THE ‘WHY’ BEHIND MERGERS  AND ACQUISITIONS

Introduction

An M&A activity/transaction should be  intentional. As obvious as this statement seems  (simplistically, no one makes a buy or sell decision  without ‘intending’ to do so), its importance to  both sides of an M&A deal cannot be  overemphasized. The Webster’s dictionary  defines ‘intentional’ as an adjective that means  something is ‘done purposely’. To be done  purposely means to be done deliberately. Implicit  in these definitions is the role of ‘critical strategic  thought’ in the decision-making process.  

A buy, sell or merge decision should be borne out  of a logical, strategic and deliberate thought  process which aims to maximise the interest of the  party (be it the buyer or the seller) as well as  deliver value to the counterparty. The outcome of  this critical strategic thought process forms the  ‘why’ behind an M&A transaction and in most  deals will determine the success of the transaction  as viewed from both sides of the deal. Think of this  ‘why’ as the foundation or yardstick of the deal  upon which every other negotiation, outcome and  strategy will rest. This makes it very crucial and  worthy of analysis so that deal makers and  practitioners do not lose sight of same while  making a deal decision and even during  negotiations.

Common reasons for ‘Buy, Sell or Merge’  decisions

Qualifying the reasons stated here as  ‘common’ is deliberate. The reason is that a  party’s ‘why’ for M&A should be peculiar to  that party’s circumstances and vision. Hence,  the reasons stated here are inexhaustive and  merely indicative to show why other parties  have made or may make a ‘buy, sell or merge’  decision. It is the author’s recommendation  that the common reasons are merely used  indicatively during a party’s decision-making  process. The motive is to maintain an original  and peculiar decision-making process. Some  of these reasons are: –

1. Market Expansion: business executives  are often faced with the question of  whether to grow organically or  inorganically. Organic growth means  developing required competitive  capabilities inhouse while inorganic  growth means acquiring such  capabilities. Sometimes, it may be  impossible or too expensive to develop  certain capabilities internally thereby  creating the need for a merger or  acquisition to onboard such capabilities  and stay competitive. It may also be the  case that a business needs to enter and  compete in a new geographical or product  market. Where this is the case, organic  growth may be quite expensive, time  consuming and/or impractical. M&As are  a faster way to tap into the growth  afforded by a new geographical or  product market. For example, Apple  competes with Sony in different markets  such as mobile phones, PCs, music and  entertainment. However, Sony had its  powerful Sony Headset devices which  had become a complementary device for  mobile phones and PCs. Apple wanted to get into this market but  perhaps did not want go through R&D, testing  and product launch. Hence, it acquired Beats  Electronics from hip-hop star Dr. Dre for $3  Billion. (Sherman, 2018) This move gave  Apple ownership of a music headset device which could rival Sony’s and ensured that it  retained its closed system of complete  hardware and software solutions. Stripe’s  acquisition of Nigeria’s Paystack is another  example of market entry through M&As.
2. M&A deals may also be driven by the need  to onboard a significant new identity or  capability.(Sherman, 2018) Sometimes, the  corporate identity of a Firm may be enhanced by the addition of another high  value Firm through M&As. It could also be  that there are new capabilities that are  desirable to improve the Firm’s position in  the industry thereby increasing its share  value and revenue. For instance,  Facebook’s acquisition of Instagram in  2014, and WhatsApp in 2015, are  value/brand enhancing acquisitions which  consolidated Facebook’s position as a leading social media company.
3. Backward or forward supply chain  integration. A Firm’s supply chain is vital  for its success. Coordinating all the players  in the supply chain to act in sync and  respond to customer needs just in time is no  easy task. This is more so where a core  capability of the focal Firm is outsourced to  another Firm. In view of this, it is  sometimes the case that a focal Firm decides  to do a backward integration by acquiring  the supplier Firm so as to bring the  capability inhouse and guarantee better  material/information flow and perhaps also  save money from the economies of scope  which may become available as a result of  such acquisition. For instance, Nvidia’s September 2020 announcement of plans to acquire ARM from  Softbank in a share plus cash deal of $40 billion, shows Nvidia’s desire to bring inhouse,  capability it once relied on ARM for. Nvidia is  a global chipmaker but has been outsourcing its  chips design to ARM. ARM on the other hand  designs chips for a wide range of chipmakers  globally and is said to have shipped about 180  billion chips globally. While this acquisition  may yet face ‘antitrust’ regulatory hurdles given  ARM’s strategic industry position, it is clear that  Nvidia’s strategy is to backward integrate in  order to cement the effectiveness of its supply chain. It is also possible that a supplier may  forward integrate by acquiring its distributor in  order to guarantee the sale of its inventory. An  example is EssilorLuxottica’s acquisition of  GrandVision in 2019. EssilorLuxottica is a  premium eyeglasses maker and the owner of  brands such as Ray-Ban and Oakley.  Grandvision is an eyeglasses retailer and owner  of Vision Express. It sells different brands of  eyeglasses including those made by  EssilorLuxottica. By acquiring HAL Holding’s  76.72% stake in GrandVision, EssilorLuxottica  forward integrated in its supply chain in order to  guarantee an outlet for the sale of its inventory – the finished eyeglasses.
4. Survival. Certain M&A transactions are  motivated by the need for survival, be it as a  result of regulatory changes (such as  deregulation or increase in minimum paid up  share capital in the banking sector), or owing  to change in market circumstances. In 2005,  the Central Bank of Nigeria raised the  minimum paid up capital for banks from 2  Billion Naira to 25 Billion Naira, with a  deadline of less than a year. This requirement  led to a rush in banking M&A deals with  financially weaker banks looking to merge with or be acquired by more financially robust banks. Also, in May 2020, videoconferencing  platform, Zoom, out of worry over the  security/privacy concerns of its customers,  announced the acquisition of Keybase, an  encryption specialist. The author believes  that this move will ensure Zoom’s survival  amidst competition from the likes of  Microsoft Teams, Cisco WebbEx, skype,  Google Meet, and even WhatsApp, among  others who may have encrypted  videoconferencing services.
5. Social/environmental/industry-wide  changes. The covid19 pandemic is a classic  example of one event which has  necessitated social, environmental and  industry-wide changes all at once. A lot of  questions have been asked about the way  we work and live, and this has caused  management in different businesses to re think their portfolios and either embark on  spin-offs or acquisitions/mergers. At the  height of the global lockdown in April  2020, videoconferencing became more  integral in the way we work.  Telecommunications giant Verizon, in a bid  to adapt to the new reality, announced that  it had reached an agreement to acquire  videoconferencing company, BlueJeans in  a less than $500 million deal.
6. Perceived Synergies. It is said that M&As  unlock synergies which parties enjoy by  coming together. When 2 entities which  were separate merge, they enjoy economies  of scale and scope. This could mean higher  bargaining power with suppliers (thereby  reducing cost and reducing their prices to  drive competition), or increased specialist  talent pool and reduced non-specialist  workforce. Also, the combined entity can  cross-sell or even tie and bundle products in order to drive sales.

It could also be case of technological synergies,  marketing synergies, R&D synergies, among  other synergistic possibilities. The very recent  announcement by Adobe on 10^th November 2020  of its acquisition of project management tool,  Workfront for $1.5 billion is a synergistic  acquisition. Workfront is a task management tool  in the same space as Microsoft Project and  Planner, Wrike, Smartsheet, Monday.com,  among others. Adobe is an established creativity  and utility software company. The acquisition of  Workfront, a business that shares a similar  ideology of delivering ease and coordination in  today’s demanding business environment, is  bound to unlock synergies for both businesses.

Why Buyers Buy and Why Sellers Sell

In Andrew Sherman’s ‘Mergers and Acquisitions  From A to Z’ (2018), he lists common seller and  buyer motivations. The author will list some of  these motivations here to give an indication into  why either side of a transaction may want to do a  deal.

Seller Motivations include:

1. The desire of the owner to retire and the lack  of successors 
2. b. Inability to compete 
3. c. Irreconcilable differences among owners d. Lack of capital for growth 
4. e. Loss of key people or key customers f. The need for cost savings through economies  of scale 
5. g. Access to greater resources as a result of  selling to a larger entity

Buyer Motivations include:

1. Desire to diversify to new markets 
2. Reducing competition by buying them off
3. Inorganic growth as a quicker and more  realistic way to grow 
4. Access to new or emerging technologies
5. Access to new markets
6. Deployment of excess cash rather than  investing it in R&D or leaving it in the bank.  This is on the understanding that such M&A  will add further value and increase the  business’ valuation.

For a buyer or seller or any other deal maker, it  is important to bear in mind that the reasons  stated above may not apply to you. Your reason  may be entirely different but must be given  critical thought and align with your long term  vision, else the value you aimed to unlock by  doing a deal may be lost and the deal may be  adjudged unsuccessful as a result. 

It is also important to clearly communicate your  deal rationale to your counterparty, especially  in a merger (distinguished from an absolute  divestment or purchase). This will ensure a  more successful deal (when viewed from both  sides) and aid post-merger integration.

The Lenovo Motorola Acquisition from  Google – A strategically motivated deal

In 2014, Lenovo acquired Motorola Mobility  from Google in a $2.9 billion deal. Google only  acquired Motorola mobility 2 years prior, in  2012, for $12.5 billion. Why did Lenovo  acquire Motorola and more importantly, why  did Google sell for such a cut-price? The aim  here is to show how M&A decisions are made  on both sides and how they ought to be driven  by clear strategy. Bear in mind that this paper  only addresses the ‘why’ behind the deal and  does not address the success of the deal. 

Why Google Sold and at the Price it did:  Motorola was formally split into 2 publicly  traded companies in 2011, with Motorola  Solutions owning the enterprise unit and  Motorola Mobility owning the consumer  division which comprised of smartphones and  other software. Google, owns the Android OS which as of 2011 was consistently under attack by  Apple and Microsoft as some of its OEMs were  being sued for infringements. This unsettled  phone hardware manufacturers and could have  cost Google the success of its now very successful  and dominant Android OS. Motorola Mobility  had over 17,000 patents in its portfolio and  Google believed that these patents would help it  defend Android from infringement claims.  Hence, it acquired Motorola Mobility in 2012.  Having acquired Motorola Mobility, the  infringement problem was addressed but its  Android licensees such as Samsung feared that its  OS supplier now had hardware capability and  could compete with them in the hardware space. 

Consequently, Samsung began to develop its own  OS, Tizen, and LG started developing WebOS.  Again, Google was concerned that it may lose its  Android market to competition from its partners.  Besides, given that its main source of income was  in the services and adverts offered through the  Android OS, it became desirable to sell Motorola  Mobility. Hence, it sold the business it bought for  $12.5 billion to Lenovo for $2.9 billion but  retained all the patents save for 2,000 of them. Its  main reason for the purchase was retained and  given that it had made hundreds of millions of  dollars on quarterly losses on the Motorola  Smartphones by underselling them to enhance its  Android market share, it could then use the billions of dollars in losses as tax deductions.  Also, it sold to Lenovo, a mainly PC company  with zero smartphone presence in US at the time,  thereby creating a partner to sell its Android OS  to, and competitor to the likes of Samsung or LG  so as to reduce its dependence on them for its  Android.

Why Lenovo Bought: Lenovo was already the  number one PC company in the world by sale  volume. It acquired IBM’s Thinkpad PC business  in 2005 and gave it global dominance. It had a  smartphone business which at the time was 5^th in the world but had zero presence in US. The PC  market had stopped growing as a result of the  increasing capabilities of the smartphone, so it  needed to grow its smartphone market to  continue its growth. Motorola had a good  relationship with US telecom carries such as  Verizon and it would be easier to leverage on  those relationships rather than build new ones.  Also, Motorola was already a strong brand in  the US. Therefore, acquiring it was a good  way to gain immediate entry into the US  market and expand its global presence.  Lenovo believed that its acquisition of  Motorola Mobility would unlock substantial  synergies to make it a strong third smartphone  heavyweight behind leaders, Apple and  Samsung.

The Lessons and Conclusion

From, the Motorola Mobility story and other  examples cited, it is obvious that a lot of  thought and strategy goes into making a  buy/sell/merge decision. Like Lenovo and  Google, every business has its peculiar circumstance which should inform its  decision-making considerations. That the  reasons for doing a deal need to be clear and  strategic cannot be overstated. Parties should  engage strategic advisers early on in the  decision-making process so that areas of  concern may be discussed and potential value  unlocking areas such as tax benefits,  technological synergies, new markets, and the  potential economics of the transaction are  fully explored. 

Understanding the ‘why’ behind the M&A  sets the tone for the entire transaction and must  be dealt with consciously, if not more  consciously than other stages of the deal.

About Niccom LLP

At Niccom LLP, we advise on Mergers and  Acquisitions, and we understand the intricacies of  deal making and structuring. We are happy to  advise you on structuring and negotiating that  deal irrespective of the side of the deal you are  negotiating from, be it the buy-side or sell-side or  even a merger properly so-called.  

We are a full-service law firm comprising of  young, experienced and innovative minds. We  provide legal and compliance services to clients  cutting across different sectors and backgrounds.  We operate out of Lagos, Nigeria, but represent  clients across West Africa, East Africa, Europe  and the Middle East.  Chike Obimma is a Partner at Niccom LLP. He  is a commercial Solicitor and holds an M.B.A  degree. He also has an LLM in International  Business Law Degree from Queen Mary  University of London. Chike can be reached via  chike@niccomllp.com