The level of energy M&A in 2009 closely resembles the rest of the general market—a continuous flow of deals waning to the occasional trickle. Prospects for future transactions are difficult to foresee, as credit and equity markets are unstable and risk-averse at the present. Yet, for those managements committed to inorganic growth as an element of their portfolio-expansion strategy, the present economic malaise provides a useful moment to take stock of changing market perspectives and expectations.
Today’s markets unquestionably move at a faster pace and with greater fluidity than those of prior eras. Part of this phenomenon simply reflects living in a world of instantaneous information made possible by technology leverage and reach. Partly, it recognizes that money conveys liquidity and can move overnight to the next option. Managements undertaking transactions need to recognize the velocity with which decisions are made about where to maintain investment and the impatience with which investors often view M&A results.
In transactions, investors demand deal performance from the managements in which they invest. This means that managements do not have the luxury of time in transaction completion and results realization; in fact, mega-transactions are now closing 20% faster than in the past.
A premium now exists on readiness to perform and ability to satisfy expectations. One way managements position themselves to accomplish these outcomes is to think in temporal stages over how to execute transaction completion and integration over the near- and long term—i.e., from closure to steady state. It is convenient to think about transaction completion in three stages: Day 1, Day 100 and day 1,000. Other timeframes may be relevant, but these milestones frame the essential nuances and requirements associated with most any transaction.
-- Day 1, which coincides with the day after legal close, carries with it the requirement for readiness, i.e., operating as a single entity. Usually it is not possible not to be fully prepared for seamless operation at the close of a transaction; circumstances simply do not allow adequate time for seamless operational preparation, e.g., systems integration, staffing decisions, process redesign, etc. However, the two companies do need to be able to effectively operate immediately after the close and ensure that the most visible of market interfaces—e.g., financial reporting, customer contact and payroll capability—are unimpaired.
-- Similarly, after the first 100 days, the byword for measurement is progress, i.e., expected results are being achieved. By this time, those actions reflecting key structural, operational and market decisions should be well under way and, in some cases, completed. At this stage of the integration life-cycle, the platforms and path for the future should be established. More importantly, “the Street” is expecting to begin to hear about outcomes, i.e., the progress made and level of benefits being captured. At this stage, the market looks to validate the confidence in management that expectations will be achieved. In a sense, this is the first milestone of “impatience” to be satisfied.
-- By 1,000 days, many observers have forgotten the rationale and promises from the transaction; they are simply measuring performance success. Since the research suggests that most transactions fail, stockholders have generally voted with their feet by this time—i.e., they have either fled the stock or remain invested. At this juncture, it is clear whether strategic outcomes have been created, financial outcomes have been delivered and market outcomes have been achieved.
Dealing with the increasing velocity and impatience in the market requires that CEOs and their teams recognize the risks associated with underperformance. The market speaks directly to its view of management performance: It either retains confidence in its execution capability or it moves on to the next investment option. In today’s fickle investment world, managements do not get a reprieve against meeting market expectations and shareholder commitments: Successful merger execution is an expectation, not an aspiration.
About the author: Thomas J. (Tom) Flaherty III is a Dallas-based senior partner with Booz & Co., which recently published the book Merge Ahead: Mastering the Five Enduring Trends of Artful M&A by Booz & Co.’s Gerald Adolph and Justin Pettit, and has been involved in many power and gas mergers in the U.S., including crossborder transactions involving companies in the U.K., Canada, Australia and New Zealand. Flaherty can be contacted at email@example.com. For the audio of his comments, click MergerCast.
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