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How to create value through M&As in a downturn?
If numbers could guarantee success, there would have been M&As happening all over. Pankaj Karna, (Partner and Head M&A, Grant Thornton India) explains how returns can be maximised even during a downturn
Issue Date - 01/04/2014

Q. Globally M&A trend is witnessing a fall this year by over 35 per cent to $1.579 trillion when compared to the previous year (Thomson Reuters). What, according to you, have been the main reasons for this?

A. Liquidity and capital situation have been a lot tighter this year and that’s obviously one of the reasons to see initial momentum on very large deals going down. Even cash or available capital markets are also limited. And, this is the reason why economic situation is a lot tighter this year in India. Globally economic conditions are tighter and you are likely to see rise in special and distrust situations, whereas, in India I think the fundamentals are strong but the liquidity conditions, capital market situation and higher interest rates are contributing to somewhat lower momentum.

Q. M&As have been cited by many reports as value destroyers. In your opinion, what have been the main reasons for some of the biggest M&A failures?

A. I would differ in opinion. While you highlighted Citigroup/Travellers’ and Diamler Chrysler, which you believe have not gone right but there have also been cases that have gone right. The Mittal Group and Tata have successfully executed meaningful and global M&A transactions. The DNAs of the organisations also have to match and that is very important, in addition to business synergies that may exist. Integration and buy-in of strategic goals and operating style are vital points as well.

Q. Valuation of M&A target has been a critical issue. What model can the acquiring companies use to ensure they don’t overpay?

A. I think, pricing of a deal is relevant to the fundamental value based on what a standalone company can achieve, cash flow suggested and what marketers think about companies of that kind. There is always a synergy value that exists but that should be reserved to the best extent possible for the buyer’s upside.

Q. How should companies approach the challenge of post M&A integration?

A. Many a times what happens is integration and efforts are present at top levels only. But often they don’t seep down to the ground level and that’s where the problem lies. Post acquisition integration, educating people about the deal across ranks, and potential factors that may impact or provide individual upsides need to be addressed. In total, buy-ins should be created at all levels within a very realistic time frame post acquisition.

Q.  What are the critical challenges in top management restructuring during and after M&As. How can they be managed?

A. Each case is different. It’s very difficult to generalise. Obviously, acquirer’s top management will have a strategy. Identifying key people in the target, and getting their buy-in early is extremely crucial.

Q. A report by BCG says that M&As in economic downturns are said to generate better returns than M&As in upturns? What is your take on this?

A. Typically in a rising market, selling momentum is low, expectations for the future are high and that is reflected in value of acquisition. Chances are deals may happen beyond target fundamentals and impacted by the demand supply situation. This may happen in the long term, especially when a downturn looks expensive. It is important not to lose eye of the fundamentals, and typically deals in downturns would be largely based on the fundamentals and with limited liquidity that typifies such environments. Benefits can be achieved by striking below the fundamental value for the advantage of buyer.

Q. So shouldn’t there be more number of M&As during economic downturns?

A. There is a difference between success and number. Number is also driven by liquidity, capital market situation, and overall support environment for the deal.

Q. What are the possible strategies that companies should adopt to generate maximum returns during a downturn?

A. Best strategy is to focus on strengths, core competencies and targets that aid the process. There would also be opportunities to diversify, which may look attractive in value, however, they need to be looked at carefully as learning and market challenges at the same time may not be the best combination available.

Pankaj Karna           

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