Watermark Wire

An Interview with Robert F. Bruner: Author of Deals from Hell and Applied Mergers and Acquisitions


Bob Bruner is a University Professor at the University of Virginia, Distinguished Professor of Business Administration and Dean Emeritus of the Darden School of Business.  He is the author, co-author or editor of more than 20 books on finance, management and teaching.  As a financial economist, Bruner is best known for his research on mergers and acquisitions, corporate finance and financial panics. His books Deals from Hell and Applied Mergers and Acquisitions have helped numerous practitioners and students toward successful transactions. He is the author and co-author of over 300 teaching case studies and of Case Studies in Finance, now in its seventh edition.  He served as Dean of the Darden School from 2005 until 2015. A native of Chicago, Bruner received a B.A. from Yale University in 1971 and MBA and DBA degrees from Harvard University in 1974 and 1982, respectively.  In this edition of the Watermark Wire, Hagen Rogers interviewed Dr. Bruner to gain his perspectives today that acquirers have with capturing significant ROI from M&A deals.

Robert F. BrunerRobert F. Bruner, Distinguished Professor and Dean Emeritus at the University of Virginia Darden School of Business

Why did you choose to write the book Deals from Hell?

I wrote it because I wanted to present a series of cautionary tales to executives and decision makers and present evidence that seemed contrary to conventional wisdom that ’M&A destroys value.’ Over 100 research articles show that M&A [covers its cost]. It neither is the golden goose or sure to create wonderful outcome, nor is it the road to hell, but I didn’t want to leave the story there. I wanted to say ‘hey you should know this sample of cases, articles, and deals [that] have an overarching finding that includes some egregious outcomes, and you executives should be aware of these downsides when deciding to undertake an acquisition.’

Do you believe that as many companies struggle with value creation from M&A now as when you wrote the book?

I think that M&A has a very considerable struggle to create value. Many executives have stars in their eyes about the small fractions of growth through acquisitions and will undertake deals…and a year or more later will say ‘what was I thinking and why did I do that!’

My point is that on average and over time mergers and acquisitions earn about the going rate of return. Why should we see anything different? On average and over time, markets tend to behave such that returns on investments compensate investors for the risk they take. We have been through some dramatic exceptions to that tendency; but again, they are the exceptions not the rule. Critics argue that M&A tends to not deliver the optimistic outcomes that executives will cite when they announce the forth coming acquisitions (the synergies, the cost savings, the revenue enhancements, the risk reduction). Such benefits are difficult to achieve. What is important is to alert executives to the magnitude of the challenge, and not anticipate that it will be easy going.

I think that M&A on average and over time points to an acceptable rate of return. But you will see some phenomenally bad deals, and Deals from Hell highlights some of those deals. There are also some really good deals but we hear a lot less about those because many executives don’t want to signal to their competitors how good the pickings are by doing certain types of deals, and in certain business fields. So, there is a natural reticence to say ‘my golly what a fantastic deal…aren’t we a great company etc., etc.’ Furthermore, when analysts and critics and journalists hear these very infrequent reports of good deals they treat those with skepticism. We [do] need skeptical analysts out there in the world, but the bad deals tend to make better press. Long story short, I think we need sunlight on the bad deals for cautioning executives to how hard it is to create value, but we also need sunlight on extensive research that points that M&A isn’t a value destroyer, but on average and over time it gives an acceptable rate of return.

In the boardroom, when executives are making decisions about proceeding with M&A, if they knew that they were going to achieve a return that only covers cost of capital, would they move forward in the M&A process? Is that good enough for executives?

You went into a very subtle question about corporate finance. The overarching message about investments of any kind is that you should adopt a risk-adjusted rate of return as a hurdle rate for any deal, pegged to the risk of the target company, not the risk of the buying company. So, if you’re acquiring into a new and riskier industry, you might use a higher hurdle rate. If you’re buying an unproven technology, you should use a higher hurdle rate, and so on. And that’s where advisors, such as yourself and others, play a very important role in helping a board of directors understand what is an appropriate benchmark for evaluating this prospective deal.

On the other hand, the body of research that I alluded to a moment ago tends to look at stock price reactions on the announcement of deals. A reasonable assumption is that thousands of analysts out there in the world, and thousands of hedge funds and millions of investors are scrutinizing the announcement of these deals in great detail. And they would not bid up the share price of a buying company, nor would they even hold it constant if they thought the shareholder of the acquirer was not likely to receive a rate of return on that acquisition that compensated the buyer for the risk. So, I think the notion of using a risk-adjusted hurdle rate that I mentioned, is completely consistent with the interpretation of this research that I alluded to.

So back to your question, I think boards of directors absolutely need to understand the risks at hand; they have a fiduciary duty to ask penetrating questions about the risks and the strategy behind the proposed deal and what management is going to do to integrate the target company, quickly and effectively, and so on. All of the answers to these questions should be folded into the judgment of what should be the required rate of return here. Are we going to get paid enough at the required rate of return? Is that target company a sensible acquisition?

Do you think that the difficulty of the acquirers to achieve return and create value is as much true for private acquisitions, as for public acquisitions, and is as much true for frequent as for infrequent acquirers?

Companies who acquire regularly tend to perform better in M&A. They are very worldly wise, and they are smarter acquirers. It’s the very infrequent acquirers who have the higher risk of making a poor deal or integrating it badly or overpaying. And again, your question of public vs. private, the evidence shows that buying a private company may yield a better payoff than acquiring a comparable public company. Boards of directors of public companies will want to earn a premium over the public market price. They don’t want to be criticized for selling low. This just means you’re going to pay a loftier price, and if you don’t pay a premium that is sufficient to the public company board, odds are they are going to turn around and shop the company to get a competing bid, and before you know it you get stuck in an auction, and then you really run the risk of overpaying. But, acquisitions of private companies tend to be negotiated transactions where you encounter the opportunity to create more value through artful deal design such as with contingent payouts, management retentions and restructuring the company. If it’s a private company you have the added advantage that you don’t have to go to the public shareholders and the SEC and all of those thousands of analysts trying to justify what you’re going to do. You can just get on and do it. And you’ve still got a board of directors in a private company to answer to, but it’s a different and much more flexible and promising environment when you try to do deals. Research supports this.

How did acquirers respond to your book?

They liked it. There were industry associations of M&A professionals that were excited when it came out, and I wrote some articles to dissect how M&A has gained. I’d say that some journalists and critics were in denial. My response was to tell them to go read the research, and come back to me and tell me where I’m wrong. None of them came back to challenge my conclusions. We have to be humble about interpreting research; but I think it’s honest and ethical to conclude that M&A tends to pay an acceptable rate of return. It is not an easy path to go. Go into it with your eyes wide open. Pay very careful attention to all the risks. Be thorough in your due diligence. Make a very careful integration plan, and understand that even if you have the perfect plan and the right price and a great strategic rationale, it still could be a challenge to get some serious value out of it. But, mother never said that it’d be easy. The uncertainty around expected returns is true in other fields such as venture capital, new product development, and investing in emerging economies. In comparison, M&A certainly doesn’t look worse.

Given that it’s difficult to accomplish the returns, possible but challenging like you said, and the challenges pop up throughout the process from even how you’re preparing to do M&A to the transaction phase and then integration, do you believe the way practitioners are set up to solve these problems for clients is leaving too much of the problem in the hands of the client? For example, I-bankers like me who are hired to help an acquirer with a transaction, when the problems aren’t only in the transaction, but they’re problems and challenges before the transaction, and integration challenges. Do you believe that the I-bank business models that exist today are properly aligned to the challenges that the acquirers face with M&A?

It’s difficult to generalize about business models because there is so much variation among them. I’d say that the advisory business model, fee only, that is not contingent on closing a deal certainly has its advantages. It aligns the interests of the advisor and the client. But many companies, public buyers especially, will compensate the advisor only for a done deal, or they compensate the advisor more richly if the deal is done. This can motivate the advisor to get the deal done at all costs. It might encourage the advisor to write a fairness opinion that is over-optimistic. But I realize from the advisor’s standpoint, getting engaged on a non-contingent basis can sometimes be challenging.

There used to be a time when companies would have a relationship, say with an investment bank, and it would be the house bank, and every time a company wanted to issue debt or equity or buy a firm, they’d call up their relationship banker and draw on the expertise of that company. The advisor benefits by nurturing the relationship with the clients. And the client is benefited by having an advisor there for the long term and who would participate with the client, suffer through the bad and celebrate the good with the client. There would be a mutual experience of understanding about the company’s intentions and how to measure success today and over time into the future. In recent years, the M&A advisory field has seen a growing emphasis on the transaction–clients will call up 2-3 prospective advisors and tell them that they’re thinking about doing “x”, and then running a “beauty contest” to decide which advisor to work with. And/or they’ll put the word on the street that they’re trying to grow by acquisition, and that would cause all the sell-side bankers to flock to pitch their deals. Such a transactional and opportunistic approach to growth by acquisition is kind of dangerous. I’ve been explicit about that in my writing. I think the kind of advisory relationship you’re talking about makes great sense, especially for companies who are not in the M&A market very actively. Large firms that are very active as acquirers, will look at thousands of potential deals every year; they’ll do their due diligence on a small fraction of them, negotiate on a fraction of those, and close yet a smaller fraction of those. If you’re very actively in the market, large active acquirers will internalize the M&A function. But for small, private, infrequent acquirers, depending on very wise, capable outside advisors with whom the acquirer has a standing relationship is the way to go.

Why do clients not require that their practitioner align more with them to their ROI as opposed to just closing the deal?

Two considerations motivate CEOs not to work with a relationship adviser. One is pride, the belief of the CEO that his or her company knows how to deal in M&A. The other would be naivete. M&A is complicated work; CEOs might be unprepared for the complexity and the surprises. CEOs can be very good on the operational side as engineers, salesmen, marketers, but when it comes to doing the deal, they can get blindsided. It takes humility, trust, patience and great advice to play the long game of M&A very well.

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