Matchmaking has never been easy. People who seem meant for each other in theory often turn out to be incompatible when they actually get together. The same dilemma people face when they’re looking for romance may also be true for TMT companies. Merger and acquisition (M&A) deals in the TMT industry have been enjoying something of a boom lately — both in their number and scale. While M&A does add value to the fragmented and underutilised metals/manufacturing sector, there is, based on our experience and research, no link between scale and return on capital employed.
Therefore, to ensure that value is created, three principles must be followed.
- Firstly, the business case for consolidation may be negated by the complexity of managing a larger and broader business. Managers may find that, after duplication has been eliminated and excess capacity closed, structurally their business is only marginally better positioned than it was pre-deal
- Secondly, the industry needs to understand that the P/E ratio amongst targets is not always equal. Acquired companies with high ratios driven by growth eventually have depressed share prices. Alternatively, acquired companies with the same ratio value, yet driven by a high return-on-capital rather than growth, lead to satisfied shareholders and appreciating share prices
- Thirdly, the amount of consolidation required to render this strategic move a success, may be too expensive for the company to execute. Companies usually underestimate the cost and time to integrate an acquisition and achieve the required synergies. Therefore midway through the strategy there is a lack of capital to continue the consolidation and reach the synergy targets. The acquirer is then left with broader assets which leave the acquirer no better off than when the consolidation drive was started. Therefore, only by focusing on integration, maintaining capital growth and phasing the strategy, can the M&A works.
Talent management is one of the major challenges. Choosing the ultimate individual amongst the respective core requires rigorous engagement and assessment.