Accounting, Analysis and Governance in Complex Deals
Fundamentals of Target Identification
A Simple Strategy Perspective
“Strategy is about making choices, trade-offs; it’s about deliberately choosing to be different.” Michael Porter
Fundamentals of Target Identification
The Process
Value Creation Framework
Fundamentals of Target Identification
The Math of Value Creation
\[\begin{array}{l} \text{Target standalone value} \\ + \text{Performance improvements} \\ - \text{Purchase price} \\ \hline \hline \text{Value created for acquirer} \\ \end{array}\]
\(\Rightarrow\) Value is created only when performance improvements exceed the premium paid
Value Creation Framework
Fundamentals of Target Identification
Implications
- Identify targets with significant improvement potential
- Have a clear and realistic plan for achieving those improvements
- Maintain pricing discipline in negotiations
Winner’s curse: as multiple bidders compete for a target, the winning bid often approaches or exceeds the value of potential synergies, leaving little or no value for the acquirer’s shareholders.
BCG knows Archetypes, too!
Archetypes for Value-Creating Acquisitions
Executing Strategy
Where to start?
The Initial Search
- Industry classification (to consider strategic fit)
- Transaction size parameters (reflecting acquisition capacity)
- Geographic restrictions (based on market entry goals or operational considerations) \(\rightarrow\) Universe of potential targets
The Search Process: Selection á la BCG
Executing Strategy
Refining the Search Process á la BCG
Executing Strategy
OpenAI’s Attempted Acquisition of Windsurf
Target Identification Example
The Search Process - Let’s speculate!
- What is OpenAI’s strategy?
- What archtypes are relevant?
- What are the key criteria for selecting a target?
- Where would you look for information?
OpenAI’s Attempted Acquisition of Windsurf
External Barriers Despite Sound Target Selection
The Deal Failed!
- Deal collapsed: reportedly over concerns about Microsoft’s access to technology through OpenAI’s partnership arrangements \(\rightarrow\) external stakeholder dynamics, not target fundamentals, derailed negotiations
- Alternative outcome: Windsurf leadership to Google; Google pays $2.4B licensing fees
- Lesson: Sound target identification can still fail due to external factors
Governance and Target Selection
Recap of Session 1
Governance in M&A - Who is involved?
- CEO, CFO, and other senior executives
- Board of directors
- Shareholders
- Stakeholders (employees, customers, suppliers)
- Regulators
Governance and Target Selection
Employment protection and takeovers (Dessaint, Golubov, and Volpin 2017)
Governance and Target Selection
Employment protection and takeovers (Dessaint, Golubov, and Volpin 2017)
Findings
Increases in employment protection reduce takeover activity by 14–27% and (synergies) by over half
Governance and Target Selection
Employment protection and takeovers (Dessaint, Golubov, and Volpin 2017)
Additional Findings
- Increases in employment protection impede layoffs, resulting in wage costs that match the magnitude of synergy losses
- Offer prices are not fully adjusted, with both bidders and targets exhibiting lower returns following the reforms
Governance and Target Selection
Financial Statement Comparability and the Efficiency of Acquisition Decisions (Chen et al. 2018)
Findings
Acquirers make more profitable acquisition decisions when target firms’ financial statements are more comparable.
\(\rightarrow\) Why do you think that is?
M&A Process
Governance and Target Selection
Financial Statement Comparability and the Efficiency of Acquisition Decisions (Chen et al. 2018)
Findings
- Acquirers make more profitable acquisition decisions when target firms’ financial statements are more comparable
- Post-acquisition goodwill impairments and post-acquisition divestitures are less likely
Governance and Target Selection
Financial Statement Comparability and the Efficiency of Acquisition Decisions (Chen et al. 2018)
Findings
Acquirers benefit most from comparability when acquirers’ ex ante information asymmetry is higher, acquirers operate in volatile operating environments, and management knows relatively less about the target
Governance and Target Selection
Common auditors and M&A (Cai et al. 2016)
Findings
- Deals with common auditors have higher acquisition announcement returns than do non-common-auditor deals
- Common-auditor effect is more pronounced for deals with greater pre-acquisition uncertainty
Governance and Target Selection
Common auditors and M&A (Cai et al. 2016)
Findings
- Increased probability of an M&A for firms with a common auditor
Governance and Target Selection
Common auditors and M&A (Cai et al. 2016)
Findings
- Lower earnings management
- Higher financial statement comparability
Thank You!
