M&A - Good or Bad?

It's interesting how one is sensitised to certain stories. Just the other day I was reading a discussion from Bain and Co which suggested that, on average, M&A activity is value-additive. Today comes the news of Tom Albanese's departure from Rio Tinto because of two disasterous acquisitions.

Of course, we all know that hard cases don't make for good laws - it was simply the juxtaposition that struck me.

The Bain study contains a lot of sense - as one would hope. It suggest that there are a few important facets that characterise successful M&A approaches:

1) Frequency. The more experienced a company is in doing M&A deals the more likely it is that the deals will be successful. You might argue that this is self evident. Practice makes perfect. Failure will tend to dissuade companies from repeating their M&A ventures.

2) Materiality. The more the market capitalisation of a company comes from acquisition the better it performs. This is less self evident but maybe it's a success breeds success issue. If a company is known for good deal-making then the deals and funds will come its way.

3) Developing a Repeatable Model. I guess this is why the above two points are pertinent. If a company has a good strategy and ensures that it's M&A activity is informed by that strategy then the model is a long way to being repeatable. Bain also note that thorough data-based due diligence, careful integration planning and detailed planning and execution of value-capture are attributes of successful M&A led organisations.

It's a good read.

And what of Rio Tinto? Well, in looking at the Alcan acquisition one of the comments I've read simply says "Rio didn't do its homework". What was that about thorough data-based due diligence? I have seen, first hand, how "getting the deal done" can take over from a cool rational look at value. The numbers can become scary and the logic gets bent just to "win" the prize (a bit like "winning" WWI). From what I understand of the Mozabique coal assets deal, again it looks as though Rio did not understand what they were getting themselves into. This suggests that Albanese and those around him were not asking the right questions.

It's a salutory lesson to anyone reliant on stock values - which includes anyone with a pension plan.