RIP Booz & Company
PwC completed its acquisition of Booz & Co today.
Regulators approved the deal, as we expected.
They appear to have conveniently overlooked or ignored the large conflict of interest issues posed by a merger of this size between an accounting firm and a consultancy. We outlined these risks in an earlier article.
Booz & Co (a well known and respected brand in the consulting world) has also changed its name to “Strategy&”.
We understand that the name was changed for legal reasons, but if PwC is trying to create a new and powerful brand then “Strategy&” is a horrible choice. The name is not distinctive, remarkable or in any way interesting. It is merely descriptive & self limiting.
PwC reported that “This new name, which will be used alongside the PwC name and brand, reflects the strength in strategy consulting that Booz & Company brings to the PwC Network and the benefits this deal will bring to all clients and stakeholders.”
From the way that PwC describes the transition (and judging by the choice of name itself) it is clear which firm wears the pants in the PwC/Booz marriage.
PwC’s announcement also lacks any semblance of celebration. It feels to us more like reading an obituary. “Booz & Co is dead, and the employees who formerly worked there now serve the PwC juggernaut [insert evil laughter here]”.
As we highlighted in our earlier article, cultural integration is a difficult and delicate process.
We predicted that PwC would be tempted to do too much too soon, and these predictions appear to be coming true.
“Price is what you pay. Value is what you get.” ~ Warren Buffett
LAST post, I highlighted the importance of strategy when considering the viability of a potential acquisition; however, before a final decision can be made, a consultant needs to estimate the value of the target company.
Building on information provided in Management Consulting: A Guide to the Profession, I highlight three approaches that a consultant can use when performing a valuation:
- Balance sheet valuation;
- Market based valuation; and
- Valuation of discounted expected future cash flows.
Each valuation method will result in a different estimate, and the method you select will depend on the situation.
If you are working for the target company, then the obvious goal is to choose the method that yields the highest possible valuation for the company.
However, if you are working for the acquiring company, then the valuation method you select depends on the objective for the merger. If the goal is diversification, then calculating the present value of future cash flows would be appropriate (DCF valuation). If on the other hand the company is being acquired for its resources and capabilities, then valuation should be based on either the market value or replacement value of assets. The replacement value is simply an estimate of how much it would cost to build similar resources and capabilities from scratch.
In addition to valuing the target company, you also need to estimate the value of potential synergies. Revenue synergies and cost synergies are the revenue streams and cost savings that would be available to a combined entity but not to the target or acquiring company acting by itself.
During a case interview, it is important to thoroughly explain your reasons for using a particular valuation method as well as describe the appropriate process for implementation.
MERGERS have had a ubiquitous presence in the news recently as leaders in the airline, publishing, and telecommunications industries have taken steps to consolidate. Just this week, two of the largest advertising entities, Omnicom and Publicis, announced a $35.1 billion merger. In recent months, tech giants Google and Yahoo have acquired dozens of companies, most notably Waze and Tumblr respectively.
Despite the frequency of these deals, a large number of market studies have indicated that “50% to 70% of mergers and acquisitions fail to create incremental shareholder value”. As a result, consulting firms have an opportunity to provide valuable expertise at each step in the M&A process with the goal of preventing these failures.
One of the most vital components of a successful acquisition is the financial valuation: determining the value of the target and ensuring that your client avoids paying too much. However, determining whether the acquisition would be a good strategic fit is the first step.
Clarifying why your client wishes to undertake the acquisition is a good place to begin, both in a case interview and in a real-life consulting engagement. Potential rationale’s for pursuing an M&A deal include:
- Performance Improvement: restoring performance of the target company through revenue growth and cost cutting,
- Growth Potential: picking winning early stage companies and helping them develop,
- Market Access: increasing market access for the products of the acquirer or the target,
- Market Power: removing excess capacity from the industry,
- Capability Acquisition: acquiring new production capabilities, skills or technologies more quickly or at lower cost than would otherwise be possible,
- Synergies: achieving revenue synergies or cost synergies not available to the target or acquirer if acting alone,
- Business Transformation: using the merger as a catalyst to change the combined entity into an entirely new company, for example, with new strategic focus, organisational structure, key processes, etc. According to McKinsey, transformational mergers are rare “because the circumstances have to be just right, and the management team needs to execute the strategy well.”
- Bargain Price: buying the target at a price below the target’s fundamental value. The ‘bargain price’ rationale is also rare since the acquirer typically has to pay target shareholders a takeover premium in addition to the target’s current market price.
Regardless of the reasons concocted by management to justify action, the vast majority of acquisitions should never take place. Due to the high failure rate and inherent problems arising from the attempt to consolidate distinctly different organisational cultures, the most valuable advice a consultant can give might be to persuade senior management not to become seduced by the allure of a potential acquisition. In the long-term, managerial decisions should support the creation of shareholder value.
Next week I will introduce the various methods consultants use when conducting a financial valuation.
Merger and Acquisition Strategies adapted from Management Consulting: A Guide to the Profession, edited by Milan Kubr and published through the International Labour Office.