THE M&A PROCESS
A qualitative study on serial acquirers and their design and execution of M&A processes
Bart-jan van Leersum s1352296
University of Groningen
Faculty of Management and Organization Master thesis
MSc. International Business and Management
Supervisor: Florian Becker-Ritterspach. Co-supervisor: Kees van Veen
Accenture
Management Consulting & Integrated Markets Consulting Finance & Performance Management
Mentors: René van Heijningen & Michiel Abbenes
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Abstract:
This paper reviews the merger and acquisition (M&A) processes prevalent at corporate acquirers and private equity acquirers. Ten interviews have been held with both corporate and financial acquirers. By comparing the two investor types, this paper has identified similarities and differences in their respective M&A processes. Most of these differences in the M&A processes between the two investor types can be explained by structural differences between the two investor types. However, the interviews also identified a large number of similarities between the two investor types and identified that a convergence between the M&A processes of these two investor types has taken place. This convergence is explained by institutional isomorphism on the one hand and the changes in the economic environment on the other hand. The convergence has not led to a completely identical process on both sides, but rather has led to a similar approach to the M&A process.
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PREFACE
Many students start their thesis with very ambitious goals on the outset; I was no exception. Instead of focusing on a small manageable project, I tried to look for a subject that would have a great impact on both the professional and the academic world or for society at large. After considering dozens of subjects that were beyond the scope of a thesis, I encountered a graduation project at Accenture that suited my interests and goals. During the course of the research, I learned that it is quite hard to write a paper that suits one’s own interest, that has academic value, and that can be used for commercial purposes. Due to differing and sometimes conflicting interest, I revised my initial research into a subject with a broader scope that is hopefully of interest to all concerned.
I would like to thank the ten interviewees for their input. I truly appreciate the openness and the fact that, despite the crowded agendas, these people have found the time and willingness to discuss the subject with me. Although there are too many people to thank to fit this page, I would additionally like to thank specifically my academic supervisor, (Florian Becker-Ritterspach), the two supervisors from Accenture (René van Heijningen and Michiel Abbenes), and the senior managers involved (Mickey de Cuba and Daniel Stokvis) for making this research possible. Furthermore, I would like to thank Ad van den Ouweland for his help concerning my thesis. Finally, I would like to thank my family for their help and unconditional support.
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TABLE OF CONTENTS
ABSTRACT: ...2
PREFACE ...3
LIST OF FIGURES AND TABLES...5
1 INTRODUCTION...6
1.1OVERVIEW...6
1.2RELEVANCE OF THE RESEARCH...8
1.3THESIS STRUCTURE...9
1.4PROBLEM STATEMENT...10
1.6RESEARCH DESIGN...11
1.7CONCEPTUAL RESEARCH MODEL...13
2 LITERATURE REVIEW: MERGERS AND ACQUISITIONS ...14
2.1CHAPTER OVERVIEW...14
2.2MERGERS AND ACQUISITIONS AT THE TWO TYPES OF INVESTORS...14
2.3DIFFERENCES BETWEEN CORPORATE M&A AND PRIVATE EQUITY...22
3 LITERATURE REVIEW: THE M&A PROCESS ...26
3.1CHAPTER OVERVIEW...26
3.2THE M&APROCESSES...26
3.3IN-HOUSE ORGANIZATION AND ORGANIZATIONAL LEARNING...28
3.4PORTFOLIO MANAGEMENT...30
3.5DEAL ORIGINATION...31
3.6DEAL ANALYSIS...32
3.7DEAL EXECUTION...33
3.8POST-DEAL VALUE CREATION...34
3.9EXIT...37
4 METHODOLOGY...40
4.1CHAPTER OVERVIEW...40
4.2CHOICE FOR A QUALITATIVE STUDY...40
4.3RESEARCH METHODOLOGY...41 4.4INTERVIEWEE SELECTION...42 4.5THE INTERVIEWS...44 5 ANALYSIS ...46 5.1CHAPTER OVERVIEW...46 5.2INTERVIEWS...46 5.3DISCUSSION OF FINDINGS...54
5.4EXPLANATION OF DIFFERENCES AND SIMILARITIES...56
CONCLUSION ...63
7.1LIMITATIONS...65
7.2RESEARCH IMPLICATIONS AND DIRECTIONS FOR FUTURE RESEARCH...66
BIBLIOGAPHY...69
APPENDIXI:M&A VALUE AND VOLUME...77
APPENDIXI:M&A VALUE AND VOLUME, CONTINUED...78
APPENDIXII:PRIVATE EQUITY FUND STRUCTURE...79
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APPENDIXIV:PRIVATE EQUITY PERFORMANCE...81
APPENDIXV:LIST OF INTERVIEWEES...82
APPENDIXVI:INTERVIEW PROTOCOL...83
APPENDIXVII:WHITEPAPER ...85
List of figures and tables
FIGURE 1: Research design ...12FIGURE 2: Conceptual research model ...13
FIGURE 3: The M&A cycle ...27
FIGURE 4: Unit of analyses ………...42
FIGURE 6: Conceptual model ...63
FIGURE 7: Private equity as a percentage of total M&A value………...………..77
FIGURE 8: Announced M&A transactions with European target ...77
FIGURE 9: Global deals by volume and value ...78
FIGURE 10: Global private equity deals by volume and value...78
FIGURE 11: The typical private equity (PE) fund structure ...79
FIGURE 12: Cumulative vintage year performance ...81
TABLE1: EXPECTED DIFFERENCES AND SIMILARITIES IN THE M&A PROCESS ...38
TABLE2:EXPECTED DIFFERENCES AND SIMILARITIES IN THE M&A PROCESS COMPARED TO THE OUTCOMES OF THE INTERVIEWS………..55
TABLE 3: KEY DIFFERENCES BETWEEN PRIVATE EQUITY AND TRADING GROUPS………...80
TABLE 4:CUMULATIVE FUND TYPE PERFORMANCE ……….81
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1
INTRODUCTION
1.1 Overview
A simplified analogy can be made between serial acquirers and divestors1 (companies that actively manage their portfolio2 through acquisitions and divestments), and Ajax, the Dutch football club. Ajax is famous for its youth academy that contracts inexperienced players, trains them and aims to sell them at a higher price as has been the case for Johan Cruijff and Marco van Basten. Additionally, Ajax is a buyer, trainer and seller of players with experience at other clubs. For instance Klaas-jan Huntelaar was bought from Heerenveen for 9 million Euro and sold to Real Madrid for 20 million Euro, disregarding earn-outs and other clauses. Essentially, Ajax, like other professional sport clubs, is not too dissimilar from serial acquirers. Companies like General Electric and private equity firms such as Kohlberg, Kravis and Roberts are well known serial acquirers. The serial acquirers actively manage their portfolio by conducting acquisitions, which can be defined as transactions that combine two firms into one new firm (Parvinen & Tikkanen, 2007). Private equity firms, which are defined in detail in chapter 2.2, are by definition serial acquirers since their only goal is to acquire and subsequently sell companies in order to generate financial returns for its investors.
Laamanen and Keil (2008) posit that acquisition capabilities comprise the knowledge, skills, systems, structures, and processes that a firm can draw upon when performing M&A. Prahalad and Hamel (1990) set forward the idea of core competencies and capabilities and how they can lead to sustainable competitive advantages. They suggest that due to their breadth of experience, serial acquirers have embedded acquisition capabilities within their organizations. This paper will look at how serial acquirers use these capabilities and design, execute and embedded the M&A process in practice. Interestingly, King, Dalton, Daily and Covin (2004)
1 “Serial acquirers and divestors” are abbreviated as serial acquirers throughout this paper. However, in Chapter
7 state that although M&A experience has a conditional effect on M&A performance, the conditions often studied in prior M&A research do not have an effect on post acquisition performance. What impacts the M&A performance remains largely unexplained. Practitioners like for example Dutra, Peters, and Dailey (2006) and Uhlaner and West (2008) have investigated the attributes of successful M&A and related it to the internal M&A processes. However, academic research on M&A processes has been rather scarce or focused on specific aspects or sub-processes (with the exception of Chatterjee, 2009). As processes may be a moderating variable that could explain differences in M&A performance, this paper researches the construct “process” in-depth so that it can be linked to performance in future research.
The total M&A playing field is based on both private equity and corporate transactions. Therefore, this study divides the serial acquirers into two main categories of investor types: private equity (encompassing buyouts and venture capital) and corporate M&A. While the largest part of the M&A transactions is conducted by corporations, private equity’s share has been increasing (as displayed in Appendix I, Figures 6-9) to a combined global leveraged buyout value of $1.6 trillion between 2005 to mid-2007 (Kaplan & Strömberg, 2009). Grimpe and Husinger (2007) state that private equity’s market share in M&A increased from 21.6 percent in 2000 to 33 percent in 2006. However, in recent years, private equity activity declined significantly as a result of the credit crunch. Even though private equity’s market power has significantly decreased as a consequence, M&A is at the core of its business model and could therefore aid research on corporate M&A processes, which takes place in a more complex setting. Therefore this paper researches if, how, and why M&A processes differ or are similar among the two investor types by comparing the M&A process of the two types of acquirers.
8 yield interesting insights on differences and similarities in their M&A processes. However, prior academic research on how the M&A process might differ between the two investor types is scarce (Grimpe and Husinger, 2007). Most comparisons in existing research are often brief notes in papers that cover only one of the two acquirers (e.g. Acharya, Hahn, & Kehoe, 2008). Grimpe and Husinger (2007) wrote one of the only papers in which the comparison between private equity and corporate M&A is a key component. However their work is very specific since 1) the research is of quantitative nature, 2) it is focused on technology acquisitions, 3) it excludes venture capital, and 4) it takes a resource-based view. This focus on technology and resources makes it difficult, if not impossible, to generalize the conclusions to corporate and private equity acquirers that are active in other industries. Additionally the research does not review processes in-depth.
1.2 Relevance of the research
This thesis may enhance theoretical knowledge on M&A within several research fields such as corporate finance and strategic management. Additionally, it may offer pragmatic knowledge to private equity funds, in-house M&A departments and advisors. This paper attempts to make this contribution by differentiating itself on the following areas:
1. This thesis encompasses the two main acquirer types of private equity and corporate M&A. Research on private equity acquisitions and how they might differ from corporate acquisitions has been scarce (Grimpe & Hussinger, 2007), although research on the differences and similarities may give a better understanding of the M&A process. 2. The paper researches processes instead of performance. Essentially, the internal
9 acquirer types and b) of their internal M&A processes. Likewise, the paper adds practical knowledge to practitioners as they can benchmark their own process to that of their investor category, which according to Sudarsanam (2003) contributes to the creation of an effective acquisition function. The interviewees of this research confirmed this.
3. This research is of a qualitative nature. As will be stated in more detail in chapter 4, a qualitative research is needed for studying M&A processes, since the companies do not disclose information on their internal processes that can be quantitatively analyzed. As an example of the corporate need for qualitative studies, Arnold (2008) states that Jeremy Coller of Coller Capital Management (the world’s largest secondary buyout fund) has made a multi-million dollar donation to London Business School, specifying that there is a corporate need for case studies in the field of private equity.
4. Finally, this research augments the literature review on M&A and private equity with multiple interviews and thereby is more closely aligned with the pragmatic reality than most research on M&A that did not consult M&A executives.
In summary, as will be explained in-depth in the methodology chapter, a process-oriented qualitative study of both private equity and corporate M&A may provide new insights on M&A (processes) that previous research has not been able to provide. Interviews are better suited for this research as there is no quantitative data available on the content of M&A processes. The focus on processes and the inclusion of interviews make the research interesting for practitioners.
1.3 Thesis structure
10 covering definition of the two investor types M&A, their respective performance and the differences between the two categories. In Chapter 3, each step in the M&A process is discussed in detail, which will lead to the propositions. In Chapter 4, the qualitative research methodology will be explained. In Chapter 5, the interviews and the propositions will be compared and analyzed. Chapter 6 will provide the conclusion and the research implications, within a framework of limitations.
1.4 Problem statement
This paper aims to a) get a better understanding of the M&A processes and b) understand the differences and similarities between private equity and corporate acquirer M&A processes, in order to expand the current knowledge of scholars and practitioners.
Therefore the research objective is: “to gain understanding on how serial acquirers design and execute M&A processes and how these processes may differ among acquirer types.”
Based on this objective, the following research question for this paper is formulated: “How and why do corporate M&A and private equity design and execute M&A processes differently or similarly?”
In order to answer this research question it is broken into three sub-questions: 1. What are the differences between the two investor types?
2. What are the differences and similarities of corporate and private equity M&A processes?
3. What are the possible explanations for these differences and similarities?
11 The second sub-question is answered by tested proposition based on literature review on the general M&A process and validated by interviews on both corporate M&A and private equity processes.
The literature reviews on the two types of acquirers and the M&A process should be able to explain the differences and similarities found in the interviews and thereby should be able to answer the third sub question. The answers to these three sub-questions are used to answer the main research question.
1.6 Research design
12 FIGURE 1: Research design It er at iv e p ro ce ss
Identify research gap Chapter 1.1-1.3
Formal literature review and theory development Define scope and problem statement on the basis of literature and the needs of practitioners.
Conduct interviews
Select methodology and develop protocol
Write interview reports
Reach conclusion
13 1.7 Conceptual research model
The conceptual research model is displayed in Figure 2. The model shows that there is a predicted effect of the investor type on the content (design and execution) of the M&A process.
FIGURE 2:
Conceptual research model
Antecedents of M&A process
Type of acquirer (private equity versus
corporate M&A)
Explanation of differences and similarities
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2 LITERATURE REVIEW: MERGERS AND ACQUISITIONS
2.1 Chapter overview
This chapter provides a description of M&A, sets apart the two investor types, their respective performance and discusses the differences between the two investor types. As stated previously, this paper focuses on processes and not on performance. However, because the processes are designed to generate performance it cannot be completely discarded. The corporate M&A and private equity performance is reviewed at the end of description of the respective acquirer types. Additionally, it is important to note that this chapter assumes that all corporate acquirers interviewed are quoted companies in order to compare private equity with public equity, although one interviewed corporate acquirer is a large private multinational.
2.2 Mergers and Acquisitions at the two types of investors
When a company acquires or merges with another firm, the two legal entities are combined into one. Despite the contractual and legal distinction that can be drawn between mergers (a combination of two firms) and acquisitions (one firm that takes over another firm), the terms are frequently used interchangeably (Grinblatt & Titman, 2002). This practical consideration justifies that they are researched as one phenomenon (Parvinen & Tikkanen, 2007). The sale of a complete investment is called an exit for both private equity and corporate investments. Acquisitions and exits are collectively referred to in this paper as M&A. A sale of a part of the company is referred to as a divestiture, when the business processes are continued by the new owner or a divestment when the processes are discontinued (Brauer, 2006)
15 section as they are both applicable to corporate M&A and private equity and may have a profound impact on the M&A process.
• Herding: conducting M&A because other (leading) companies set the example. • Hubris: overconfidence in the managers’ own abilities to create value. The effect of
experience can contribute both negatively and positively to M&A performance. An organization may correctly make inferences and learn from previous acquisitions, but it may also make false inferences. Management hubris is one of the false inferences, whereby the acquirer falsely attributes the success of previous acquisitions to its own skills (Doukas and Petmesaz, 2007).
• Acting in self-interest: traditional agency theory focuses on the alignment between stakeholders and, in particular, on the shareholder-manager relation. A common example is empire building, where management makes acquisitions to enhance their personal status, which is not in the interest of shareholders. Similar to Parvinen and Tikkanen (2007), this paper takes a broader perspective and also includes employees and firm-external professionals. Examples of these professionals are investment bankers, accountants, consultants, and lawyers.
Corporate M&A
16 correlation will decrease the companies’ portfolio variance and thus lower the risk of default of the total portfolio. This would subsequently lead to a lower cost of capital. Additionally, corporate acquirers can off-set losses and profits of different portfolio companies.
Numerous literature reviews analyzing one hundred or more M&A accounting- and stock-performance studies have shown that on average, shareholders of acquirers either incur wealth losses or break-even at best (Bruner, 2004). The shareholders of target companies capture the largest part of synergistic benefits and realize abnormal returns in the order of 20 percent to over 43 percent. Bruner (2002) indicates that almost all of the twenty studies researching the net economic gain (measuring the net weighted average performance or the absolute value creation of acquisition and divestitures combined) are positive. Therefore, one can argue that the popular notion that acquirers on average destroy shareholder value may not necessarily represent the reality and that M&A in total seems to create value. However, Capron and Pistre (2002) note that there is a large dispersion between acquirer returns, and Pettit (2007b) argues that in a longer time frame the dispersion of returns increases. Moreover, the distribution of the takeover gains between target, bidder, and shareholders varies across decades and depends on the characteristics of the deal (Martynova & Renneboog, 2008).
Unfortunately, after three decades of research on M&A (Cartwright & Schoenberg, 2006), there is still no consensus on how to measure corporate M&A performance (Zollo & Singh, 2004; Zollo & Meier, 2008) since there is no single factor or measure that can describe performance accurately (Zollo & Meier, 2008). Moreover, studies researching the effect of acquisition experience on M&A performance generate inconsistent results (King, et al. 2004; Srikanth, 2005). This may indicate that accounting measures and stock performance measurement (event studies) could be inadequate for measuring true performance.
17 loss account, balance sheet and cash flow statement) are consolidated in the acquirers’ financial statements. Second, the stock price reflects both the performance of the acquirer and the target. The subsequent paragraphs describe the limitations of quantitative research in more detail and are divided into the two categories of quantitative M&A research: event studies and accounting studies.
Event studies research stock performance in an event-window around the M&A announcement. However, because stock prices reflect opinions about the future, they also reflect the perceptions of shareholders on the M&A decision. Moreover, a negative stock performance does not necessarily relate to the (perceived) success of the acquisition. Although the company may incur low or even negative returns, one should ideally compare the M&A decision with the other options the company has to generate returns. Some companies may have a core business that is declining and would have been worse off if they did not conduct the M&A. Because the disparity between acquisition and organic growth cannot be measured, the performance measurement of M&A decisions remains ambiguous. Additionally, an acquisition signals the shareholders about the declining attractiveness of the core business. The shareholder response may relate (in part) to opinions about the core business instead of the M&A decision.
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Although researchers have studied individual acquisitions and their performance implications at great length, there are very few studies that examine the characteristics and performance consequences of active acquisition behavior (Laamanen & Keil, 2008). Moreover, it may be possible that because the differences between “serial acquirers” and “serial acquirers and divestors” are not accounted for in quantitative tests, the “serial acquirers and divestors” performance could be hidden between the negative performances of the “serial acquirers.” This could imply that the negative performance of conglomerates hides the performance of companies that balance both acquisitions and divestures. For example, Drakinoff, Koller and Schneider (2002) found that companies that balance buying and selling portfolio companies outperformed companies that focused narrowly on either acquisitions or divestitures, even when adjusted for risk.
Overall, there is little consensus on the performance of serial corporate acquirers. Tests between experience and performance have generated a variety of relationships, similar to the research on the relationship between partnerships and experience (Zollo, 2008). The variety ranges from an U-shaped relationship (Halebian & Finkelstein, 1999), a negative relationship (Kusewitt, 1985), a positive relationship (Fowler & Schmidt, 1989), no relationship (Zollo & Reuer, 2003), to a contingent relationship that depends on the successfulness, the homogeneity, and the time period of time between acquisitions (Hayward, 2002). Moreover, a meta-analysis of King et al. (2004) researching seven studies and thirteen hundred events has not found any relation. Aktas, de Bodt, and Roll (2009) and Chaterjee (2009) remark that there is a sharp contrast between practitioner material and scholar evidence on the performance of serial acquirers. While the academics presented conflicting evidence, several white papers (Rovit, Harding & Lemire, 2004; Cools, Gell & Roos 2005) found that experience in M&A leads to better performance of serial acquirers.
19 acquirers in seven industry sectors between 1 January 1990 and 31 December 1999. They found that a high acquisition rate, as well as a high variance in such acquisition rate, negatively relate to acquirer performance. However, the research also indicates that an acquirer’s size and acquisition experience may alleviate these negative attributes, while the scope of its acquisition program may reinforce the negative attributes. The negative effect of deal heterogeneity indicates that a higher degree of specialization leads to a better performance, while the positive effect of size may be due to the fact that for larger companies it is easier to free up resources and supporting services when needed. Moreover, the research has found that in the long-term, frequent acquirers outperform non-frequent acquirers (with a median 12.6 percent per year versus minus 3.9 percent per year according to Laamanen and Keil, 2008).
In summary, corporate acquisitions seem to have a negative impact on shareholder returns, while divestitures and divestments have a positive influence. Several factors may decrease the negative impact of acquisitions on shareholder value. Experience, size and homogeneity of acquisitions seem to lead to better performance (Laamanen and Keil, 2008). However, because there is so much contradicting research on M&A performance the relation between the two variables, experience and performance, remains inconclusive (Chatteryee 2009).
Private equity
According to Gilligan and Wright (2008), definitions of private equity are confusing and not consistently applied. Therefore it is imperative to form a comprehensive definition. In this paper private equity is defined as the following:
Private equity can broadly be defined as encompassing both buyout and venture capital (Wood & Wright 2009) and is risk capital provided to a wide range of companies. This ranges from financing young startups, known as venture capital, to buying mature companies, known as buyouts (Gilligan & Wright, 2008).
20 outside investors3 or from the parent company, in case of a captive arm. Moreover we include that: private equity funds invest in illiquid equity, and that private equity is lightly regulated.
Within private equity there are different types of investments, but in general there are two main categories: venture capital and buyouts (Kaplan & Schoar, 2005). Buyouts are typically structured with a high level of debt (Grimpe & Husinger, 2007); hence the term “leveraged buyout”. Ljungqvist, Richardson and Wolfenzon (2008), mention four main distinctions between buyout and venture capital besides the lifecycle referred to in the definition. First, venture capitalists (VCs) often take minority stakes, while buyout funds usually take majority stakes (Kaplan & Strömberg, 2003). Second, venture capital has larger informational asymmetries (Gompers & Lerner, 1999). Third, venture capital often finances in stages, while buyout funds typically make one-off investments (Cornelli & Yosha, 2003). Fourth, in contrast to buyouts, the highest bidder is not immediately the winner in venture capital (Hsu, 2004) due to the added operational value a VC may bring. However, one can argue the last distinction may be fading because of the increased focus on operational value creation at buyout firms.
Private equity acquisitions do not bring about synergies as in corporate takeovers since the acquisition vehicle (special purpose vehicle or SPV) does not contain assets before the acquisition. The main sources of takeover gains include debt tax-shields, target incentive improvements and undervaluation by the market (Grinblatt & Titman, 2002). The arbitrage on company value is typical, but not exclusive for private equity. Asset-stripping displays this arbitrage, a company’s assets may represent a higher value in separated form than the acquisition price for the total, and may thus create value when sold in demerged form.
Due to lack of information disclosure at private transactions and complex acquisition structures (Fenn, Liang, & Prowes, 1997; Wright & Robbie 1998), the performance of private equity is difficult to measure and has therefore been the subject of debate. While advocates of
21 private equity (e.g. industry associations, consultants, and private equity firms themselves) often come to the conclusion that private equity produces significant returns, some scholars come to other conclusions. On the one hand, the European Private Equity and Venture Capital Association (EVCA) shows average returns of 11.7 percent Internal Rate of Return (IRR) over a ten year rolling basis for European private equity funds (EVCA, 2007). On the other hand, scholars like Kaplan and Schoar (2005) state that on average buyout funds under perform the public markets net-of-fees, with a mean of 80 percent and a median of 90 percent of the S&P 500. This may even understate the negative performance as researchers use databases (e.g. Thomson Venture Economics) that could be subject to selection bias since these databases rely on voluntarily disclosed data.
Although the performance of the whole private equity asset class can be considered disappointing, Kaplan and Schoar (2005) found a large heterogeneity between funds, possibly indicating a more successful approach and better skills and strategy. Additionally they found differing performances between different time-frames. According to Phalippou and Zollo (2006) private equity fund performance co-varies positively with business- and stock-market cycles, which is an unattractive property. Additionally, performance also differs per investment stage/fund type. Researchers like Hege, Palamino, and Schwienbacher (2003) and trade associations, such as EVCA, show that venture capital historically underperforms buyout funds (Wright, Renneboog, Simons, & Scholes, 2006; Wright, Gilligan, & Amess, 2009). This is displayed by Table 4 in Appendix IV, which displays the private equity returns per fund type.
22 investors, private equity investors demonstrate long-run, sustainable differences in ability and performance (Moon, 2006). In general, the more established and experienced funds have a
better performance (Wright, Gilligan, & Amess, 2009; Kaplan & Schoar, 2005), which may be attributed to a positive relation between experience and performance (Phalippou & Gottschalg, 2009). Kaplan and Strömberg (2009) indicate that the database used in the research of Kaplan and Schoar (2005) may even understate persistence since the fund that underperforms would have difficulties in raising a new fund.
Currently, there are both major threats and opportunities to the private equity market according to practitioners (Meerkatt and Liechtenstein, 2008). First, due to the lack of liquidity on the debt markets, it has become difficult to secure debt financing. Second, companies’ free cash flows have dropped, decreasing their ability to pay off existing debt or refinance, which increases the chance of default. Third, valuations are lower, reducing the cash flows from exits. Fourth, investors may be reducing private equity asset allocation in order to keep the same ratio between public and private equity. However, historically the best returns are made in investments in the years following a recession. Therefore, it is difficult to judge whether private equity will still have a significant impact on M&A in the future.
2.3 Differences between corporate M&A and private equity
23 1. The fund/organization structure and size. The corporate M&A team is part of a larger organization and is supporting the core business, while the private equity partnership is an organization on its own. The total number of employees of large multinationals can easily be in access of one hundred thousand. In contrast, Kohlberg, Kravis & Roberts (one of the largest private equity funds) stated that they employed 139 investment professionals in 2007 according to Kaplan and Strömberg (2009). Additionally, most private equity funds have a partnership structure in which the funds committed by the investor (limited partner or LP) can be drawn down by the fund (general partner or GP). As a private equity fund typically has a limited lifespan, the acquirers will aim to maximize value within a certain timeframe, while corporate acquirers will want to maximize the value with a longer timeframe in mind. While private equity funds have concentrated shareholder groups, public equity has a dispersed shareholder group. Therefore, the contact between private equity funds and its investor base is much more frequent than at listed firms, even though their influence is limited as well (Gilligan and Wright, 2008).
24 firms (e.g. Kleiner Perkins Caufield Byers) have a ‘keiretsu approach’ and actively promote cross-synergies among portfolio companies, and B) several buyout funds (e.g. HAL Investments and Waterland Private Equity) are noted for their buy-and-build strategies where the acquired company or SPV makes acquisitions in order to reap synergies in a fragmented industry.
3. Rewards. Public scrutiny will lower the chance of e.g. excessive rewards/remuneration at listed firms. Since private equity buyers do not have to disclose the remuneration of their employees to the public, they will have more freedom to incentivize the deal team and management as they see appropriate (Gilligan and Wright, 2008).
4. The goals of the organization. Corporate M&A takes place to reach the objectives stated in the strategic plans. This implies that corporate M&A must be seen as a means to an end and not as a goal in itself (Sudarsanam, 2003). This is in sharp contrast with private equity that has as main goal generating financial returns in a relatively short time frame (Kaplan & Schoar, 2005; Thomsen & Pedersen, 2000 [in Grimpe & Hussinger, 2007]). While at corporate M&A synergies can be reaped from combining businesses, in general, the private equity transaction must create value on a standalone basis.
5. The regulation of the two investor types. Corporations are far more regulated than private equity firms. Corporate acquirers need to get approval from antitrust regulators, but can also be forced to divest units if the companies’ market power is too large.
These structural differences may, in part, explain the differences in M&A processes.
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3 LITERATURE REVIEW: THE M&A PROCESS
3.1 Chapter overviewThis chapter will review the M&A cycle in-depth. It will first offer an overview of the entire M&A cycle and subsequently will review the sub-processes in detail. It is expected that private equity and corporate M&A will have a different M&A process that reflects the structural differences between the two type acquirer. In the end of each paragraph the expected differences and similarities are summarized.
3.2 The M&A Processes
27 Figure 3:
The M&A cycle
The outer circles display the simultaneous processes that are active during the M&A process, although other authors (e.g. Sudarsanam, 2003) identify the post-acquisition audit (organizational learning on previous acquisitions) and the portfolio management as separate steps that occur after the value capture as discrete phases. This paper argues that In-house organization (which is a broader category than post-acquisition audit) and portfolio management are not discrete phases, but are rather constantly active as displayed in Figure 3. This is amplified by the factor that especially frequent acquirers, often, if not always, have several deal prospects in the process.
The inner two circles display the five processes of the buy-operate-divest process: • Deal origination: the process of acquiring leads/prospects.
Text
Text Deal execution Post-deal
28 • Deal analysis: the process aimed at the analyses of the investment and is
subdivided in a) the analyses of the company, b) the valuation of the company c) due diligence and d) developing value creation plans. • Deal execution: comprised of the final valuation, the negotiation of
contracts, and the signing of the contracts.
• Post-deal value creation: entails the period between signing the
acquisition contract to acquire the company and the disposition phase of the company or business-unit.
• Exit: the exit refers to the disposal of the previously acquired company.
The inclusion of all phases distinguishes this research from Parvinen and Tikkanen (2007) that excluded the post-deal value creation (because of the added complexity) and neglected the exit. Chatterjee (2009) identified three phases: identification, negotiation, and integration. He combined the deal origination and the deal analysis phase into one phase and did not include the exit. However, the inclusion of the exit is important because it facilitates a full comparison between private equity and corporate M&A. Moreover, the best performing acquirers balance acquisitions and divestitures (Drakinoff, Koller, & Schneider, 2002) as exits generate more shareholder value. Because only the better serial acquirers will be interviewed for this paper, one must include the exit, as literature points out that it is an important phase.
3.3 In-house organization and organizational learning
Sudarsanam (2003) states that the organization of a process that facilitates effective decision-making is a pre-condition for successful M&A. The in-house organization refers to the structure, employees, and internal process organization at the acquirer.
29 and knowledge in the form of codes, rules, and templates (Sudarsanam, 2003). Informal learning is embedded in an organization’s routines, habits, and structures. The knowledge is not explicitly articulated, but rather resides in persons, and thus is also transferred person-to-person. Zollo and Singh (2004) found that experience accumulation does not positively influences post-acquisition performance, while knowledge codification has a strong positive effect. Because serial corporate acquirers and private equity acquirers have conducted many transactions, they will probably have built up a large amount of codified knowledge. Moreover, the better acquirers are expected to disperse the knowledge formally as it enhances performance.
30 acquirers can give stronger incentives to the deal- and management teams than the corporate acquirers.
In summary, it is expected that both corporate acquirers and private equity acquirers have a similar way of learning and that they both rely for the largest part on formal knowledge dispersion. Additionally, it is expected that private equity gives stronger incentives to its employees and thus aligns the interest of the employees (agent) and the fund (principle) more effectively.
3.4 Portfolio Management
Modern portfolio theory developed a theoretical framework explaining the practice of diversification and asset allocation, by showing that a risk-return trade-off must be made for each additional allocation (Markowitz, 1991). Copeland, Koller and Murrin (2003) stated that a company can be seen as a portfolio of businesses.
31 portfolio management is possibly more disciplined at private equity funds because portfolio companies are stand-alone entities and thus the profitable portfolio companies cannot subsidize unprofitable portfolio companies.
In summary, it is expected that private equity’s portfolio management is more objective.
3.5 Deal origination
Deal origination, also known as deal sourcing, is the process by which deals enter into consideration as investment prospects (Tyebjee & Bruno, 1984). One can delineate two types of origination strategies: 1) proactive origination, and 2) reactive origination.
This paper defines proactive deal origination as the process of strategy formulation, selecting targets, and contacting them before they are put up for sale. The counterpart, reactive deal origination, occurs when the target contacts the possible acquirers, which is often done through corporate finance advisors. Proactive origination minimizes adverse selection (Parvinen and Tikkanen, 2007). While the companies that exhibit potential may not be offered on the market because they do not need financing, the companies that are in dire need of financing are offered on the market. Proactive origination circumvents this problem by looking at companies that are not yet offered on the market. Because private equity has a fund structure they must make investments in a limited time. If no attractive companies are offered the private equity firm must look actively for opportunities as they cannot invest there money in organic growth. Therefore it is expected that private equity has a more developed proactive origination process than corporate acquirers.
32 possibility of principle–agent problems. Therefore it is expected that both types of serial acquirers have devised structures, incentives, monitoring competencies that mitigate the principle-agent problems.
In summary, it is expected that private equity has a more proactive origination process. However it is also expected both types of acquirers are equally dependent on investment banks or other advisors for their reactive origination. One may expect that with the anticipation of possible principle-agent problems both acquirer types have devised ways to manage the agents and align the interests.
3.6 Deal analysis
In this paper deal analysis is defined as the combination of what Tyebjee and Bruno (1984) consider to be to subsequent phases: 1) the delineation of key policy variables, which delimit the number of prospects, and 2) an evaluation that compromises the risk-return relation and the decision to invest. In the deal analysis phase four main sub-processes are identified:
A. Analysis of the investment
• Asses strategic fit with the company (corporate M&A) or investment criteria (PE) • Analysis of the market
• Analysis of the business model
• Analysis of the management/employees B. Valuation of the company
There are several methods that are often used as complementary methods or in combination
• Discounted cash flow • Real options
• Multiples
o Comparable Companies Analysis (multiples of companies that are listed) o Comparable Transaction Analysis (multiples of comparable deals)
33 • Break-up-analysis
• Monte Carlo simulations • What-if scenarios
C. Due diligence
• Choice of parts that require further investigating • Choice on internal/external investigation
• Approval by investment committee or board for a mandate to make costs D. Develop value creation plan
• The value creation plan is made both to instill a sense of urgency and to retain coordination. The value creation plans is generally made before the acquisition and consists of all the things that need to be done in a certain time frame by a variety of actors.
Unsurprisingly, superior analyses, valuation, due diligence (Cording, Christmann, & Bourgeois, 2002) and planning skills (Chatterjee, 2009) have all been associated with M&A success. Naturally, the quality of these four elements is interrelated.
However, because corporate M&A departments are part of a larger and more complex organization and has to address more regulatory issues, it is expected that the analysis phase will be more extensive than it will be for private equity.
3.7 Deal Execution
34 The negotiation process can be negatively influenced by managerial over-commitment, which in turn can be attributed to (1) personal responsibility for the decision to acquire the target, (2) competition for the target, and (3) whether the decision to acquire the target is public (Haunschild, Davis-Blake, & Fichman, 1994). There is a difference between private equity and corporate acquirers in this respect. Bargeron, Schlingemann, Stulz, and Zutter (2008) found that the difference in the premium paid for acquisitions is affected by the incentives of target and bidder managers. The premium paid on public targets is significantly higher when the acquirer is a public firm instead of a private firm; target shareholders receive a 63% higher premium.
In summary, it is expected that managerial over-commitment is higher at corporate acquirers than at private equity, due to the different the incentive structures.
3.8 Post-deal value creation
In general, the methods of post-deal valuation creation can be categorized into different classes. In order to compare value creation, it is imperative to point out that value creation at a corporate takeover happens at both the parent and the target level. This is not the case with private equity. However, private equity can let the target itself undertake mergers and acquisitions in order to derive synergy benefits (e.g. as in a buy and build strategy). There is no single framework that captures the value creation of buyout funds (Berg & Gottschalg, 2003). However, the following list attempts to give a comprehensive, but non-exhaustive, view on value creation techniques utilized by both corporate M&A and private equity, including venture capital and buyouts (based on Gilligan & Wright, 2008):
Value creation (increasing the enterprise value) 1. Operational value creation
1.1. Increase operating cash flows
35 1.1.2 Increase gross margin (increasing economies of scale and scope) 1.1.2.1 Reduce overhead
2. Financial value creation, improve capital efficiency 2.1. Reduce working capital
2.2 Sell fixed assets e.g. sale lease back 2.3 Reduce investments
2.4 Reduce financing costs 2.5 Reduce the tax charge
2.6. Change accounting measures
3. Governance and monitoring to improve management decision making 3.1 Use debt to increase investment discipline
3.2 Align management’s incentives with owners’ objectives
3.3 Reduce principle-agent problems: moral hazard and adverse selection 4. Strategic Restructuring (e.g. sale of business-units)
Value capture (only the equity owners benefit from this and is in general conducted at purchase and exit)
5. Multiple arbitrage (buying at a low multiple and selling at a high multiple) 5.1 Arbitrage across time
5.2 Arbitrage across size (small company discount) 5.3 Arbitrage across geography
5.4 Arbitrage across industry 6. Financial engineering
6.1 Leverage; amplify the return on capital
36 research on M&A performance, many corporate acquisitions have failed to create value for the acquirer. As stated in chapter 2.2 there are two main methods how corporate acquirers create value: through operational synergies and through financial synergies. Operational synergies can consist of revenue synergies and/or of cost synergies. Economies of scale and scope are useful to predict the performance of homogenous targets, since they are more likely to exist with overlapping businesses than with conglomerate acquisitions (Capron, 1999). Bruner (2002) posits that the equity markets discount the forecasted synergy value. Interestingly, investors value the forecasted cost-synergies higher than the revenue-enhancing synergies; hence investors apply a smaller discount to cost-reduction synergies. This reflects their perception of likelihood of success.
Acharya, Hahn and Kehoe (2008) decomposed private equity leveraged buyout returns into two components: unlevered returns (which should capture the return of operational and governance changes) and amplifications of these returns by leverage. The returns are found to be for 20-30% attributable to alpha outperformance (benchmarked unlevered return to quoted peers) and for 25-35% attributable to amplification by leverage. The remaining 35-55% is due to sector-exposure. They found that alpha was stronger during sector downturns in line with BCG’s Meerkatt, Brigl, Rose, Herrera & Lichtenstein (2008) report “the advantage of persistence”.
37 Thus private equity needs to have unique capabilities if they want to successfully bid against strategic buyers.
In summary, it is expected that corporate M&A creates value differently than private equity because it due to the different fund and organization structure and the difference in the financial structures of investments. Corporate acquirers are expected to mainly create value by synergies, while private equity is expected to create most value by financial engineering.
3.9 Exit
There are two main methods to gain a return on an investment. The first method is to redistribute cash flows and assets to the parent. The second method is to liquidize the investment. There are four main forms of liquidizing a company (Sudarsanam, 2003): selling to a strategic buyer (trade sale), selling to a financial buyer (private equity fund), selling it to the stock market (IPO), or writing-off the investment. The preference and choice for a specific exit mode are driven by the nature and financial position of the portfolio company, the stock market, the M&A market and local regulation (Wright and Robbie, 1998). For example the attractiveness of an initial public offering depends on the investor appetite, which is a reflection of stock market performance and the overall economy.
38 managers may refrain from divestitures, they may be forced to divest units as a result of antitrust legislation (Moschieri and Mair, 2008).
In summary, it is expected that there is a difference in the origin of the exit as a result of the differing goals, the differing regulation and the different organization/fund structure.
Conclusion of literature review
The literature review reviewed various expected similarities between the M&A processes of private equity and corporate acquirers, leading to proposition 1.
Proposition 1: The best practices identified in M&A literature may lead to various similarities in the M&A process (as displayed in table 1).
Additionally, various differences between the M&A processes of private equity and corporate acquirers are expected, because of structural differences. This leads to preposition 2.
Proposition 2: The structural differences between private equity and corporate M&A may lead to various differences in the M&A process (as displayed in table 1).
Table 1:
Expected differences and similarities in the M&A process of private equity and corporate acquirers
Phase Variable Expected difference (D) or similarities
(S)
Explanation why differences and similarities are expected: In-house
organization
Learning and knowledge dispersion
S: Both mainly spread learn and disperse knowledge formally (codified).
39
Alignment between investors/ shareholders and the M&A executives
D: Private equity fund is better aligned with it’s investors because they can give their employees a stronger incentive
• Rewards
• The fund/organization
structure and size
Portfolio management
Objectivity D: Private equity is more objective • The fund/organization
structure and size • The goals of the
organization
• Rewards
Proactivity D: private equity is more proactive • Fund/ organization
structure and size Deal origination
Principle agent problems
S: Both will have devised methods to reduce principle (acquirer)-agent (intermediaries and advisors) problems
• Literature points out that there are potential principle agent conflicts that need to be adressed
Deal analysis Extent and
complexity of analysis
D: Corporate M&A will have a more extensive analysis phase
• Fund/ organization
structure and size
Deal execution Principle
agent problems
D: Corporate M&A is more often over-committed to a deal • Rewards Post-deal value creation Source of value creation
D: Private equity primarily relies on financial engineering, while corporate M&A is focused on operational value creation
• Financial structure of individual investments
• Fund/ organization
structure and size
Exit Origin D: Corporate acquirers exit because of
strategic fit and regulatory requirements, while PE exits to generate shareholder returns
• Fund/ organization
40
4
METHODOLOGY
4.1 Chapter overview
This chapter explains how the main research question will be answered. Additionally, this chapter will outline the shape and content of the qualitative research.
4.2 Choice for a qualitative study
Studying serial acquirers is a fairly complex process. This is the result of mainly three issues: first, there are several acquirer forms and acquisition modes, which were discussed in detail in Chapter 2. Second, most previous papers concerning serial acquirers only research companies that acquire, instead of balancing acquisitions and divestitures. As a consequence, the performance of companies that optimize portfolio-value by M&A is clouded by companies that acquire to serve the empire-building agenda of the board. Previous research that included a sample of companies that mainly acquire, as opposed to companies that balance acquisitions and divestitures, skews performance negatively (Chapter 3). Third, as is outlined in Chapter 3, attributing performance of a whole company to solely the M&A strategies and processes is difficult, especially for a long period. Unfortunately, using private equity as a direct proxy for M&A performance of both acquirer types is not possible due to the structural differences between private equity and public equity, as described in Chapter 2. Moreover, the access to (unbiased) private equity data is very cumbersome, making it hard to conduct quantitative research. These three issues combined result in a messy problem that cannot easily be disentangled.
41 to come to terms with the meaning, instead of the frequency, of the phenomenon. Cartwright and Cooper (1990) and Pablo (1994) state that qualitative research could offer interesting insights on M&A (Datta, 1991 [in McDonald, Coulthard, & de Lange, 2005]). Additionally, Capasso and Meglio (2005) state that although there is abundant research on M&A, utilizing several methodologies, it is still unclear what factors lead to success or failure. As stated in chapter 1 a qualitative research on processes, may aid future research on performance drivers. In summary, a qualitative methodology seems to fit this research better than a quantitative methodology, as we want to understand the whole messy problem instead of the effect of a few variables on the phenomenon.
4.3 Research methodology
Haleblian, Devers, McNamera, Carpenter, and Davison (2009) suggested that, for process-related studies, scholars should consider alternative methodologies (e.g. in-depth interviews) as opposed to the dominant use of quantitative research in the field of M&A. On basis of literature several ex-ante differences and similarities have been stated. Information on M&A processes at active acquirers is difficult to obtain. Therefore this paper uses interviews to obtain the information needed to test the propositions. The interviewees can provide information on 1) how the M&A processes are designed; 2) how they are executed; 3) how the M&A landscape has evolved and what they have learned. This could verify or reject the various expected differences and similarities. In contrast to other qualitative methodologies (e.g. surveys), the key decision-makers are more likely to answer and elaborate on complicated and confidential issues in interviews.
42 influence on the stock price. Through Accenture’s professional network and my own personal network we managed to contact some of the leading dealmakers.
The cases/interviews are selected strategically, due to the fact that random cases may hamper source accessibility and data collection. Moreover, Flyvbjerg (2006) states that strategic selection may ease the generalization of conclusions because the typical or average case/interviewee often does not contain the most information and thus is harder to generalize.
The unit of analysis will be the companies that conduct M&A. The analysis of these cases will be performed with the pattern analysis technique that tests the propositions formulated in the literature review. The conclusion makes analytical generalizations based upon the analysis.
FIGURE 4: Unit of analyses
4.4 Interviewee selection
For this research, ten in-depth interviews have been conducted, five at private equity funds (three venture capital funds and two buyout funds) and five at M&A departments of large multinationals.
The selection of interviewees is based upon the following criteria: each interview must add relevant knowledge to the understanding of the M&A process and the content is comparable
Venture capital Buyouts
Private equity Corporate M&A
43 to other interviews. Based on the initial criteria, a shortlist of 20 companies has been created, 10 of which have been interviewed. Ghauri (2004) stated that cases should have some degree of similarity in order to be of comparable value. The final selection criteria are stated below and can be divided in similarities and differences:
Similarities
1. M&A activity. The companies interviewed are active acquirers. While private equity acquirers are active by nature as it is their core business, most corporate acquirers often do not have a similar breadth of experience. However a high level of M&A activity ensures that the processes are typical for the firm researched and are not an improvised one-off process. Unfortunately, it is impossible to measure the activity of private equity acquirers correctly. Databases like Zephyr do not link foreign special purpose vehicles to the private equity firms and do not include all venture capital activity. Therefore this paper does not measure the activity of the interviewees, but has relied on citations of scholars and practitioners.
2. The interviewees themselves have significant M&A experience. The interviewees have a decent overview of the whole buy-operate-divest cycle and thus are senior persons within the fund or organization. The M&A experience is an accumulation of experience over time. The extensive experience of interviewees ensures that opinions are not skewed by the time frame and that the opinions are not based on inferences of a small set of investments. At private equity, different job titles are used than at corporate acquirers (as can be seen in table 5, in Appendix V), but all interviewees were seasoned and senior deal-makers.
44 of returns e.g. awards, citation by field experts and scholars, etcetera instead of a single measure. For example the performance of a captive fund cannot be measured, but can be estimated to have a decent performance because they win awards. Equally some companies have been cited by scholars for having superior M&A skills.
Difference
4. Distinctive industries and or organizational structures: The interviewees are employed by companies within different industries (and thus have different NACE codes). This avoids that the conclusions are biased towards a certain industries (one venture capital fund focuses on IT, while another focuses on clean-tech). The private equity companies (buyout and venture capital) have another distinctive feature, the organization form.For example, one is a captive fund (which means that it is funded and owned by the parent), whereas one other has a traditional fund structure.
The (anonymous) list of interviewees is stated in Appendix V, Table 5.
4.5 The interviews
45 transcription was correct and complete. Although slight iterative improvements have been made and additional questions have been added to specific cases/interviews, the general outline of the questions has remained the same and is displayed in Appendix VI.
46
5 ANALYSIS
5.1 Chapter overviewIn this analysis, we summarize the results from the interviews per sub-process. Secondly, we look at factors that may explain differences and similarities between the acquisition processes. Note that not all information in the interview analysis has been described by the table that compares the expected differences and similarities with those found during the interviews. However, these items are explained in the discussion.
5.2 Interviews M&A process
All interviewees followed, on an aggregated level, a similar M&A process as displayed in Figure 3 and thereby make it possible to compare the processes.
In-house M&A organization
47 corporate M&A departments due to a higher employee turnover and every new employee must be trained. At private equity funds the employee turnover is limited due to the carried interest structures, which seem to commit or lock-in employees for the long haul. Moreover, within private equity partnerships everybody has significant M&A experience. At corporate acquirers, many people are involved with the M&A process that may not have or have limited M&A experience. Therefore, at corporate acquirers more coordination could be needed between M&A experts and those without significant experience (e.g. business managers). Second, an internal and external complex environment raises the need for more extensive coordination. The more coordination is required, the more formal processes are needed. This paper argues that Zollo and Singh’s (2004) results can not be generalized. Codification may lead to better results for corporate acquirers, but this may not be the case for all investor types. At private equity, a partner or director (and often the whole team) is almost always involved from origination to exit. At corporate acquirers, this is frequently not the case and the due diligence, deal execution, and post-deal value creation may be performed by different teams. Many corporate acquirers seem to be subject to the problem that these various teams need to transfer knowledge to each other. Issues identified during due diligence may not be followed up upon in the following phases, or the deal team may not be involved in monitoring the post-deal value creation. Most multinationals mitigated this risk by installing overlapping teams, either with different teams working side-by-side or with team-members switching from team to team.
48
In general, while the incentives of private equity employees are deal-related, corporate M&A incentives are not deal-related. The incentives at corporate M&A departments consist of a base salary, bonus, and possibly stock ownership at senior levels, while the private equity funds rely more on performance-based pay. The reluctance of trading companies to give their employees a deal-related incentive is based on the fact that the performance of corporate M&A is difficult to measure, since the success is dependent on other businesses. Moreover, a deal may have a negative impact on performance, but it may have a large strategic importance which may not be easy to quantify. As a result, methods to replicate the incentive structures of private equity funds (e.g. the EVA-based banking system) are not used.
Portfolio management
49 become overcommitted to a deal or company. To mitigate this, the portfolio decisions are not made by the deal team, but instead by an investment committee or the board.
Deal origination
A) Proactive origination.
Both corporate acquirers and private equity funds stated that proactive deal origination is of key importance. The private equity funds and the multinationals have indicated that over time, as their experience accumulated, they have put more effort in proactive origination. Most interviewees have developed a systematic approach to proactive deal origination. Proactive deal origination has several advantages. First, by contacting management before they have put the business up for sale, one can develop a relation with the vendor and management that can lead to a better positioning when the company is for sale. This is especially important during periods with intense competition between bidders. Second, it can lead to proprietary deals. Third, when the company is sold through a corporate finance advisor, the company already is prepared and thus can more thoroughly examine the business. Furthermore, proactive deal origination assures that the company keeps it eye on strategically interesting deals and is thus less likely to put out opportunistic bids or follow other companies, known as herding. The dependence on reactive origination methods lowers the ability to get proprietary deals as investment memorandums are almost always sent to multiple buyers. Venture capital relies even more on proactive origination, because, first, there are less M&A intermediaries at the smaller deal sizes and second, many companies that are interesting are not yet known to the public or the M&A advisors. The private equity funds seem more willing to cold-call companies, while multiple corporate interviewees stated that they did not use cold-calling since they perceive it as a hostile tactic. This may explain why corporate acquirers often decentralize deal origination to the business-unit/segment leaders, because they often already have contacts within their industry.
