I was going through some old books at home, looking for something to read on a lazy Sunday morning and stumbled upon an old book titled "Deal from Hell: M&A lessons that rise above the ashes" where the author, Robert F Bruner, outlined views views and merger failures and what he thought of the failures.
Just like when you go through an old album, you just can't put it down.
Anyway, I thought that it would be interesting to look at some of his findings and compare them with the M&A that has happened ("SapuraKencana Merger") and the M&A that might happen (the CIMB, RHB & MBSB proposed merger).
Robert F Burner, in his book outlined 6 causes for merger failures. And merger failure does not mean that the merger itself did not materialise, but rather a merger that resulted in a destruction of market value, financial instability, impaired strategic position, organization weakness, damaged reputation and violation of ethical norms and laws. In other words, post merger mess ups.
Based on the recent performances of both the fundamentals and share price of SapuraKencana, I definitely do not think that the merger was a failure. I thought I would also throw in the proposed mega bank merger to see how does it stack.
1. The business and or the deal were complicated.
SapuraKencana: Although the terms of the merger appeared complicated with all the SPV, share swap and pricing and swap ratio, it actually was a very straightforward deal. Two companies of almost equal size (approx RM6 billion each) decided to get together. The valuation was done such that Kencana was valued just slightly more than Sapura, which would give the shareholders of Kencana slightly above 50% shareholding in the new entity and Sapura shareholders slightly below 50%. Oh by the way, since the valuation was being done, the price was set at premium to the historical prices of both companies, so on the onset, both shareholders did not lose (and since the share price did not drop, both shareholders did in fact win). That was it.
Business wise, both companies were in the same industry doing complimentary things. I did not expect any major system upgrades and changes in the business model had had to be made. This 'no-complication' enabled the people on the ground to quickly focus on business rather than spending too much time on integration.
Mega Bank Merger: In my view, it has the potential to be uncomplicated and straightforward. There is one common major shareholder who is EPF would could make quick decisions. I have a feeling it is not going to be done by purely cash. My reason is, firstly, CIMB, like many other banks under Basel regime, would be holding cash dearly to meet the various threshold. Secondly, the share swap deal allows flexibility to assign premium much easier than cash. In the cash deal, the premium would have to be realized, in a share swap deal, the premium is on paper. If the merger decide to follow the SapuraKencana route, they may use a SPV which would use a combination of share-swap and cash to buy the businesses of the three, and if they can convince some financiers to lend them the money for the cash portion that even better as it is almost akin to a 'leveraged buy-out' by the existing shareholders. If you need more info on the, drop me an email on the comment box and I will send you my lengthy opinion.
Business wise, this is slightly a different story that the SapuraKencana deal. In the SapuraKencana deal, the merged entity was going to be involved in a rapid-growth (albeit very risky) and margins that are big enough to absorb any temporary operational slack during the transition period. The focus was on boosting the revenue by getting more contracts. However, in the Mega Bank merger, the industry is considerably more mature than the oil and gas industry in Malaysia. Margins are very competitive and operational efficiency is the key to avoid failure. Slacks in the operations during transitional period post the merger (if it happens) could attack the bottom line very quickly. Nonetheless, to be fair, both RHB and CIMB are seasoned acquirers so they both should know how to handle the business transitions pretty well.
2. Minimum flexibility or rigid business system
SapuraKencana: The SapuraKencana have plenty of flexibility in its business system as it is in a rapidly growing industry (in Malaysia) where the business system are fluid to adapt to the changing business environment. The business system of the merged entity, which then included a wider spectrum of services along the value chain, appears to have plenty of slack to act as buffers to any problems that a business unit might face.
Mega Bank merger: Banking system is mature and is much less flexible with plenty of regulations influencing its capital and how the business is managed. This s an areas which the dealmakers and project managers need to look at carefully.
3. The new 'merged' entitiy had an elevated risk exposure
SapuraKencana: A larger balance sheet and more product offerings does not appear to increase the level of risk of the merged entity. Although the management seemed to be taking more projects which may have riskier profile, the size of the company appears to have mitigated some of the additional risk.The decision making process does not change much as the decision maker largely left with the two 'owners', well one now. As the decision maker is largely the same people, I don't expect the risk appetite going to change significantly.
Mega bank merger: They all appear to share the same risk profile. Does not seem to be an issue here. The decision making process in these seasoned banks would also have been very mature and committee driven. Again I don't expect the management to be taking on a significantly more risk than before.
4. Biased decision process due to recent sucesses, pride, overoptimism etc.
SapuraKencana: Many M&A were driven by hubris, or ego, and hence why many M&A failed. Ego and pride create bias decisions. In the case of Sapura Kencana, considering the ultra high personality of the two owners, it was very exciting to see how both owners put this aside and put business first. Between them, there was common ground and that was to make more money by having a bigger business.
Mega Bank merger: They have Nazir to keep things in check. Enough said :-)
5. Business is no longer as usual
SapuraKencana: Business was definitely as usual after the merger, albeit much bigger. Same expectations and same business process, in principle.
Mega Bank merger: They are buying into similar business so it should be business as usual post merger.
6. The operational team broke down due to cultural or political differences.
SapuraKencana: The two owners were so commanding that they could ensure that the people and the culture merge for the good of the company. There was no major talks of camps and warlords emerging from within the merged entity.
Mega Bank merger: Again I would rest this on the experience of CIMB and RHB in handling cultural integration.
In conclusion, SapuraKencana fits the bill of not having any of the causes for a failure in a merger. Thsi is clearly translated into skyrocketing share price movements as a reward and vote fo confidence from the investing community.
As for the new bank merger, we will just have to wait and see if they could circumnavigate these sinkholes succesfully.
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