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The Deal Economy: Winning Deal Strategies

2/02/2017
The Deal Economy: Winning Deal Strategies

While daunting for some, this unsettled state of political affairs doesn't add up to an overpowering deterrent to doing deals for a few of America's top dealmakers.

A new administration is arriving in Washington, and what this will mean to the business and regulatory environment isn't clear. Europe continues to be racked with economic difficulties. Britain must cope with Brexit, and several other Western European countries face divisive elections. In Asia, the economic environment is uncertain as well.

While daunting for some, this unsettled state doesn't add up to an overpowering deterrent to doing deals for a few of America's top dealmakers. That's one takeaway from a high-powered panel during The Deal Economy conference. The panel addressed the topic of "Winning Deal Strategies." The conference took place on Dec. 1, 2016, at the JW Marriott Essex House in New York City.

Panelists included Brett Bauer, executive vice president for strategic corporate development at Berry Plastics Corp.; Marc Brown, managing director, corporate development, global head of M&A and strategic investments at Microsoft Corp.; Andrew Hulsh, a partner at Pepper Hamilton LLP; and Emily McNeal, vice president of corporate development at Wal-Mart Stores Inc. CNBC's Robert Frank served as moderator.

"You can't make your strategy fit with what the political economy's going to be," McNeal said. "From an M&A and from a strategy perspective, it's: What's the business? Where do I want to be? Where do I not want to be? And how do we then go and execute?"

Corporate strategy is paramount and "M&A is a tactic," Brown added. "Where do you want to be, where do you think you can create moats of long-term value. That starts the conversation, and then you decide how you're going to get there."

Corporate dealmakers face challenges on many fronts, the panel acknowledged. One is valuation, which has risen sharply in recent times. That's not about to go away. "Deal prices, at least in our space, are going to remain at an elevated level for the foreseeable future, at least for the next year," Bauer said.

Private equity is a major culprit of the high-valuation environment. And because PE firms are more dependent on borrowed money for deals than their strategic competitors, interest rate hikes could actually help corporations like his, Bauer maintained. "As interest rates go up, I actually see that as a good thing for me, because private equity is going to be less of a driver of higher prices," he explained.

That interest rate increase, however, won't deter auctions. Quite the contrary, Hulsh said. "I just see more and more deals being run through an auction process."

With the likelihood of more auctions and with the observation that many bids come in at close to the same price, Hulsh continued, it's important for bidders to distinguish themselves if they want to succeed. There are a number of ways to do that, he said: Offer equity instead of all cash; allow decision makers an opportunity to participate in the acquired companies, "creating incentive plans, providing stock appreciation rights."

So saying, because companies have so much cash on their balance sheets, "we'll still see a preponderance of cash deals where cash is available," Hulsh said.

Microsoft, as an example, is "primarily a cash buyer," Brown said. The company does 15 to 20 deals a year, although the median deal size is only $75 million.

As McNeal pointed out, the preference for cash doesn't mean that even the largest corporations have a blank check when it comes to doing deals.

"You've got to make some real choices, even at companies like Wal-Mart, which are obviously big, and there are resources available," she said.

That requires discipline, the panelists agreed. Brown cited the lack of deals involving so-called unicorns-high-tech startups valued at $1 billion or more. "The whole class of unicorns that have developed over the last 18, 24 months has yet to reach a point, and usually it's cash flow that drives them this way, where then they have to make a different set of decisions. So, we're being patient, and we'll see where we end up," Brown said.

Doing deals outside the U.S. represents another challenge. "Internationally it's still a difficult time to do things, because there doesn't seem to be a lot of certainty on a lot of different metrics," McNeal said. "It's hard enough to get a grip on what's happening here, versus kind of predicting what's going to happen everywhere globally."

That doesn't necessarily keep these dealmakers away, however. "We're looking for great teams and great products wherever they are, Latin America, Australia, Europe," Brown said. "We try to take a global view when we're looking, and being proactive about outreach to companies."

Brown added that currency fluctuations "don't play a role in that analysis."

That view differs from PE acquirers, Hulsh pointed out. "I've seen a number of our private equity sponsor clients increasingly look at deals in Europe and in other parts of the world, in part as a result of the strength of the U.S. dollar," he said.

Companies like Microsoft understand that in this "global game," as Brown described it, regulatory regimes add to the complexities of dealmaking and regulatory environments have ramifications of doing business.

"If it's the right strategic deal, then you try and find ways to make it work," McNeal added. "You try and get as much help as you can to get through the regulatory process, make your case and put your best foot forward, but it's something we're always going to have to deal with, and it's regardless of where the administration is."

From a U.S. antitrust perspective, there isn't that much concern, even with a new administration, Hulsh said. "The bar for opposing a merger on the basis of antitrust concerns is a very high bar, and I think that that bar will continue to exist," Hulsh added. "Those transactions that are inherently violative of antitrust laws will continue to be opposed, and those that aren't will continue to fly."

In doing deals, post-acquisition integration is the biggest challenge, Brown said. The deal, itself, is "actually really easy," he said. "It's the integration, it's the value creation for the shareholders over the long term that is very, very difficult, and that's true, I think, in our case, of a $75 million deal as it will be for LinkedIn," the company Microsoft acquired last year for $26.2 billion in a deal that closed in December.

Panelists had some different takes on what the integration process requires. "It's about the people," Brown stressed. "How are you treating the people, both economically as well as culturally, is incredibly important," he said. "Then, once they become part of the larger Microsoft structure, what great career opportunities do they have, what financial opportunities do they have, all become incredibly important."

"You have to focus on speed," Bauer added. "It's better to execute and be done than to have things sitting out and decisions not being made, and people wondering what's going on or what's going to be the next step."

Successful integration can benefit more than the company being acquired. "Companies that are able to show a successful track record integrating the companies that they've acquired are going to be more attractive to prospective sellers than companies that don't have that track record," Hulsh concluded.

McNeal also stressed that in talking about deals and their challenges, divestitures should be part of the mix as well. For example, Wal-Mart acquired the online shopping site Jet.com last August for $3.3 billion in cash and shares. But it also sold the Mexican apparel chain Suburbia about the same time for $852 million. Wal-Mart almost doubled its stake last year in the Chinese online retailer JD.com. It sold several shopping centers in Chile for almost $650 million.

"There's just a lot of different things in and around what you think of [as] dealmaking how you think about reworking a company," McNeal concluded.