Ravi Madhavan's A&D Blog

Watson/ Actavis

Another consolidation deal in the generics pharma space yesterday, with US-based Watson Pharma buying the Swiss Actavis: summary facts, NYT DealBook story, analyst presentation. The messaging stresses the scale/ consolidation rationale, as illustrated by the following slide, as well as the management team's track record in integrating past deals. (For background on consolidation in generics, see this Goldman Sachs report - dated by now, but lays out the drivers of consolidation.)

ABB, Thomas & Betts

ABB has done a nice job explaining the deal rationale behind this weekend's announcement of their proposed acquisition of Thomas & Betts. The presentation is detailed and clear, and video remarks by the CEO and division head provide more texture.

IBM's acquisition strategy - and what HP should learn from it.

HP has been criticized of late for its pricey $11.7B acquisition of Autonomy (This NYT DealBook story refers to a JPMorgan Chase analyst report which argues the deal “sets an unfavorable precedent for future acquisitions to come.”) Here's a WSJ story arguing that HP should learn from IBM's acquisition strategy. Excerpt:

Boring deals tend to be better deals. That's the tip Hewlett-Packard should take fromInternational Business Machines' latest acquisition.

On Tuesday, IBM bought little-known Q1 Labs, a small, privately-held security software specialist, for an undisclosed price.

Not surprisingly, the deal failed to excite. Acquisitions like H-P's $10 billion blowout buy of Autonomy get far more attention. They also tend to be worse for shareholders.

Contrast that with IBM's stated strategy to spend $20 billion total on acquisitions from this year thru 2015. What sets IBM's dealmakers apart is their discipline. They target small companies that will benefit from being plugged into IBM's massive, worldwide distribution network. They also look for compelling technology that fits with their existing products.

The strategy seems to have worked well. IBM's return on capital, which measures total operating profit after taxes relative to total debt and equity invested in its business, has averaged a healthy 16% since 2000, according to CapitalIQ data. Over the same period, H-P's return on capital has averaged 9%. It makes sense that IBM would have higher returns given its greater emphasis on high-margin software. Yet the fact that its returns continue to grow suggests the company's acquisition strategy is creating value for shareholders.

 

BHP Billiton's PetroHawk announcement

BHP Billiton's announcement presentation today (access here) on its $12.1B acquisition of Houston-based PetroHawk (65% premium) was interesting. Some of my takeaways:

• BHP Billiton CEO Marius Kloppers' McKinsey background is evident in his language and framing.
• The key strategy message was that BHP Billiton is a natural owner of large, long-life, high-margin shale assets. BHP Billiton will be able to bring lower cost and faster funding for the development of PetroHawk's shale gas assets in Texas and Louisiana. Exploration companies do not have the same cost of capital as a diversified resource company like BHP Billiton. "The ability to deploy the capital is the opportunity that we're looking for here," (Kloppers). BHP Billiton is not interested in 2nd tier "price plays."
• The changing energy mix in the context of environmental security concerns presents opportunities.
• Shales are entering a new stage of the development cycle - moving beyond the entrepreneurial stage to needing capital and scale for growth. The attendant industry restructuring will unlock significant value.
• BHP Billiton looks at the Build vs. Buy vs. Buy-back (shares) question. Buy opportunities come along only once in a while, whereas Buy-back opportunities are always there.
• In the development of shale minerals, who owns mineral rights is a crucial question. Unlike in many parts of the world, PetroHawk's operations are in areas with private mineral rights (TX and LA). Mineral rights owners receive 15-20% royalties. 
• PetroHawk CEO Floyd Wilson made a brief appearance, in which he said that the deal not only benefits shareholders but also assets and people, as BHP Billiton provides platform for growing the business.
• BHP Billiton Petroleum Chief Executive J. Michael Yeager said he is "covetous" of PetroHawk's employees, all of whom will be invited to stay on. 
• Safety and sustainability considerations were discussed at length, with Mario Kloppers stressing that the company is in its communities for a very long time.

NYT report here. Also, Fuel Fix summarizes some analyst reactions - including price per acre considerations and a list of other deal possibilities in this space.

Pfizer re-focusing

NYT Deal Book reports that Pfizer is exploring strategic alternatives for its Nutrition and Animal Health units. The press release is straight from the divestment text book. Excerpt:

“Both Animal Health and Nutrition are strong businesses with attractive customer bases and solid fundamentals, but distinct enough from our core businesses that their value may be best maximized outside the company,” said Ian Read, president and chief executive officer, Pfizer. “In exploring these alternatives, we can determine what options will best drive their future growth opportunities and expansion, and enable shareholders to potentially realize higher value for these businesses.”

Of M&A note...

A few interesting developments over the last few days:

It's time to bet on a big year for M&A deals, according to (WSJ report) Goldman Sachs.

HP's new CEO has laid out (Business Insider summary) his new strategy: "Disciplined acquisition strategy" is one of the mantras.

There are rumors (WSJ report), again, of a merger between Sprint and T-Mobile.

Google's #2 M&A guy leaves for FaceBook, according to Business Insider. BI also has a nice overview of Google's 15 biggest deals. 

Airline mergers: Antitrust defense logic

I came across this May 2010 Senate statement by the CEOs of United and Continental defending their merger logic. The five charts lay out the key elements of the defense: Efficiency without sacrificing service to smaller communities, the merged entity will only be the third largest domestically, US carriers are no longer global revenue leaders, average fares continue to decline despite mergers, non-stop overlaps are limited and have other airlines serving them. A good exemplar of communication to defuse Antitrust concerns, I thought. (My all-time favorite resource here is Charlie Rose's conversation with EchoStar's Charlie Ergen.)

Telling the acquisition story

One question that comes up often in discussions of M&A best practice is how to communicate effectively about deal strategy and progress. I recently came across a very nice example, from IBM, of explaining the rationale for a series of acquisitions. Note how, in the following slide, 18 acquisitions over five years are arrayed along three sub-themes in the Business Analytics and Optimization space: (1) Optimized business performance, (2) Trusted information, and (3) Integrated data & content management. By clustering the deals using the sub-themes, the narrative suggests a coherent and disciplined acquisition strategy that is aligned with - indeed, driven by - corporate strategy goals (which is presumably to deepen capabilities or reinforce market position in each sub-space). The full presentation, by IBM CEO Mark Loughridge, can be found here.

 

Novartis - Oriel deal

The Novartis - Oriel deal announced yesterday (Retuers story here) has a couple of instructive features. One, in making the announcement, Novartis stated clearly that acquiring substitutes for currently branded products that may be running out of patent protection is a key driver of such acquisitions. Excerpt from the Reuters story:  

"Oriel is a strong strategic fit with Sandoz and the acquisition is expected to support our strategy of increasing the number of differentiated, higher-value products in our development pipeline," said Jeff George, Division Head Sandoz, in a statement.

"One of our strategic objectives is to offer fully substitutable generic versions of key branded medicines, including respiratory medicines," he said.

Two, the deal also illustrates the substitution of an acquired technology for an internal project because the former is seen as a better or easier route to the market. Specifically, reports suggest that Oriel's electronic inhaler is a better solution than a device from the British firm Vectura, which Novartis had been working on.

Simultaneously, Novartis also announced (WSJ report) a major restructuring of its U.S. operations, involving the realignment of operations into five therapy areas and a 20% headcount reduction at the corporate office.

Heineken to showcase Femsa Cerveza acquisition in Davos

The World Economic Forum annual meeting in Davos, Switzerland, begins this week. The glittering gathering of business and political leaders will focus this year on the sobering task of rethinking, redesigning and rebuilding the world's economy. However, this NYT story says that Heineken's CEO will be there to also celebrate the global brewer's cross-border deal success with Mexican beer company Femsa Cerveza. A string of overseas acquisitions appears to have positioned Heineken very well in growing markets such as India, Brazil and Mexico.