How do you assess the value of a merger or acquisition strategy?

Rupert Murdoch, Australia’s greatest dealmaker gave a masterclass in deal strategy. In 2017 he sold the Hollywood interests of 21st Century Fox to Disney for US$52.4 billion. The deal transferred content, cable channels, distribution and a 30% interest in Hulu, giving Disney control of Hulu and a home to re-house its streaming after withdrawing it from Netflix. The deal turned Disney into a content empire able to fight disruption from Netflix/others and forced competitors to bet their balance sheets on massive investments in content to compete. Equally, Murdoch cleverly rehoused his disrupted assets in an environment that could defend against the disruption and ride the content tailwinds. Without killer strategy, the rest is conversation.

Microsoft's acquisition of Activision Blizzard in 2022 Strategic Rationale: Microsoft aimed to expand its gaming and metaverse presence. This aligns with its long-term vision of integrating gaming with its cloud computing and AI capabilities. Objectives and Drivers: Key drivers included gaining a strong foothold in gaming, leveraging Activision Blizzard’s rich game library, and enhancing Microsoft’s Game Pass offerings. Alignment with Core Competencies: Microsoft's expertise in cloud computing and AI technology complements Activision Blizzard’s gaming prowess. Creation of Synergies: The deal aimed to create synergies in gaming technology and content delivery, strengthening Microsoft's competitive position in the gaming industry.

Unity breeds strength. Align with overall goals to enhance the organization's vision. Scrutinize financial health, evaluating impact on profitability and ROI. Thoroughly assess risks, legalities, and regulatory issues. Analyse impact on competitiveness and market reach. Assess cultural fit to avoid hindrances in integration. Identify operational and technological synergies for enhanced value. Ensure the merger enhances customer satisfaction. Evaluate talent integration, addressing skill gaps and cultural clashes. Develop transparent communication plans for stakeholders. Have a comprehensive plan for smooth transition post-merger. Weighing these factors ensures alignment with objectives and sets the stage for a prosperous future.

To assess the value of a merger or acquisition strategy, first, understand the strategic rationale. Identify the deal's objectives and how it aligns with your company's vision and core strengths. For example, acquiring a competitor may expand market share, or merging with a supplier could enhance supply chain efficiency. Consider how the transaction will generate synergies, such as cost reductions or revenue growth, and whether it offers a clear competitive advantage. A well-defined rationale ensures that the M&A supports long-term goals and adds tangible value.

Elon Musk's acquisition of Twitter in 2022. Musk evaluated Twitter's financial health, ad revenue potential, and its position as a major social media platform. He considered Twitter's potential for growth, particularly in areas like subscription services and new user engagement strategies. The $44 billion offer likely involved valuation methods like DCF and market multiples, assessing Twitter’s future revenue potential and comparing it to industry standards. The brand value, influence, and intellectual property of Twitter as a major communication platform significantly influenced its valuation. Musk's interest in enhancing Twitter's technology, like fighting bots, could add value to Twitter's operations and user experience.

o estimate the value of a target company, analyze its financials, market position, and growth potential. For example, in Disney's acquisition of Pixar, Disney considered Pixar’s strong brand and creative talent, which were key intangible assets. Using valuation methods like discounted cash flow (DCF) helped Disney assess future cash flows. Similarly, when Microsoft acquired LinkedIn, market and transaction multiples played a role in determining LinkedIn's value, factoring in its vast user base and data assets. Accurate valuation ensures you pay a fair price that reflects both tangible and intangible assets.

NVIDIA's attempted acquisition of ARM in 2022. NVIDIA proposed $40 billion for ARM, a price influenced by ARM's technology's strategic value and the competitive tech market. The offer included a mix of cash and NVIDIA stock, showcasing a strategic balance of financing methods. Market conditions, competitive landscape in the semiconductor industry, and negotiation strategies played a crucial role in shaping the offer. NVIDIA aimed to maximize ROI while managing risks, especially regulatory and integration risks, and controlling capital costs.

In my opinion it’s very easy, and common, to over estimate the synergies and under estimate the integration costs. Another aspect to consider is customer opinion if they feel that an acquisition is dipping into their own market - the potential withdrawal of their contract could be a significant financial downside to the transaction.

Salesforce's acquisition of Slack Salesforce anticipated synergies in expanded customer base, increased product offerings, and enhanced collaboration capabilities. The company faced integration costs related to combining different technologies, cultures, and potential regulatory scrutiny. Salesforce would have estimated these synergies and costs, impacting the offer price of $27.7 billion and the deal's structure. Integrating Slack’s communication platform with Salesforce’s CRM systems could offer unique technological advantages. The acquisition enhances Salesforce’s competitive stance against Microsoft and other tech giants in the cloud-based software market.

The value of the m&a strategy is better assessed by the relative weight it's given to numbers/people making the call on the other side. Particularly when addressing an international deal, culture is an important factor. Even more so, truly understanding the counterpart decision making process and aligning initial approaches to their own thought process. This definitely allows better chances of having a collaborative negotiation and getting more access to crucial information before drafting any agreements.

Broadcom's proposed acquisition of VMware in 2022. Broadcom faced risks such as market volatility in the tech sector, regulatory scrutiny, and potential opposition from VMware’s stakeholders. Broadcom would have considered alternatives like organic growth or forming strategic partnerships. Broadcom likely quantified these risks, especially considering the regulatory environment and market conditions. The decision to proceed with the acquisition over other strategies suggests a comprehensive evaluation of M&A against alternatives.

Once all those things mentioned and considered, there are only two questions to ask. Will this acquisition work if we discount the “ synergies”? Can the acquisition be effectively integrated within an eighteen to twenty four month time frame? Just my thoughts…..