Merger and acquisition activities reached record levels in 2007, according to the McKinsey Review. These transactions reached almost $4 trillion worldwide. However, with an increase of these transactions, deals are getting more aggressive. In 2007, $520 billion worth of merger and acquisition activity were “hostile transactions.” This amount beats the previous record for hostile transactions, which was set in 1999. This trend leaves managers wondering, what can I do to better anticipate a hostile takeover?
What Causes Hostile Transactions?
There are a variety of factors that cause hostile transactions, including a loss of trust between shareholders and management. When managers anticipate a hostile takeover, they typically put together a defensive plan to resist the takeover. However, according to the McKinsey Review, this strategy doesn’t necessarily create the most value. Managers are acting in the best interest of keeping the company’s independence, instead of evaluating what’s best for the company’s shareholders.
Serve the Company and Shareholders
Managers should focus on serving both shareholders and preserving long-term independence by acting preemptively. Managers need to recognize what another business owner might see in their company and seize those opportunities themselves. This will provide shareholders value and help protect your company.
To accomplish this, focus on corporate value strategy and creating initiatives that add value to the company. Having these measures in place allows a company to identity financial, operation, strategic and portfolio decisions that might otherwise make a company appealing for hostile takeover.
If you address these areas, your company will be stronger. Outside companies will look elsewhere for deals where they can buy at a low price (because your company will be valued higher).
Companies who don’t successfully implement these strategies will have a difficult time explaining why merger and acquisition activity isn’t in the best interest of the company.
Diagnosing your Company’s Vulnerability
Create strategies that focus on accurately diagnosing your company’s weak spots. For example, a company might be able to improve operations, improve governance and better manage their balance sheet.
Make operational changes: Companies should carefully evaluate opportunities for untapped potential. Find these opportunities by focusing on areas with average performance. Performance targets should be developed to create more operational value. For example, a company might increase efficiency by outsourcing production.
Evaluating your portfolio: Another item to consider is restructuring your portfolio. For example, if you have a large portion of capital that isn’t being maximized, you could be a target.
Focus on improving your portfolio by identifying opportunities to enhance its composition. According to the McKinsey Review, a European telecommunications company focused on diversifying noncore assets (15 to 20 percent of the total corporate value) to operate more efficiently and become less attractive to outside companies.
Make Changes in your Balance Sheet: If a company has an under performing balance sheet, it may become a target. Private equity firms who have long-term cash balances that are normal, high amounts of working capital and a balance sheet that’s underleveraged are more attractive to outside companies.
Management needs to evaluate the balance sheet to determine areas that have capital that can be given up. For example, could you give extra dividends to shareholders? During this process, make sure to retain enough cash to effectively grow the company in the future.
Improving Governance: Companies with weak governance need to focus on improvement. A management group with interests that don’t line up with shareholders creates more vulnerability.
If governance is an issue with your company, focus on strategies to re-align management interests with those of shareholders. Also, work on increasing the transparency of governance. Managers should also focus on communicating their commitment to increase shareholder confidence.
Dealing with Perceptions
Companies also need to address perception issues. Make sure the value of your company is perceived highly. You don’t want other companies thinking they have a lot of opportunity to increase the value after changes are made.
For example, if shareholders lack confidence in management’s ability to deliver value to an organization, a company may be perceived as a target for takeover. Improve communication with investors. Continue to work on improving shareholder earnings. If necessary, a company must take an aggressive approach to building confidence (if there are serious problems with management). This can be achieved by replacing problematic managers.
Focusing on strategies that improve shareholder value and building trust can minimize the chances of a hostile takeover. These measures also make sure a company is aligning their desire to stay independent with providing the most value to shareholders. Although value isn’t always the key driver for Merger and Acquisition activity, when a company has captured all of the opportunities for success, it’s valued higher. This can minimize company appeal and make shareholders happy.
Resources:
Jenny Askfelt Ruud, Johan Nas and Vincenzo Tortorici. “Preempting Hostile Takeovers.” The McKinsey on Finance, Number 24, Summer 2007
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or click here to email Mark.
Wednesday, April 7, 2010
Creating a More Effective Risk Assessment Strategy
When creating a risk assessment strategy, companies spend a lot of time focusing on direct risks. Indirect risks, which are often overlooked, can have a serious impact on your business. These risks can cause issues with securing raw materials, limit revenue and your ability to compete in the market place.
For example, according to the McKinsey Review, in 2000 there was a lightening storm in New Mexico. It caused a fire which damaged a technology company that produced chips. Millions of mobile phone chips were damaged.
The technology company didn’t just supply one mobile company, it supplied chips to several. All of the companies were scrambling to shift production to suppliers in Japan. However, not all companies were able to make the adjustment quickly. Companies who didn’t move quickly lost serious revenue.
Regardless of your industry, indirect threats cause a ripple effect. It’s not realistic to eliminate these risks altogether, but with proper planning, you can minimize them.
Target the Value Chain
Most companies have a process in place for evaluating their value chain risk. However, companies need to incorporate processes for targeting the most common indirect risks. According to the McKinsey Review, there are four areas that should be examined (called risk cascades), including: competitors, supply chains, distribution channels and customer responses.
Evaluate the Risk of Competitors
When a company has a structure that is seriously different from competitors, they are at higher risk. Although you don’t want to “copy” competitors, if you plan on varying your strategy substantially, you must pay more attention to indirect risks.
Having a completely different strategy from your competitors means if you’re hit by an indirect risk, the competition may be able to capture your share of the market (because their strategy is much different). This can drive down revenue and hurt the company long-term.
Consider Supply Chain Exposure
When creating a strategy, focus on areas of weakness in your supply chain. Are there indirect threats that could interrupt your ability to secure parts and materials? If so, it could create pricing and supply issues. These issues can affect the customer’s ability to access your product, which can drive down sales.
Look out for Distribution Channel Risks
Managers should also spend some time evaluating potential distribution channel risks. These risks can hinder your ability to reach customers, interfere with costs and even pose a threat to your existing business model. For example, the McKinsey Review discuses the bankruptcy of Circuit City in 2008. As the electronic company liquidated, it created price pressure for other companies.
These companies were holding more then $600 million in unpaid receivables at the time. Customers were in “bargain hunting” mode which directly affected other retailers. Companies were forced to drop prices to make sales.
Anticipate Customer Response
Anticipating the response of customers is difficult. With so many factors involved in a purchasing decision, there are plenty of indirect risks associated with this category.
For example, consider the increase in gasoline prices. As this occurred, customers changed their vehicle purchasing behavior. There was a steady decline in the purchase of large vehicles. Automobiles with the ability to achieve better gas mileage experienced an increase in sales. Customers were also more willing to purchase new alternatives, like the Hybrid.
Evaluating your Risk Profile
When creating risk strategies, companies should carefully consider the risk cascades. Anticipating how direct and indirect risks move through the value chain can help companies prevent the “ripple effect” that occurs when indirect risks aren’t considered.
For example, most industrial companies believe they’re in trouble when the price of carbon increases. The McKinsey Review, however, argues that carbon price increases doesn’t always hurt business. In fact, some companies may benefit.
If carbon was more expensive, aluminum would become the material of choice, which could positively impact automobile manufacturing companies. Therefore, some companies might be negatively impacted, while others (like the automotive companies) would see positive results.
Although companies can’t see around every corner, they can be as prepared as possible. Creating the best possible risk assessment by identifying indirect threats can help create more effective, corporate strategies. Risk cascades can help your company create more effective strategies for anticipating future changes and getting ahead of the curve.
Resources:
Eric Lamarre and Martin Pergler. “Risk: Seeing Around the Corner.” The McKinsey Review, October 2009.
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or click here to email Mark.
For example, according to the McKinsey Review, in 2000 there was a lightening storm in New Mexico. It caused a fire which damaged a technology company that produced chips. Millions of mobile phone chips were damaged.
The technology company didn’t just supply one mobile company, it supplied chips to several. All of the companies were scrambling to shift production to suppliers in Japan. However, not all companies were able to make the adjustment quickly. Companies who didn’t move quickly lost serious revenue.
Regardless of your industry, indirect threats cause a ripple effect. It’s not realistic to eliminate these risks altogether, but with proper planning, you can minimize them.
Target the Value Chain
Most companies have a process in place for evaluating their value chain risk. However, companies need to incorporate processes for targeting the most common indirect risks. According to the McKinsey Review, there are four areas that should be examined (called risk cascades), including: competitors, supply chains, distribution channels and customer responses.
Evaluate the Risk of Competitors
When a company has a structure that is seriously different from competitors, they are at higher risk. Although you don’t want to “copy” competitors, if you plan on varying your strategy substantially, you must pay more attention to indirect risks.
Having a completely different strategy from your competitors means if you’re hit by an indirect risk, the competition may be able to capture your share of the market (because their strategy is much different). This can drive down revenue and hurt the company long-term.
Consider Supply Chain Exposure
When creating a strategy, focus on areas of weakness in your supply chain. Are there indirect threats that could interrupt your ability to secure parts and materials? If so, it could create pricing and supply issues. These issues can affect the customer’s ability to access your product, which can drive down sales.
Look out for Distribution Channel Risks
Managers should also spend some time evaluating potential distribution channel risks. These risks can hinder your ability to reach customers, interfere with costs and even pose a threat to your existing business model. For example, the McKinsey Review discuses the bankruptcy of Circuit City in 2008. As the electronic company liquidated, it created price pressure for other companies.
These companies were holding more then $600 million in unpaid receivables at the time. Customers were in “bargain hunting” mode which directly affected other retailers. Companies were forced to drop prices to make sales.
Anticipate Customer Response
Anticipating the response of customers is difficult. With so many factors involved in a purchasing decision, there are plenty of indirect risks associated with this category.
For example, consider the increase in gasoline prices. As this occurred, customers changed their vehicle purchasing behavior. There was a steady decline in the purchase of large vehicles. Automobiles with the ability to achieve better gas mileage experienced an increase in sales. Customers were also more willing to purchase new alternatives, like the Hybrid.
Evaluating your Risk Profile
When creating risk strategies, companies should carefully consider the risk cascades. Anticipating how direct and indirect risks move through the value chain can help companies prevent the “ripple effect” that occurs when indirect risks aren’t considered.
For example, most industrial companies believe they’re in trouble when the price of carbon increases. The McKinsey Review, however, argues that carbon price increases doesn’t always hurt business. In fact, some companies may benefit.
If carbon was more expensive, aluminum would become the material of choice, which could positively impact automobile manufacturing companies. Therefore, some companies might be negatively impacted, while others (like the automotive companies) would see positive results.
Although companies can’t see around every corner, they can be as prepared as possible. Creating the best possible risk assessment by identifying indirect threats can help create more effective, corporate strategies. Risk cascades can help your company create more effective strategies for anticipating future changes and getting ahead of the curve.
Resources:
Eric Lamarre and Martin Pergler. “Risk: Seeing Around the Corner.” The McKinsey Review, October 2009.
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or click here to email Mark.
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