The payments industry has always had an element of Monty Hall's classic show. At points it's even included the costumes and props. Buying companies, technologies and merchant portfolios has long fed the growth engines of the industry's leaders although we can all recite multiple examples of where someone chose door #2 and got the 25 pounds of cottage cheese.
As the market downturn (that's the polite way to refer to the 40% destruction of stock market value) drags on, we hear more and more discussion about "deals." Despite this talk, the question remains "what payments industry mergers & acquisitions should I pursue?" To address this question we look at the rationale for entering into a strategic transaction and the most common deal pitfalls.
So why go the M&A route? Acquisitions are usually the result of a buy vs. build decision. Can I build my business to achieve the market position that the target company occupies for an equivalent cost and in a timeframe that makes sense? Most of the time, the answer to that question is that it is easier to buy a category killer than try to compete with it. If you are the category killer, the question becomes can you break the #2, 3 or 4 players through competition for less than it would cost to buy them?
Most companies, when planning an M&A budget set some priorities for what they are looking for from acquisitions. Those items generally include: adding to the customer base, improving the product offering or expanding the choice of products offered, reaching into new geographies, adding cross-selling opportunities, adding distribution and marketing channels or product development capabilities.
Unfortunately, Wall Street tends to push a lot of deals on companies for the wrong reasons. These "bad deals" mostly make numerical sense on paper but are not always a good option for the buyer.
A few examples include:
#7 + #8 = #2:
This is probably the worst of the worst and also the most frequently made mistake. The strategy involves taking two companies that are way behind the industry's leaders in their segment, combining them and magically leaping into a top-tier position as a result of the scale created through the merger. This is unlikely to work, regardless of what the banker's models say. If the companies don't have the products, sales engines or market presence to be competitive on their own, scale won't necessarily improve that position.
Triage vs. Do Not Resuscitate.
Especially in this market environment, there are a lot of companies that are broken or at least in financial difficulty. Buying a company that is hemorrhaging cash is likely to make the burden of their obligations your newest problem. Some companies just can't be saved. If a company's financial infrastructure or competitive position is badly impaired, pull the plug and pick up the parts
that have value afterwards. Another strategy to explore is buying a division or business line that is strong and has value to you. This allows the seller to deploy the cash in the rest of their business to attempt to fix the problem.
"The cost savings sell this deal"
Embarking on a transaction solely due to the buyer's ability to rip out the overhead costs of the seller and combine the operations is a recipe for a lot of sleepless nights. Financially, there is substantial benefit in most transactions from leveraging the cost base and reducing redundant functions. The issue comes with the integration of the businesses and the carnage that results from overlapping sales and operations. Remember that the bankers can help you get the deal done, but when it comes to making the deal work, you are on your own.
Every Last Dime.
This is less of a deal issue and more of a negotiation concept. If you are selling your company to a buyer and are receiving a mix of cash and shares in the new company, there is no need to reach for every last dollar in the price. Most people believe that the highest price wins the auction every time. It is not true. If the upside of the combined company makes the stock worth more over time, then it is possibly the better deal. Asking a buyer to max out on price impacts the combined company's cash resources. This could constrain the ability to exploit the opportunity which drove the desire to pursue the acquisition in the first place and thus, result in lower overall value for the shares received from the buyer.
There is nothing wrong with being opportunistic when thinking about M&A. Frankly, you can't forecast when somebody is going to wake up one morning and decide that they want to sell. You should, however, be disciplined in what you are looking to add to your company through acquisition and take a pass on opportunities that don't fit your strategy. Remember, trading what you have for the untold fortune built on what's behind door #2 sometimes ends up as cottage cheese.  |
