M&A Success Drivers:

Capitalizing on Experience
U.S. Findings
Contacts: Sam Rovit
Catherine Lemire

November 2002
Copyright© 2001 Bain & Company, Inc.

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent.
 M&A success drivers: Capitalizing on
experience
Summary of study
findings

Detailed results of Detailed findings of

empirical research BDP case studies

Individual case studies

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 What differentiates successful
from unsuccessful deals?

Do value creators differ in their

approach to deal-making?

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 What differentiates successful acquirers?

Results

Experience

Capabilities

4 key disciplines

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 The foundation for any successful deal is
the application of 4 disciplines

Know your Know what Know the Know your

strategy you are value of the own
buying asset competencies
 Develop  Thorough due  Value  Frank self-
rational, well diligence on synergies assessment
articulated the base realistically  Design
growth business  Develop merger to
strategy  Ascertain detailed plans exploit both
 Ensure M&A exactly how for reaping companies’
strategy is the target synergies capabilities
aligned operates and and synergies
makes money

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 Successful companies have climbed the
acquisition learning curve
Tackle big deals

Institutionalize
Expertise learning

Start small

Number of transactions
 Learning  Further refine  Leverage
acquisitions processes acquisition
 Begin  Develop capabilities expertise for
institutionalizing  Systems in place to larger deals
process retain acquisition  Deals in near
 Low risk targets learning adjacencies
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 Key lessons from successful acquirers

 Get in the game

- Deals as strategy enablers
- Start small and build up

 Set up a core deal team

 Get line management involved early, and often

 Structure and discipline the process

 Kill the deal fever

- Insist on high-level approval for the deals
- Align compensation

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 Scope of recent empirical research on M&A
activity and behavior

Companies considered Deals reviewed Performance metric

 Sample of 724  7,476 acquisitions  Excess returns

companies from sample of 724 delivered to
- U.S. based companies companies shareholders in 1986-
- Public in 1986-2001 - Deals announced in 2001
- Revenue >$500M in 1986-2001 - Total shareholder
2000 - Deals with disclosed return (TSR), including
and undisclosed value cash dividends, less
(2,825 disclosed) each company’s cost
- Domestic and cross- of equity (Ke)
border deals by U.S.
based companies

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 On average, more frequent acquirers out-
perform in the long-term
Average annual excess returns
indexed to average (1986-2001)
1.75
1.51 1.54
1.50
1.36
1.25 1.17
1.08
1.00 0.97 Average
0.85 index = 1
0.76
0.75

0.50

0.25

0.00
0 1-4 5-9 10-14 15-19 20-24 25-29 30+
Number of deals (1986-2001)
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 Successful frequent acquirers maintain deal
activity throughout the economic cycle
Frequent acquirers (>=20 deals in 1986-2001)

Average annual excess returns

indexed to average (1986-2001)
2.0
1.74

1.5

1.06 Average
1.0 0.96
index = 1
0.75

0.5

0.0
Constant Recession Growth Doldrum
acquirer acquirer acquirer acquirer
Timing of deal activity in economic
cycle for the 1986-2001 period
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 Acquirers making smaller deals on average
also outperform in the long-term
Average annual excess return
indexed to average (1986-2001)
1.5

1.25
1.13 1.10
Average
1.0 0.92 index = 1
0.85

0.64
0.5

0.20

0.0
0-5% 5-10% 10-15% 15-20% 20-25% 25-35% 35%+
Average transaction value as a % of acquirer market cap
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 In fact, more than 75% of acquisitions
(where value is disclosed) are for <$100M

% of U.S. deals (where value is disclosed)

100%
>=
$100M
80

60

40 <
$100M

20

0
1996 1997 1998 1999 2000 2001

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 The penalty is greatest for rolling the dice
or sitting on the sidelines
Excess returns indexed to average (86-01)

Deal frequency
“String of pearls” “Mountain climbers”

Frequent
(>=1 deal/yr) 1.33 1.48

“Small bets” “Roll the dice”

Infrequent
(<1 deal/yr)
1.12 0.69

Small Large
“Inactives” (<10% of buyer’s (>=10% of buyer’s
0.76 market cap) market cap)
Average deal size
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 Who are successful frequent acquirers in
the last 15 years?

 Clear Channel  Washington Mutual

 Medtronic  Johnson & Johnson
 Fidelity National  Citigroup
 Cardinal Health  Intel
 Fiserv  Wells Fargo
 Danaher  ADP
 Fifth Third Bancorp  Cintas
 Philip Morris  Coca-Cola

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 BDP case studies
1986-2001
Cintas
(5%)
 We studied half a dozen
Fiserv
of the best frequent
Frequent

(12%)
Clear
Channel
acquirers in a broad
(21%) range of industries
Cardinal -Interviews with CEO,
Deal frequency

Fidelity
Health
(12%) NationalWashington CFO or Head of
(13%) Mutual Business Development
(9%)
-Secondary research
Infrequent

 We have codified how

these firms organize and
institutionalize the M&A
process

Small Large
Average deal size

Note: Excess return (1986-01) is noted below the company’s name in brackets CapitalizingonExperienceUS
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 Lessons from successful acquirers
Get line Structure &
Set up a core Kill the deal
Get in the game management discipline the
deal team fever
involved early process

 Use acquisitions  Same core team  Pull line people  Set clear  Insist on high-
as a vehicle to gets involved in early on, acquisition criteria level approval
enable growth all deals preferably at the and integration - Require scrutiny
strategy  sourcing and guidelines by Manager not
Team is long on closely involved
 screening stage 
Start with small transactional Codify and in the deal
- Buy-in
acquisitions in the experience document - Require board
core business to   Get the same line criteria, guidelines approval for large
Dedicate 100% deals or deals
reduce risk and people involved in and protocols
when deal activity outside of the
accelerate due diligence - Especially when
and complexity core
learnings and integration experience
are high turnover in core 
- Ready to act Use incentive
 Acquire M&A team and
 Nurture when deal is system to drive
companies that line management
continuity of done the “right” deals,
leverage the  Refine through
core deal team  Require line not any deals
core or are in post mortems
 management to - For line people,
close adjacent Key roles are: to
approve deals and feedback incorporate
areas manage the target’s financial
and commit to loops
process, run the projections in
economics, and realizing the  Core deal team their baseline
structure & target’s financial and/or senior budget
negotiate the projections, management - For deal team, tie
transactions developed with imposes a walk- incentives to
ongoing
the core team away price performance of
deals done in at
least last 3 years

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Cardinal Health’s learning curve
Rx distribution (core)
Automation
Rx technology/svcs
Transaction value as Med-surgical supplies
a % of market cap
125%

100

Allegiance
75

Owen
50
James W. Daly

Whitmire

RP Scherer
25

Pyxis
Marmac

0 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Total #
2 0 1 0 1 1 1 2 3 1 3 3 3 11 10 8 5
of deals:
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 Washington Mutual’s learning curve

Transaction value
as % of market cap
150%

100

Great Western

Ahmanson
Keystone
Pacific First
50
Bank
United
Pioneer

Dime
0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

# of
0 2 0 0 4 2 3 1 3 2 3 1 1 2 2 3
deals:

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 Cintas vs. UniFirst
Cintas’ more aggressive acquisition Cintas’ program has also
program has helped grow revenues benefited shareholders
at a much faster pace

Total
Revenues shareholder return
$2,500M 2,500

Cintas
2,000 2,000 P/E = 29

Cintas
Since ‘96, ~250
1,500 deals worth $3B
1,500

1,000 1,000

UniFirst UniFirst
500 500
Since ‘96, ~20
deals worth $100M P/E = 14

0 0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

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 Lessons from successful acquirers
Get line Structure &
Set up a core Kill the deal
Get in the game management discipline the
deal team fever
involved early process

 Use acquisitions  Same core team  Pull line people  Set clear  Insist on high-
as a vehicle to gets involved in early on, acquisition criteria level approval
enable growth all deals preferably at the and integration - Require scrutiny
strategy  sourcing and guidelines by Manager not
Team is long on closely involved
 screening stage 
Start with small transactional Codify and in the deal
- Buy-in
acquisitions in the experience document - Require board
core business to   Get the same line criteria, guidelines approval for large
Dedicate 100% deals or deals
reduce risk and people involved in and protocols
when deal activity outside of the
accelerate due diligence - Especially when
and complexity core
learnings and integration experience
are high turnover in core 
- Ready to act Use incentive
 Acquire M&A team and
 Nurture when deal is system to drive
companies that line management
continuity of done the “right” deals,
leverage the  Refine through
core deal team  Require line not any deals
core or are in post mortems
 management to - For line people,
close adjacent Key roles are: to
approve deals and feedback incorporate
areas manage the target’s financial
and commit to loops
process, run the projections in
economics, and realizing the  Core deal team their baseline
structure & target’s financial and/or senior budget
negotiate the projections, management - For deal team, tie
transactions developed with imposes a walk- incentives to
ongoing
the core team away price performance of
deals done in at
least last 3 years

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 Clear Channel leverages a seasoned core
M&A team
Clear Channel Clear Channel profile
CEO
 Same core resources get
Business units Corporate
involved in all deals
- Significant transactional
Entert- experience
Radio Outdoor
ainment CFO
CEO CEO CEO  Core M&A teams reside at
the business unit level
- BUs closely involved
Business Business Business Finance - Supported by Corporate
unit unit unit team M&A team on larger, more
complex deals
 100% dedicated only
Financial
where deal activity and
Finance Finance M&A complexity are high
& M&A
team team team
analysts (e.g. Entertainment)
 Core M&A teams part of
the Finance team
100% dedicated to M&A
- Fiscal discipline
Partially allocated to M&A CapitalizingonExperienceUS
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 Fidelity National’s core M&A team evolved
with its M&A lifecycle
Fidelity National
Prior to 1998 Since
1998

Deal
activity:

 Small, straightforward deals in  Larger deals in core

core title insurance business  Expand beyond the core in
real estate services

Team CEO CEO

resources:
Ad hoc team EVP M&A
•9 years investment banking experience
•Pulled together on a •Extensive network

deal by deal basis Specialized M&A team

•Transactional experience
•Centralized at Corporate
•100% dedicated to M&A

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 Lessons from successful acquirers
Get line Structure &
Set up a core Kill the deal
Get in the game management discipline the
deal team fever
involved early process

 Use acquisitions  Same core team  Pull line people  Set clear  Insist on high-
as a vehicle to gets involved in early on, acquisition criteria level approval
enable growth all deals preferably at the and integration - Require scrutiny
strategy  sourcing and guidelines by Manager not
Team is long on closely involved
 screening stage 
Start with small transactional Codify and in the deal
- Buy-in
acquisitions in the experience document - Require board
core business to   Get the same line criteria, guidelines approval for large
Dedicate 100% deals or deals
reduce risk and people involved in and protocols
when deal activity outside of the
accelerate due diligence - Especially when
and complexity core
learnings and integration experience
are high turnover in core 
- Ready to act Use incentive
 Acquire M&A team and
 Nurture when deal is system to drive
companies that line management
continuity of done the “right” deals,
leverage the  Refine through
core deal team  Require line not any deals
core or are in post mortems
 management to - For line people,
close adjacent Key roles are: to
approve deals and feedback incorporate
areas manage the target’s financial
and commit to loops
process, run the projections in
economics, and realizing the  Core deal team their baseline
structure & target’s financial and/or senior budget
negotiate the projections, management - For deal team, tie
transactions developed with imposes a walk- incentives to
ongoing
the core team away price performance of
deals done in at
least last 3 years

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 WaMu’s line and functional managers are
actively involved
Due Deal
Sourcing close Integration
diligence

Deal team A team

Core teams

Vice-chair Steering
M&A committee

Senior Acquisition
Specialist Specialist Dedicated team
Specialist Managers
#1 #2 (25-35 FTE)
(8 FTE)
#5
Deal specific

Banking & Home Specialty

resources

HR Legal Financial Loans & Finance

Services Insurance Group

Corporate functions Business segments

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 Cintas has clearly defined the roles for its
core M&A team and line operations
Deal
Sourcing Due diligence clos Integration
e

Core  Ensure employee  Coordinate due  Monitor integration

company acquired
Operating Officer
M&A assigned to each diligence process progress

1. Sign-off from

who will inherit

target is keeping  Perform all financial - Stay in touch to
Team: contact analysis ensure all are on
- Valuation the same page
 Give employee - Deal structuring
 Deal with adjustment
reasons to contact
 Lead negotiation to purchase price
target, by monitoring
market- place and  Ensure terms of deal
company changes
are followed

Line

2. Approval from one

 Identify and rate (on a  Team up with core  Operating Officer

of three executives,
and Board on large
Ops: scale of 1-4) all 750 team to evaluate inheriting the acquired
potential targets operations company leads

acquisitions
- Quality of customer integration
 Keep in touch with list
- Condition of 
each target on a facilities
Assume key
regular basis - Quality of people management positions
at acquired company

 Act fast and decisively

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 Lessons from successful acquirers
Get line Structure &
Set up a core Kill the deal
Get in the game management discipline the
deal team fever
involved early process

 Use acquisitions  Same core team  Pull line people  Set clear  Insist on high-
as a vehicle to gets involved in early on, acquisition criteria level approval
enable growth all deals preferably at the and integration - Require scrutiny
strategy  sourcing and guidelines by Manager not
Team is long on closely involved
 screening stage 
Start with small transactional Codify and in the deal
- Buy-in
acquisitions in the experience document - Require board
core business to   Get the same line criteria, guidelines approval for large
Dedicate 100% deals or deals
reduce risk and people involved in and protocols
when deal activity outside of the
accelerate due diligence - Especially when
and complexity core
learnings and integration experience
are high turnover in core 
- Ready to act Use incentive
 Acquire M&A team and
 Nurture when deal is system to drive
companies that line management
continuity of done the “right” deals,
leverage the  Refine through
core deal team  Require line not any deals
core or are in post mortems
 management to - For line people,
close adjacent Key roles are: to
approve deals and feedback incorporate
areas manage the target’s financial
and commit to loops
process, run the projections in
economics, and realizing the  Core deal team their baseline
structure & target’s financial and/or senior budget
negotiate the projections, management - For deal team, tie
transactions developed with imposes a walk- incentives to
ongoing
the core team away price performance of
deals done in at
least last 3 years

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 A few have started to codify the M&A process
 All successful frequent acquirers
nurture continuity of M&A core team
 Several, such as GE Capital, Cintas and
Washington Mutual, have codified
and documented the M&A process
- To capture standard patterns emerging
over time, especially in integration
- To serve as guide as they naturally
experience turnover after several years
of M&A activity

Turnover Screening and

in core Integration
due diligence
M&A team
 Typically in the  Model process
form of: and approaches
- Criteria  Supported by
- Checklists tools & templates:
 Form the basis of - Checklists
the “deal” memo - 30 day plans
- Communications
plans
- Workshop agendas

Refined through post mortems

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 WaMu’s four beacons of light guide all
acquisitions decisions
“We have acquisition criteria, our beacons of light.
We stick to them religiously.”

1. Target 2. Target 3. Target 4. Acquisitions

companies that companies that companies that must grow
match our do not present do not earnings in a
business undue jeopardize reasonable time
strategy operating capital ratios period
risks or impair asset
quality

“By sticking to those beacons, WaMu has become very

disciplined in how we look at things. I like to say we haven’t
really overpaid for an acquisition. We haven’t taken on
anything that caused us to blow up operationally.”
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 Cintas has codified its acquisition process,
with detailed integration checklists

Due Deal
Sourcing Integration
diligence close

Buying criteria Integration checklist

Operations Administration
 100 pages long  Deal with every
 Quality of customer list  Adapted to each possible detail
 business unit  E.g.: getting the
Conditions of the facilities  E.g.: making sure bills paid, payroll,
 Quality of the people rented uniforms employee benefits
are identified as
 Presence of labor unions belonging to
Cintas

Reviewed & updated

regularly by Operating Officers

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 Lessons from successful acquirers
Get line Structure &
Set up a core Kill the deal
Get in the game management discipline the
deal team fever
involved early process

 Use acquisitions  Same core team  Pull line people  Set clear  Insist on high-
as a vehicle to gets involved in early on, acquisition criteria level approval
enable growth all deals preferably at the and integration - Require scrutiny
strategy  sourcing and guidelines by Manager not
Team is long on closely involved
 screening stage 
Start with small transactional Codify and in the deal
- Buy-in
acquisitions in the experience document - Require board
core business to   Get the same line criteria, guidelines approval for large
Dedicate 100% deals or deals
reduce risk and people involved in and protocols
when deal activity outside of the
accelerate due diligence - Especially when
and complexity core
learnings and integration experience
are high turnover in core 
- Ready to act Use incentive
 Acquire M&A team and
 Nurture when deal is system to drive
companies that line management
continuity of done the “right” deals,
leverage the  Refine through
core deal team  Require line not any deals
core or are in post mortems
 management to - For line people,
close adjacent Key roles are: to
approve deals and feedback incorporate
areas manage the target’s financial
and commit to loops
process, run the projections in
economics, and realizing the  Core deal team their baseline
structure & target’s financial and/or senior budget
negotiate the projections, management - For deal team, tie
transactions developed with imposes a walk- incentives to
ongoing
the core team away price performance of
deals done in at
least last 3 years

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 At Fidelity National, potential deals go
through a series of filters

 Generate
ideas from  CEO
 Internal/  Deal
external meets
with external memo is  Begin
network reviewed
target’s due integration
 Monitor ~100 by CEO &
key diligence
potential people Board
targets

Initial CEO screen Line mgmt CEO/Board

screen by based on sign off on approve all
CEO and target’s deal’s P&L deals
M&A EVP “pulse”

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 At Clear Channel, line managers’ incentives
are tied to long-term deal success
“The deals they (operating managers) do are tied to them forever.”
Randall Mays, CFO Clear Channel

Valuation/
bid price

Walk-away price
Target’s
cash flow  Target’s cash flow projections
projections are integrated in business
80 unit’s baseline projections
Target's
cash flow
 Compensation is tied to
60 projections actual results vs. baseline
 Every year, results to-date of
40
deals made in last 3 years
Baseline
20 projections are evaluated vs. initial
projections
0 - Influences compensation
Business unit projections
- Learning mechanism
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 Successful acquirers build a competency

Results

Experience

Capabilities

4 key disciplines

CapitalizingonExperienceUS
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Corporate M&A Toolkit
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