Strategic Planning and Development Council

Transcription

1 Strategic Planning and Development Council Best Practices for Navigating Today's M&A Market May 2015

2 Contents I. Survey Scope II. M&A Outlook and Key Observations III. What Differentiates the Most Successful Acquirors from the Pack? 2

3 Survey Scope

4 Inaugural MAPI M&A Survey Overview Survey Goals: Better understand exactly how Industrial companies execute their M&A strategies Is there a set of best practices that can be determined for Industrial sector business development protocols in this challenging M&A environment? RBC worked with MAPI to solicit more than 100 MAPI members and other select Industrial companies to complete a confidential survey of internal M&A practices 60 questions addressing 8 general topics: M&A Outlook Valuation and Returns Analysis M&A Program and Transaction Benchmarking Due Diligence Process Deal Sourcing / Activity Performance Goals / Metrics Internal M&A Communication / Protocol & Practices Auction Process Tactics 4

5 M&A Outlook and Key Observations

6 The M&A Environment is Challenging What were some of the common threads regarding the importance of M&A? Over the next 12 to 24 months, do you expect your company's growth to be primarily driven by: A large majority 70% of respondents believe M&A will be essential to meeting company growth objectives 90%+ view the current M&A market as at least somewhat overvalued Pressure from Boards and shareholders to complete M&A has been steadily increasing for the last few years Nearly 3/4 believe M&A will be essential to meet company growth objectives Do you view the current M&A market to be: Over 40% indicated they feel increased pressure from internal leaders to complete M&A vs. a year ago These factors combine to create a very tough M&A environment where the importance of getting it right has never been higher 6 92% view the current M&A market as at least somewhat overvalued

7 How are M&A Initiatives Reviewed and Decisions Made? Key findings regarding internal M&A decision making and communication: How often is M&A a topic at Board meetings? The CEO autocracy no longer exists 60%+ review M&A pipeline with the CEO / CFO at least once a month ~80% usually discuss M&A at Board meetings, while ~20% discuss M&A sometimes In addition to the CEO / Board, more than 80% of companies have multiple other executives with significant influence on M&A decision-making Roughly half of companies largest shareholders are at least marginally influential on M&A scope and strategy In addition to the CEO / Board, how many others have significant influence on final M&A decision-making? 84% have multiple other executives with significant influence on final M&A decisionmaking 7

8 What are the Most Important M&A Objectives? There are multiple objectives that companies view as important Customer base expansion was most consistently cited as an important factor Diversification was the least cited important factor Achieving Cost Synergies / Scale Efficiencies Accessing New Geographic Markets Customer Base Expansion Acquiring Talent / Technology Diversification 40% 45% 57% 42% 22% Note: Percentages indicate portion of respondents that ranked the objective as very important. 8

9 Valuation and Returns: Focus is on Intrinsic Value Metrics Two ways to approach valuation: What is the most important metric used to evaluate M&A attractiveness? Intrinsic value (e.g., ROIC and DCF) Market-based metrics (e.g., stock price / earnings impact, comparables analysis) Survey found more than 80% of companies view intrinsic value methods as most important in evaluation attractiveness of M&A targets While ROIC and DCF are the metrics most relied upon, the majority of companies rarely or never adjust internal return targets Implications of this data are meaningful: If companies focus primarily on intrinsic value and they give themselves little to no flexibility to adjust return thresholds, competing in this M&A market (with historically high valuations) will be extremely challenging More than 4 in 5 place the most emphasis on ROIC and DCF metrics How often does your company adjust ROIC / other internal return targets? 56% of companies rarely or never adjust internal return targets 9

10 Synergies Drive Returns How important are synergies in assessing M&A opportunities? How often are you able to meet defined return thresholds without including synergies? ~75% of respondents typically cannot reach returns hurdles without including synergies Respondents defined highly attractive synergy potential as >4% of target revenue Responses imply that the burden on management teams is increasing as they look to synergies as a way to justify elevated valuations in an expensive M&A environment 78% cannot reach returns hurdles without including synergies What constitutes highly attractive synergy potential (as a % of target revenue)? 95% indicate at least 4% of target revenue is the threshold for an attractive level of synergies 10

11 What are the Most Important Target-Specific Diligence Concerns? The three most important areas of diligence were: 1. Quality of management 2. Market trends 3. Other factors such as off-balance sheet liabilities Reliability of Historical Financial Record 6% Market Trends 29% Integrity / Quality of Management 35% Hidden Costs / Contingencies 15% Identification / Quantification of Available Synergies 6% If, early in an M&A process, companies encounter a very material issue (a "potential showstopper") for which there is no immediate resolution, only 5% would move forward in the process and work towards a resolution without sounding the alarm Note: Percentages do not sum to 100% due to 9% of respondents ranking other concerns as most important. 11

12 Are Sellers' Projections Credible? Seller s financials projections are almost unanimously viewed as overly optimistic How often are a seller s projections too optimistic? Where are the biggest credibility gaps? Market growth assumptions Ability to achieve restructuring savings / cost initiatives Key takeaway: Acquirors clearly do not rely on target management projections to form views on how a business is likely to perform in the future Where are the Credibility Gaps? Credibility Gap Category Almost Always Usually Almost Always or Usually Market Growth 43% 35% 78% Restructuring / Cost Initiatives 22% 39% 61% Capital Needs 14% 42% 56% Market Share 27% 24% 51% Expenses 11% 40% 51% Pricing 11% 32% 43% 12

13 What are the Most Challenging Integration Activities? Most respondents establish clearly defined postintegration plans How challenging is synergy realization? However, nobody found synergy realization to be straightforward The most difficult integration activities are synergy- and cultural-related Almost nobody viewed either of these activities as straightforward Integration Activity Highly Challenging Challenging Highly Challenging or Challenging Cultural 14% 59% 73% Synergy 14% 54% 68% Workforce 5% 46% 51% Customer 0% 24% 24% 13

14 What Differentiates the Most Successful Acquirors from the Pack?

15 Do Successful Acquirors Behave Differently? We attempted to determine if there were any differences between the M&A process protocols and behaviors of the most and least successful acquirors The most successful acquirors defined by: Long-term stock price performance Valuation multiple Companies with above-average stock price and trading multiple performance must have also been acquisitive in nature over the same time period to be considered a successful acquiror Acquisitiveness measured by cash used for acquisitions / cash flow from operations Top and bottom quartile acquiror responses were then contrasted to find key differences between the groups M&A protocols and practices Selected Metrics Survey Respondents Overall MAPI Metric 75 th Percentile Median 25 th Percentile Median 5-Year Total Return (1) 169% 123% 63% 107% LTM Average EV / EBITDA 11.2x 9.6x 8.7x 9.3x 5-year Acquisitiveness 85% 49% 14% 30% (1) Shorter time periods utilized where longer-term data was unavailable. 15

16 Common Practices among All Industrial Acquirors First, there are several things that all types of companies tend to agree on: M&A dialogue at the Board level is important Focus on reviewing long-term M&A objectives and discussing specific targets as they are pursued Intrinsic value used to assess the financial viability of transactions Accounting metrics and precedent / public trading benchmarks are much less important Post-acquisition planning Most have a defined integration plan and track goals for 1 2years 16

17 Where Do the Leading Acquirors Separate from the Pack? There are three principal areas in which the most successful acquirors differentiated themselves: Superior M&A Results 17

18 Strategic Objectives Successful acquirors tend to place more emphasis on acquiring technology On the other hand, the least successful acquirors focus more on acquisitions that expand their customer base and market share Suggests better acquirors have a technology-driven strategy and believe they can attract new customers through better products Meanwhile, the least successful acquirors try to buy customers but may have difficulty retaining them without the proper focus on product technology Which of the following M&A objectives do you consider very important: Acquiring Technology Customer Base Expansion Most Successful Least Successful Most Successful Least Successful 18

19 Risk Assessment Successful acquirors have conviction in their ability to fix a target's internal issues Diligence is therefore focused on non-controllable factors such as market trends and hidden costs / liabilities Meanwhile, the least successful acquirors tend to focus on more controllable factors such as target management and pricing How often do you usually or almost always identify credibility gaps with regard to: Rank your top concern Market trends Pricing Management Quality Most Successful Least Successful Most Successful Least Successful Most Successful Least Successful 19

20 Process Protocol Successful acquirors tend to have a second layer of key decision-makers (a shadow counsel ) with meaningful influence on the M&A process Includes key operational, financial, and legal personnel beyond the CEO and Board Successful acquirors are more sensitive to M&A process dynamics For example, the best acquirors are more reluctant to participate in processes perceived to involve a large number of auction participants Respondents with 4+ individuals beyond the CEO / Board with at least some influence on the M&A process: How often does your perception of the number of auction participants have little or no influence on your willingness to participate? Most Successful Least Successful Most Successful Least Successful 20

21 Survey Conclusions The goal of the survey was to better understand how Industrial companies execute their M&A strategies and determine if there is a discernible set of best practices for Industrial sector business development protocols Particularly important in today s challenging environment in which most respondents believe that M&A will be essential for growth and that pressure is increasing from Boards and shareholders Are there differences between protocols / behaviors of the most and least successful acquirors? Several common practices among all Industrial acquirors were identified: M&A dialogue at the Board level is important, particularly regarding long-term M&A objectives and specific M&A targets Intrinsic value (vs. accounting metrics and precedent / public trading benchmarks) is most important to assess the financial viability of transactions Post-acquisition planning is key The most successful acquirors differentiate themselves in three principal areas: Strategic Objectives Successful acquirors tend to place more emphasis on acquiring technology, while the least successful acquirors focus more on acquisitions that expand their customer base and market share Implies better acquirors have a technology-driven strategy and believe they can attract new customers through better products Risk Assessment Successful acquirors have conviction in their ability to fix a target's internal issues and therefore focus diligence on non-controllable factors such as market trends and hidden costs Process Protocol Successful acquirors tend to have a second layer of key decision-makers (a shadow counsel ) with meaningful influence on the M&A process and are more sensitive to M&A process dynamics 21

22 Biography Glenn Riedman Phone: (212) Glenn Riedman Co-Head, Managing Director Industrial & Diversified Services Group Glenn Riedman is a Managing Director in Industrial & Diversified Services Investment Banking Group. Mr. Riedman brings over 20 years of experience advising industrial companies. Prior to RBC, Mr. Riedman was a Managing Director at J.P. Morgan, where he focused primarily on capital goods companies. Prior to joining J.P. Morgan, he spent 11 years covering industrial companies at Bear Stearns. Mr. Riedman earned an MBA from Columbia University and a BSEE from Boston University. Select Industrial Clients 22