In the past, chain Mergers and acquisitions (M&A) of commercial companies were performed to avoid proper fulfilment of obligations relating to liquidation or bankruptcy of these companies. The reason why there are huge number of failed M&A.
A merger refers to a situation where two companies, due to several reasons, mutually agree and become a single company.
It is a situation when one company buys a majority or all the assets and shares of another company. If the company obtains more than 50% ownership of another company, then also it is considered as an acquisition.
Mergers and acquisitions require two companies to work in collaboration but the financial, strategic and overall impact of the events are different.
As per the stats of IMAA, since 2000, more than 7,90,000 transactions have been announced worldwide with a known value of over 57 trillion USD. Over 61% of M&As fail, of acquirer’s 59% have destroyed company’s value in 1 year. A total of ¾ of acquisitions are unsuccessful in creating value.
There are several reasons for failure of M&A deals, following are few of them:
- Mislead value for investment – The investment on the assets may look good on papers, but practically they may not be the revenue generating areas after the closure of the deal.
- Lack of clarity in the integration process – Post-merger, the disintegration of factors like key employees, processes, important projects, policies, etc. lead to failure in the execution process.
- Culture clash – If the M&A deal fails to devise a strong strategy focused on the difference in the cultural aspects of two companies, a low productivity in employees of both the companies is observed.
- Poor communication – If the purpose behind the deal is unclear or is not communicated to the employees, a lack of synergy in teams is marked and expectations from the deal are not met.
- Negotiation errors – The company overpays the acquisition fees, which leads to financial losses and failures in future.
Deep dive in few of the renowned failed M&A:
1] Suzlon Senvion:
Suzlon purchased Senvion in 2007 for 1.4 billion Euros, mostly with borrowed money. The objective behind the acquisition was to secure superior technology, talented management and access to lucrative international markets, thereby turning into a global company.
Senvion soon became one of the most profitable assets for Suzlon Energy. And eventually things went downhill, interest costs ballooned, trapping Suzlon. The financial crisis that blew up in 2008 and the global slowdown that followed didn’t help. The company failed to repay $209 million of debt. The default was the biggest on convertible bonds by an Indian firm. By the end of 2014, Suzlon was sitting on a debt of 17,323 crores on a consolidated basis. Debt restructuring and r-financing exercises were taken up in the next 2 years. Suzlon looked at selling non-core assets, taking Senvion public as well as raising money through the public route. Nothing worked.
A complete stake sale route made sense to create maximum shareholder value. Senvion was the only marquee asset with Suzlon Energy that could have fetched better valuations. Only good assets gets valuations. With lenders putting pressure on Suzlon Energy to cut down the debt, it had to sell Senvion to Centerbridge Partners for 7200 crores without waiting for an IPO.
The macroeconomic factors of any cross-border transaction did have a part to play with the bust of 2008. However, this was an example of a high leverage transaction with no clear debt paring plan.
2] Tata Steel Corus:
Tata steel completed acquisition of Corus on 2 April 2007, at the peak of the boom that ended with the Global Financial Crisis in 2008 by paying out $12.1 Billion (of which $6 Billion was debt) with the objective to pave the way for the Tatas to enter the UK steel sector.
Global steel demand, especially in developed markets like Europe, has remained muted following the financial crisis of 2008, trading conditions in the UK and Europe have rapidly deteriorated more recently, due to structural factors including global oversupply of steel. Cheap Chinese steel dumped across the globe has rendered the business unviable in the face of the continuing financial crisis impact. Tata Steel over last 10 years has reduced the production capacity of Corus from 18 MTPA to 10 MTPA. The company further cut its European exposure by reducing the stake from 100% to 50% after combining the business with Thyssenkrup. Tata Steel used the cash box to shop for distressed assets in India – Bhushan Steel. But these new purchases mark the persistence of an old problem—debt.
Tata – Corus transaction came at a time that commodity prices had peaked. The basis for valuation was production capacity despite an auction and reservations on valuations, Tata Steel ended up paying 30% more than the negotiated price – prestige at play. Finally, this was a leveraged buy out with no clear debt paring plan present with the buyer. There was no way that a 4 MTPA operation could help offset losses from an 18 MTPA operation. Tata Steel has revised its strategy to be India centric, however, it again faces similar challenges of high Debt/ EBITDA ratios of 4 which it hopes the business will sustain with more profitable EBITDA/ ton.
Key Lessons for an Investor:
- While we look at companies which undergoes frequent restructuring and has a complex relations with related parties a specific attention towards capital structure of the company needs to be taken into consideration.
- Leveraged buy outs needs more specific and detailed analysis of the M&A.
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