March 1, 2006 (Vol. 26, No. 5)
If You Do Your Homework, Careful Execution Will Yield a Successful Outcome
The corporate merger (combining two businesses into one, usually by means of the initiating company paying for the transaction with its shares so that the shareholders of the target are now part-owners of the combined entity) or acquisition (the combination being effected by the initiating company paying cash for the assets or shares of the target company so that its shareholders are no longer part-owners of the enlarged business) transaction is one of the most powerful tools in a CEOs toolkit. It can fundamentally and rapidly strengthen a company, as well as grow both scale and profitability overall or selectively.
Prior to embarking on an acquisition strategy or contemplating a merger, the chief executive requires a clear view on several issues:
What are his companys current internal strengths that can be exploited and what are the current weaknesses that need to be addressed?
What are the opportunities and challenges that the company is facing in its current and expected markets?
Within the context of this corporate assessment, how will an acquisition or merger strengthen the company or accelerate its profitability or growth?
Is a merger and acquisition (M&A) transaction the most effective approach to address the current issues that the company is facing?
How does the company select a suitable M&A candidate?
Business Arrangements
Addressing the question of whether M&A is really the most effective approach to moving the company forward, particularly in the healthcare arena, it is useful to consider the various tradeoffs with other alternatives that may accomplish the same goals in a more cost-efficient or -effective manner. The following business arrangements accomplish many of the same goals (i.e., clinical development of a compound or validation of a technology, finance, commercialization, and manufacturing) without the financial, legal, and time commitments required for an acquisition (Table):
Simple licensing arrangements (product or technology)
Product acquisition
Corporate partnering
Operating joint venture
While an M&A deal clearly offers ownership and control of IP, technology, research, manufacturing, sales and marketing, and the financial benefits of these activities, in many situations the essential goal of the company may involve only its access to a particular technology, its access to a new market or channel, and its securing production of a key intermediate or formulation. All of these objectives may be better handled via one of the transaction alternatives.
Having evaluated the companys current business position, corporate strategy, and transaction alternatives, a successful M&A strategy needs to address:
Selecting appropriate M&A target candidates
Ensuring adequate financial, technical, and human resources are in place to effect the transaction
Approaching potential M&A candidates
Executing the transaction, including the related due diligence
Integrating the target after the transaction
Organizing for M&A
The first step in identifying and analyzing appropriate M&A candidates is to ensure that the personnel and processes are in place both internally and externally for a transaction. Leadership of the M&A program (strategy, finance, execution) needs to be clearly defined with adequate resources to evaluate properly the benefits and risks associated with potential candidates.
While the structure of teams can take a variety of different forms, with input from different areas and external advisors, it is critical to ensure that the key group of decision makers internally (including the board of directors, senior management, and the heads of relevant functions such as business development, finance, marketing, and/or R&D) are supportive of, and committed to, the selection and acquisition of a particular potential target.
With the appropriate people and processes in place, the actual evaluation of potential candidates focuses on why it is a particular M&A candidate of interesthow does it help our company? Having a clear view of the companys own strengths, weaknesses, challenges, and opportunities is critical to ensure a better understanding of how the M&A transaction would improve the initiating company.
M&A can be justified by strengthening the acquiring or dominant merger company in one or several areas.
Motives and Rationale for M&A
Technology/R&D CapabilityEnabling technology can be critical to speeding up a manufacturing process or a discovery process. If obtained, it can also be prevented from assisting other competitors. An R&D pipeline of products and the key teams associated with them can fill a hole in the Acquirors therapeutic franchise.
Manufacturing CapacityAn M&A candidate may provide highly specialized or proprietary plant or processes (such as fermentation); access to rare but critical raw materials or intermediate compounds; access to key markets in different geographies where customers value local production; access to lower cost production facilities or those that operate at higher standards from an environmental or regulatory compliance perspective.
Marketing/Market CapabilitiesHorizontal M&A transactions can increase market presence or market share in an existing area/franchise field or allow access to new geographies.
Vertical M&A transactions allow for reaching end customers either more directly or via access to new distribution channels; and they may allow for direct control over key suppliers of products or intermediates.
An M&A deal may allow diversification of a therapeutic sector or a technology base as well as brands being sold.
Another key goal of some M&A deals relates to accelerating time-to-market for a pipeline compound either by acquiring development skills, new compounds, or direct, controlled access to a new market.
An M&A transaction may also be the only feasible route to enter a difficult-to-penetrate market in an acceptable fashion (e.g., Eastern Europe) where a permanent presence is desired.
FinancialAn M&A deal can provide access to the targets cash resources or equity shareholder base or eliminate royalty payments paid to the target for a product (in essence converting cash on the balance sheet to increased revenues). The combination of acquiror and target can reduce earnings volatility (and enhance investment attractiveness), alter the cost structure of the combined entity by elimination of redundant functions (e.g., administration) and offer the potential of rationalization of R&D projects and manufacturing plants or sites.
A well-executed M&A may also increase earnings (and EPS) due to purchase price, consideration paid, and synergies, even post-goodwill write-offs, or avoid potentially damaging litigation, most likely in the area of patents or distribution arrangements.
Other M&A Considerations
Other elements critical to a successful M&A transaction include:
Selection criteria for acquisition targets
Application of selected criteria
Approach to a target on willingness to deal
Elements of transaction dynamics
The critical importance of broad and deep due diligence
Negotiating the sale and purchase or merger agreement
Integration of the M&A target post-closing
Any M&A deal brings with it a series of strong challenges. Combining businesses and cultures is never easy, and transactions do not always prove to be successful. However, if the participants do their homework and follow these outlined steps, successful execution will often lead to a successful outcome.
