Merger &

Acquisition (M&A)
C h 2 : I n t e g r a ti o n , S y n e r g y,
a n d Va l u e C r e a ti o n
Why firms want to do M&A ?Do They?
Revisiting Coley and Reinton 1988: simple steps towards
merger performance improvement
Merger segmentation and value management
by acquirer: overview

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M&A Four categories
Opportunistic, Operational, Transitional, and Transformational

• Category 1: Opportunistic ( Bottom trawler.)

The word ‘opportunistic’ refers here to the timing of the transaction. Unless the acquirer is a liquidator, this category involves pursuit of companies in
segments that are already well known to the buyer. The acquirer acts quickly to exploit temporary negotiating advantage, such as when cash-strapped owners
of the target company are eager to sell a SBU whole rather than liquidate that business.
• Category 2: Operational (Related merger types: Bolt-ons (2a), Line extension equivalents (2b).)
The acquirer targets acquisitions specifically related to its core business/es. There is no experimentation with unfamiliar industries; the most adventuresome
initiative in this type are acquisitions of businesses related to but not identical to the buyer’s existing new product and services. The basis of differentiation
typically involves geography (sales territories), target customers and/or channels. In some instances, the acquirer’s primary consideration is whether to
acquire the desired new business (buy) or alternatively, develop that capability within the present organization (make).
• Category 3: Transitional (Related merger types: Consolidation mature (3a), consolidation emerging (3b).)
The industry is consolidating, and the acquirer wants to be at the forefront of that process rather than last man standing. The most common form of
consolidation involves companies and industries that are already well-established. Profit and revenue growth rates and cash flow return on investment
(CFROI) have all flattened and the remaining primary source of efficiency gains is from rationalization of expenses and functions. Companies in immature
industries are also sometimes subject to consolidation forces, but for different reasons: combining R&D efforts and investment budgets in order to ensure
survival, sharing of technology or dwindling working capital.
• Category 4: Transformational (Related merger types: Lynchpin strategic (4a), speculative strategic (4b).)
‘The roster of companies that have favored transformational deals includes Vivendi Universal, AOL TimeWarner... Enron, Williams and others’ (Harding and
Rovit, 2004: 53).34 The chief executive officer of the acquiring company is motivated to steer the company in a dramatic new direction, and mergers are the
chosen mechanism. In many instances, the thought process of the acquiring company’s chief executive is that: a) the buying firm faces an uncertain economic
future and operating in the present manner and structure is no longer an option; and b) diversification into a new, major (but unfamiliar) industry represents
an opportunity to revitalize the company.
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M&A Four categories Further Breakdown
Nine Types of Merger Short Based on Success Probability

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Category 1: Bottom trawlers
87–92 per cent deal success probability range, estimated

• ‘Trawlers’ refers to the mindset of bargain-seeking acquirers; ‘bottom’ to the status of

their prospective targets. The bottom trawler acquirer searches the depths of the
available companies lists, actively seeking companies in distress that have recently
declared ‘We can no longer compete’ (Circuit City and Palm in the 2000s), or comparable.
• The reasoning: a company that is available at a minimal price and APP faces minimal risk
of failure because little is at risk. Even if the deal fails completely, proceeds from
liquidation are a higher percentage of the purchase price paid than for the other eight
types of acquisitions.

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Category 2a : Bolt-ons
80–85 per cent deal success probability range, estimated
• As the name implies, ‘bolt-ons’ imply a target business that fits seamlessly into the
acquirer’s existing product-service range. A publisher adds a new title in a fast-growing
but presently uncovered related segment. A catalogue company that specializes in plus-
size dresses for women acquires a company that concentrates on clothing designed for
plus-size male counterparts.
• Bolt-ons are assigned a success expectation that is only slightly less than that of bottom
trawlers. Acquisition of Tropicana® by PepsiCo or Procter & Gamble’s purchase of Pantene
are examples. In both instances, the acquiring company was already deeply familiar with
both the category and the product, having been involved in somewhat similar products in
the past.
• Risks associated with bolt-ons are minimal and manageable. Some legacy customers of
the target might fear the acquired brand will lose its quality and/or exclusivity. But that
risk can be mitigated by careful formulation marketing and channel management and
generally does not represent a major obstacle to deal success.
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Category 2b : Line extension equivalents
65–70 per cent deal success probability range, estimated
• Similar to but slightly below the bolt-on deals in terms of success probability profile are
product-service line extension equivalents. The illustrative example is Volkswagen’s
acquisition of Eastern European automaker Škoda. By acquiring that marque, the parent
lowered production costs in two ways: a) through access to new labor markets, and b) by
increasing scale economies for VW’s existing product platforms. Marketingwise, the move
broadened VW’s appeal into lower-price segments without repositioning the parent
marque.
• The direction (up or down market) of the line item extension equivalent is sometimes a
factor in that merger’s success or failure. When an upmarket nameplate diversifies with a
downmarket target, both acquirer and acquiree face potential damage to their respective
commercial franchises. The downmarket company moving upwards faces the possibility of
losing its traditional accounts, as low-end market rivals ignite the flames of customers’ fears
that extra overhead means the end of the value-for-money positioning (cheap, compared to
almost everyone else). When the upmarket brand is perceived as moving downmarket by
merger, that sense of exclusivity can rarely if ever be recaptured
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Category 3a : Consolidation mature
55–60 per cent deal success probability range, estimated
• The prospective acquiring company’s industry is mature: stable and midlife in terms of
corporate economic lifespan (Mauboussin-Johnson’s CAP). The sector’s rate of profit
growth has flattened, with speculation that the rate of increase will soon begin to
decrease. Unit (volume) growth has also recently plateaued, although revenue growth
may temporarily still be increasing because of aggressive pricing. New pockets of excess
capacity arise every year because of new, low-cost entrants and too many legacy
competitors. From personal computers to pharmaceuticals, steel fabrication to logistics,
the unwritten role is either buy or be acquired.

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Category 2c : Multiple core related complementary
40–45 per cent deal success probability range, estimated
• The greater depth and complexity of the acquisition type leads to a lower success profile.
• The acquiring company likely struggled with that portion of its strategy in the past:
Procter & Gamble/Gillette is an example of a combination of this type that appears to be
prospering; AT&T’s multiple acquisitions aimed at accelerating entry into the computer
business in the late 1980s and early 1990s indicate the opposite.

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Category 3b : Consolidation-emerging
37–42 per cent deal success probability range, estimated
• faces a noticeably lower success profile, in part because neither principal to the deal is
yet fully established. At first, the two rivals in the same fast-growing segment insist that
they will go it alone. At some point it becomes apparent that there are more companies
than customers and that actions must be taken to ensure that the firm is one of the
survivors. The unthinkable becomes thinkable: combining with your rival with the
objective of emerging as the one giant in a sector presently populated only with midgets.
• Two factors account for the lower success. The first is reserves: business models of
companies in emerging industries are often unstable, with consistent profitability yet to
be established. A second factor is management. Only a few years from their start-up
dates, emerging companies are more likely to be run by entrepreneurs who are great at
starting companies, but not so great at building them into major, consistently profitable
corporations.

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Category 2d : Single core related complementary
30–35 per cent deal success probability range, estimated
• This merger type is comprised of deals that are similar to the other type in the
transitional category (2c, multiple core related complementary) except that the target
business has only a tenuous connection to the acquirer’s base business, and thus limited
synergy opportunities. Combinations such as eBay/PayPal fall into the 30–35 per cent
success envelope; DaimlerChrysler and H-P/ Autonomy are indicative of the mirror 65–70
per cent failure probability.

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Category 4a : Lynchpin strategic
20–25 per cent deal success probability range, estimated
• What’s a company to do when its primary business is rapidly disappearing? Assuming that neither
selling out nor liquidation are best for shareholders in value creation terms, the company’s
priority is to capture a supplemental core business quickly in an attempt to elude implosion
• 4a and 4b involve major changes in the acquiring firm’s future direction:
• The business of the prospective target is largely or completely unknown, effectively relegating the buyer to a
role comparable to that of the detached financial takeover company acquirer. Little or no new expertise is
brought to bear on either day-to-day or strategic management of the target company.
• Eager to avoid implosion, negotiating leverage is lost and the seller knows it. Especially if the target is well-
managed already, the adverse value gap between purchase premium paid and achievable synergies means a
deal with minimal chances of success.
• Success chances are reduced by the additional layers of managers in the acquired firm who must be educated
continually about the company that they are nominally managing. At the very least, bringing the acquiring
company’s management ‘up to speed’ reduces performance in the acquired firm (one example: AOL’s
acquisition of TimeWarner). In chronic situations, top talent departs from the acquired firm, frustrated at
inconsistent management by administrators perceived as outsiders.
• Exceptional Succes story : IBM’s dramatic turnaround under then-CEO Louis Gerstner in the 1990s
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Category 4b : Speculative strategic
15–20 per cent deal success probability range, estimated
• Speculative strategic deals secure a well-deserved bottom rung in the merger type list
with minimal profile success (15–20 per cent). Driven by desperation and/or enticed by
the siren song of a dramatic, visionary ego-acquisition, these stillborn M&A deals are
easily spotted: consider the merger success dimensions identified in Table 4.1, and such
transactions are almost always on the adverse side of each variable, sometimes all of
them

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Four adjustments to M&A Success Profile ranges
Phase of cycle, APP, Relative Size, Domestic VS International

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Thank You.
Samuel Sahata
+6282110275326
samuel.sahata@lecturer.pmsbe.ac.id
https://www.prasetiyamulya.ac.id/
Reference

• “Masterminding the Deal Breakthroughs in M&A strategy and analysis”, Peter J Clark and Roger W
Mills, Kogan Page, 2013
• “Creating Value from Mergers and Acquisitions and Acquisitions Creating Value from Mergers The
Challenges”, Sudi Sudarsanam, FT Prentice Hall, 2003