

45 years $404 million $50 million

The number of years
Warren Buffett invested in
his rolling acquisition of
GEICO, making Buffett
one of the wealthiest men
in America.
How much Apple paid for
NeXT, to position Apple with
a new operating system and
bring Steve Jobs back,
setting the stage for “the
greatest accumulation of
shareholder value in
corporate history."
How much Google paid
for Android, gaining
a foothold in mobile
communications, one of
the largest and most
important markets on
the planet.

In 1997, Apple was flailing. But its acquisition
of NeXT, a company founded by its former
chairman Steve Jobs, positioned Apple with a
new operating system and brought Jobs back. At
$404 million, that acquisition may have seemed
overpriced at the time, but it “saved Apple and
set the stage for the greatest accumulation of
shareholder value in corporate history” (Martin).
In 2005, Google spent $50 million to buy
Android. And while that’s a lot to spend on
an operating system, it gave the company a
foothold in mobile communications, one of the
largest and most important markets on the
planet (Martin).

Moving right along

I
nspired by the incredible success of some
deals (and funded by record levels of capital),
the M&A market continues to flourish,
and experts agree the immediate future
is bright. Matt Porzio, a former investment
banker from German advisory firm Metzler, and
a driving force behind content management
and collaboration provider Intralinks’ M&A
business, anticipates four influential trends for
M&As in 2016 (Porzio):

1. Social deal-making, the use of social computing and online deal sourcing, will connect sellers with
buyers at an increasing rate. Deal sourcing platforms like Dealnexus will become mainstream.
2. Driven by tighter internal governance and increased risks to the transaction, deals will leak far
less often, improving their odds of being completed.

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3. Companies’ boards and senior managers will improve their levels of engagement with insti-
tutional investors to manage shareholder activism and reduce the influence of activist hedge
funds.
4. The Federal Trade Commission and the Department of Justice will become more aggressive
in enforcing anti-trust, making it more challenging for major players in a market to acquire or
merge.

So, Where Are We Headed? (Porzio)

Social deal-making, the use of social computing
and online deal sourcing, will connect sellers
with buyers at an increasing rate. Deal
sourcing platforms like Dealnexus will become
mainstream.
Driven by tighter internal governance and
increased risks to the transaction, deals will
leak far less often, improving their odds of
being completed.

Companies’ boards and senior
managers will improve their levels of
engagement with institutional investors to
manage shareholder activism and reduce the
influence of activist hedge funds.
The Federal Trade Commission and the
Department of Justice will become more
aggressive in enforcing anti-trust, making
it
more challenging for major players
in a market to acquire or merge.

Jeff Golman, Forbes contributor and vice chairman and head of the investment banking group at
Mesirow Financial, shares Porzio’s enthusiasm. Golman cites four deal drivers (Golman):

1. CEOs saw M&A activity drive up stock prices in 2015 for both the acquiring company and the
target. This will give CEOs and their boards increased confidence.
2. Interest rates remain close to historical lows, facilitating cheap financing of debt.
3. In a slow-growth economy, M&As will continue to be an attractive means of achieving growth.
4. The continued consolidation within market sectors will force companies to consider M&A
strategies as a means to remaining relevant or fending off takeovers.

So, there you have it: A quick look at M&A in 2016. Market sectors are tightening, cash is plentiful,
confidence is strong, and opportunities are everywhere. What about your business? Is it time to
make your move?

© 2016 MarketPoint LLC

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About the Author

M
ichael Zimmerman is the Senior Marketing Strategist at MarketPoint
LLC, a business consulting firm specializing in strategic communica-
tions, brand management and outsourced marketing. Calling on 36
years of management experience, including two CEO positions and
several marketing leadership roles, Michael is a regular contributor to SmartCEO
Magazine (New York, Philadelphia, Baltimore, and DC editions); he has been pub-
lished in Social Media Today, Technorati, The Social Customer, and Sales and Marketing
Management Magazine, and speaks frequently at area universities.

Works Cited

Christensen, Clayton M., Richard Alton, Curtis Rising, and Andrew Waldeck. The Big Idea: The New M&A Playbook. March
2011. Article. 24 June 2016. <https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook>.

Congressional Budget Office. Budget. 2016. Web Page. 23 August 2016. <https://www.cbo.gov/topics/budget>.

Davidson, Adam. Why Are Corporations Hoarding Trillions? 20 January 2016. Article. 23 August 2016.
<http://www.nytimes.com/2016/01/24/magazine/why-are-corporations-hoarding-trillions.html>.

FAA. Section I, 1.2 - SPACE. n.d. Document. 23 August 2016. <https://www.faa.gov/other_visit/aviation_industry/designees_

delegations/designee_types/ame/media/Section%20I.1.2%20Space.doc>.

Golman, Jeff. Four Reasons 2016 Will be a Strong Year for M&A. 11 January 2016. Article. 28 June 2016.
<http://www.forbes.com/sites#/sites/jeffgolman/2016/01/11/four-reasons-2016-will-be-a-strong-year-for-ma/
#5fd385374d49>.

Graham, Luke. The biggest mergers and acquisitions of 2015. 24 December 2015. Slide Presentation. 24 June 2016.
<http://www.cnbc.com/2015/12/23/the-biggest-merger-deals-of-2015.html?slide=1>.

IHTD. How much is a trillion dollars? 2015. Web page. 23 August 2016.
<https://ihtd.org/festivalguide/resources/how-much-is-a-trillion-dollars/>.

Martin, Roger L. M&A: The One Thing You Need to Get Right. June 2016. Article (from the June 2016 edition). 23 August
2016. <https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right>.

McClure, Ben. Mergers and Acquisitions: Why They Can Fail. n.d. Article. 16 June 2016.
<http://www.investopedia.com/university/mergers/mergers5.asp>.

Miller, Ron. Dell Buys EMC For $67B In Largest Deal In Tech History. 12 October 2015. Article. 23 August 2016.
<https://techcrunch.com/2015/10/12/dell-buys-emc-for-67b-in-largest-deal-in-tech-history/>.

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Porzio, Matt. Looking Ahead: M&A Trends In 2016. 8 January 2016. Article. 28 June 2016.
<http://www.forbes.com/sites/mattporzio/2016/01/08/looking-ahead-ma-trends-in-2016/#6f7b2f113942>.

Rigby, Darrell K. “Mergers & Acquisitions.” 10 June 2015. Bain & Company: Insights. Web. 24 June 2016.
<http://www.bain.com/publications/articles/management-tools-mergers-and-acquisitions.aspx>.

Robinson, Larry. Scales of Measurement. n.d. Table. 23 August 2016. <http://midimagic.sgc-hosting.com/siscale.htm>.

Shen, Lucinda. These are the 12 Biggest Mergers and Acquisitions of 2016. 13 June 2016. Article. 29 June 2016.
<http://fortune.com/2016/06/13/12-biggest-mergers-and-acquisitions-of-2016/>.

Statista. Value of merger and acquisition deals worldwide from 2007 to 2015. 2016. Web Page and Charts. 16 06 2016.
<http://www.statista.com/statistics/293308/value-of-global-merger-and-acquisition-deals/>.

Sutel, Seth. AOL Buys Time Warner for $162 billion. 10 January 2000. News Story. 23 August 2016.
<http://abcnews.go.com/Business/Decade/aol-buys-time-warner-162-billion/story?id=9279138>.

The Economist. “Linked Up.” 18 06 2016. The Economist. Article (from the print edition). 24 06 2016.
<http://www.economist.com/news/business-and-finance/21700605-it-one-most-expensive-tech-deals-history-it-
may-not-be-smartest-making-sense>.

Turrentine Brokerage. Preliminary Winegrape Crush Report Is 3.7 Million Tons. 2 February 2016. News Release. 23 August
2016. <http://www.marketwired.com/press-release/preliminary-winegrape-crush-report-is-37-
million-tons-2095781.htm>.

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