Chike Obimma
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 in exhaustive 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: –
a. Market Expansion: business executives are often faced with the question of whether to grow organically or inorganically. Organic growth means developing required competitive capabilities in-house 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 on-board 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.
b. M&A deals may also be driven by the need to on-board 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.
c. 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 in-house 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 in-house, 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 per cent 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.
d. 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.
e. 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 video-conferencing company, BlueJeans in a less than $500 million deal.
f. 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 10th 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:
a. The desire of the owner to retire and the lack of successors
b. Inability to compete
c. Irreconcilable differences among owners
d. Lack of capital for growth
e. Loss of key people or key customers
f. The need for cost savings through economies of scale
g. Access to greater resources as a result of selling to a larger entity
Buyer Motivations include:
a. Desire to diversify to new markets
b. Reducing competition by buying them off
c. Inorganic growth as a quicker and more realistic way to grow
d. Access to new or emerging technologies
e. Access to new markets
f. 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 two 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 5th 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.
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
