M&A Explained Part 2: Three Reasons For Making Acquisitions

Hello and welcome back to the second episode of this 4-part series where Stephen and I are going to unpack the topic of mergers and acquisitions, M&A. In this particular episode, we're gonna look at different reasons that drive the decision to acquire another company. So putting that simply, whether it to be to gain political influence, or to make the most of a potential revenue or cost synergy. We're gonna examine some of these and incorporate real-life examples of people or companies that I'm sure you might have heard of. So it's really super easy to understand and follow. So Stephen, hope you are well, and where would you like to start first?

Yeah. Good to, good to be on the pod again. Yeah. So we're gonna do, we're gonna cover soft power. We're going to start with that, and then we're going to look at some revenue synergies— that's a bit of jargon— and then we're going to look at cost synergies, which is every M&A banker's favorite thing to talk about. But let's start with soft power, and I'm going to use a practical example, but I want to bring this up more to discuss and more, but more to make people aware that M&A, mergers and acquisitions, I was— it's an advisory industry because we are dealing with humans, and behind every spreadsheet and behind every corporate entity is a combination of different human emotions that want to have different outcomes. And the average CEO, the average major investor, they're not necessarily short on confidence, and they're not necessarily shy about wanting to have more Power. Sometimes that's hard power in the form of money, and sometimes that's soft power in the form of social, cultural, political, or in this case, sporting influence. So the example that I wanted to use to represent M&A, buying a company as a means of attaining soft power, is, uh, is the Saudis. We love talking about the Saudis because, hey, we're a finance podcast and where's all the money? Uh, it's in Saudi. So we, we haven't spoken about Saudis for a few weeks, so let's, let's get into it. The article that I wanted to raise this week was about the Saudis basically making a pitch for the Indian Premier League. So the IPL is a cricket tournament that happens every year between a bunch of Indian franchise teams. Uh, it goes on for 8 weeks. Massively, massively culturally important and becoming one of the most lucrative sporting events from a broadcasting revenue on the planet. I think only the NFL gets a higher dollar-per-match broadcasting fee than the Indian Premier League. So this is big money. And the Saudis having spread their wings to football and to the PGA Tour, and obviously they've got the 2034 World Cup coming up. They're trying to get a slice of the Indian Premier League, which is valued at $30 billion. And this is a brilliant way for the PIF and the Saudi royal family to continue to extend their influence. You know, it's historic. Over the last few years it's been, you know, to the north and to the west, and now this is more to the south. And obviously India is a, is a huge market from a, from a commodities perspective, but also a huge political, military, and cultural power that it makes sense to get involved in. So, so this is a great example of acquiring for soft power.

Yeah. And you, you have this idea that with Saudi being very active in North America, in Western Europe, it's interesting. They obviously have this Vision 2030 this idea of having this ability to diversify their income stream essentially away from oil. So there's, there is a long-term agenda here, but it's interesting. They're getting that short-term impact by deal making in the developed world, and then they're looking to hedge themselves with getting some exposure to what is going to be an increasingly more affluent and the largest populous area of the planet. So, yeah, it seems so interesting.

Yeah. And if you've ever watched an IPL game, I'm a bit of a cricket fan. I've seen plenty. And my gosh, the support is fanatical. So I'm just looking here on the website. Bidders paid $6.2 billion for the right to broadcast games through to 2027, and they only run for 8 weeks every year. The IPL is a very short-form tournament, so it is quite remarkable And it's only a very young franchise as well. You think of cricket being a very old-school sport, but the IPL has only been around for 15 years, something like that. And that's where the money is going. If you want to follow the money, especially when it comes to cricket, go to India. And I think that's what the Saudis have seen.

Yeah. So when we talk Saudi, we often talked a lot about these kind of cultural assets and sports being very I guess specific for Americans as well. But let's talk a little bit about the influence of media. And I know your deal of the week this week was talking about the Barclay Brothers and the Telegraph Media Group. So what's the situation there?

Yeah, so this is, this is a brilliant deal of the week, and it's got a lot of elements to it. But, um, the Telegraph Media Group, owner of the newspaper that we all know, one of the only true broadsheets remaining in the UK. So the Barclay brothers, who are a pair of identical twins famous for buying and then selling the Ritz, not famous for owning Barclays the bank, very different family, uh, yeah, they got into a bit of hot water owning the Daily Telegraph by basically pumping it full of too much debt that they ended up not being able to service and not being able to pay. The result being the banks took ownership of the Telegraph and is now owned, in inverted commas, by Lloyds Banking Group, who have restructured the debt and are now looking to sell it again. Barclays Brothers are once again very interested in buying back their prized cultural asset. But it's interesting, you were telling me about some of the names, uh, from, from the hedge fund world that are sniffing around this particular asset. And you've got to be thinking to yourself, Telegraph Media Group, this is not going to be an acquisition for just sheer financial common sense. There's got to be more to it than that. So the Barclay brothers are interested. Who else did you— who else did you say was interested in the Telegraph Media Group?

Yeah, so Ken Griffin, who's basically the name synonymous with Citadel, which is the world's most profitable hedge fund. And yeah, there's some interesting bits with that because timing is so, um, so clear to me in a sense of we're, we're a year out from a US political race at the moment, and someone like Ken Griffin has been particularly involved. He's quite influential already in his current status in the media, in right-wing politics. So on both sides of the Atlantic, he kind of says his piece, and he's been a big Republican donor. The problem here is he's, he's vocally said he gets very— he's very tired of Donald Trump. I think he's actually called Trump a three-time loser, um, is how he's referred to him. Um, so it's interesting that obviously Trump is very much at this point in, in the running and still looking like— although he has to fend off, as he always does, multiple lawsuits, uh, coming his way— but it's looking like he's run again and be a firm challenge to what appears to be Biden. But can Griffin get in and start to shape the narrative into what is— we know no one's really paying too much attention to US politics now. There's a lot of stuff going on, geopolitics and, and so forth, interest rates, inflation, recession risk. But that conversation piece and its influence over financial markets as well as society and politics will increase in the several months to come, and it will ratchet up. So now is quite optimal to start making some moves. And, you know, you look up a register of political donors in the UK, and many of the top donors, no surprise, for the Conservative Party are hedge fund managers. So Chris Rokosz or Alan Howard, the co-founder of Brevan Howard, big backers of the Tories, for example. So it's not unusual, this. But I guess one thing I wanted to just quickly do is to just quickly run through, uh, you mentioned the word soft power, and you hear this a lot, I guess, particularly in the current Saudi context, where it's not— it's kind of COVID influence, if you like, hence the soft. But I just wanted to break down a little bit about the political side of this, because I think it will help with your understanding about the intersection then with economics and markets. So the first thing is editorial control, and that's probably the most kind of obvious one. It means that you can frame certain political issues. Now, you and I were just talking offline a moment ago that Ken Griffin, the Citadel chap, he was at a major keynote speech talking about AI. And that AI, it's like a race at the moment and who can dominate that conversation piece. So, you know, you rightly said Rishi Sunak has kind of tried to engineer this big platform where he had all the best talking minds, Elon Musk and the rest come, and then the US come out and make their move so they're not falling behind. So the kind of framing of political issues is really quite pivotal. The selection of open editorial contributors. So remember, Boris Johnson was a writer for The Telegraph, if you remember. And so you can use these people as pawns to kind of shape that, um, that conversation piece, uh, and get certain emphasis to highlight certain topics more than others. Then there's agenda setting. So determining which issues are given attention and considered important by then public and policymakers. If you continue to tell a story, we as humans will think, well, that's the main story. And then policymakers will have to react to the main story at hand because that's of my gravest concern, maybe not something else. So I can kind of steer you in one way. There's reputational management. I mean, Ken Griffin's just come off his most profitable year in history. So not only is he ready to make an acquisition, He's just made a record $16.5 billion for his investors last year. So that's never— it's a good thing behind closed doors. It's never a particularly good thing publicly when you're living this extravagant lifestyle. That doesn't fare well in a cost of living crisis where the man on the street is experiencing the exact opposite. So that's the sort of thing you'd love to have a little bit of PR management on. Of which you can obviously curate the stories and the narrative a little bit. Then there's access to policymakers. Now, if you think about, uh, media coverage or media executives, they have direct access to top politicians and policymakers. So how much can you have in terms of control of backchannel communications where you have got this direct line to these people because it's a reciprocal relationship. Politicians need you and you need them. What can you do for me? Well, what can I do for you? So therefore you get kind of horse trading in that respect, which can set the kind of the agenda for policy. Then there's public opinion influence. I think that one's quite self-explanatory. Election influence, as I've just mentioned, and then ideological influence. So beliefs, ideological beliefs that might use their platform to promote those and shape those learnings of their audience over a longer time frame. So Yeah. And then there's business interests, of course. I mean, a hedge fund owner might use that media influence to support policies that will benefit them from a regulatory perspective and other perspectives as well. So yeah, I thought there is lots of rationale here of why our dear friend Ken wants a little slice of that action, I'm sure.

Yeah. And that was a great explainer, by the way. There's so much there to potentially unpack. But to bring it back to deal rationale. Whenever, whenever you, whenever you become a billionaire, I would assume— hasn't— that has never happened to me. Uh, when you become a billionaire, what, what do you— what else is there to do with your money? And, and it's that translation, as we said, from hard power into soft, and all of those amazing things— setting the agenda, uh, ideological, uh, inputs, uh, that, that's probably more fun than than, than another yacht. Again, I don't have any experience of this.

Yeah, I'll take the yacht for now, just, uh, it's a down payment. All right, so let's talk about, uh, revenue synergies then.

Yeah, absolutely. This one's, this one's, this one's a little bit different, and this one is probably straight from the textbook, probably straight from the economics textbook as well. And synergies, again, it's one of those M&A jargony words that we like to roll out as bankers, um, to make ourselves sound very clever, but whenever I see the word synergy, I always just think benefit. It's a simpler word. So a revenue benefit from one company acquiring another company. And actually what we mean by revenue synergy or a revenue benefit is more about what's called complementary goods. So two products that when sold together have a complementary nature and therefore can potentially be bundled to the advantage of the consumer and to the marketability of the company. A classic economics textbook example is, well, I own a toothbrush company, why don't I also buy a toothpaste company? And then I can bundle the two together and you've got a complementary good. See, weirdly enough, the toothpaste example is useless because that, that doesn't happen because the production lines are totally different. You never see than bundled. But you do see it with things like computer games. You know, again, we talk a lot about Microsoft and Activision. Microsoft's buying Activision because it's got the console and it wants the games and it wants to bundle the two together. But the news story that came out this week that I thought was quite interesting, just from a revenue synergies perspective, it's a company called Cedar Fair— two companies called Cedar Fair and Six Flags. Both US amusement park operators. Together they own a collective 27 amusement parks, and they've just agreed to merge with each other. Pretty much a merger of equals, as opposed to one company buying another. And part of the rationale for this is, is to achieve the scale— remember economies of scale from last week— to rival the likes of SeaWorld and Walt Disney. But actually, part of this is revenue synergies. And I read a really interesting report from a Macquarie analyst who said that a combined footprint— remember, a combined 27 amusement parks— could potentially make a national pass network offering quite compelling. So this is the classic bundling. I've now got— I bought another company or I've merged with another company, and I've now got a better offering so that I can bundle together into a single, more lucrative, potentially more stable revenue stream well into the future. So that is a classic revenue synergy.

Yeah. And from a content perspective, which is where I sit from that angle, I mean, I remember buying a cup from the Disney Store for my daughter recently, and it had all the different princesses from all the Disney films. So what's the synergy there from a content perspective of characters between Cedar and Six Flags?

Yeah, it's a good question. You've been— you, you've always wanted this, I think. And so this is going to be a mashup between Snoopy, Charlie Brown, um, Bugs Bunny.

God, it's old school. They're all very old school. Then you throw in Batman.

It's, it's, it's a strange combination of licenses, uh, that they hold across these parks. Some of them are extremely old school and maybe either due for a retirement or a bit of a kind of renovation. But then they've got, as you say, they've got some of the DC Comics, they've got some Warner Brothers. There's some pretty intellectual property positive licenses that they've got there. So again, yeah, you could potentially cross-pollinate the theme parks with different popular characters that maybe some of them are more zeitgeisty and maybe some of them are more likely to attract the crowds than others. So there's definitely that revenue synergy there as well from a kind of content perspective, as you said.

And how about then looking at it from the complexion of costs rather than straight revenue?

Yeah, so cost synergies. I have to say that over the next couple of episodes, I'm probably going to talk about cost synergies more than once. So I'm going to give myself a little caveat and say that I'm going to be talking in this example about marketing-based cost synergies. The reason why I think cost synergies are so important, cost benefits from one company acquiring another, is because in the world of M&A, let's just get a little bit theoretical just for one second. If I'm an M&A banker advising a company that's looking to acquire another company, and I'm doing all the valuation of this, of this other company, and, you know, and I'm trying to add this all up and say, look, the valuation is X, the, the free cash flow that you're going to get as a firm, or the profitability that you're going to get as a firm, is Y. Now, if Y doesn't look attractive enough, the profitability relative to the valuation, maybe we need to start thinking about the cost synergies of buying this other company, the cost benefits of me buying one company and then happily, you know, shutting down one of the offices because we already have a customer service center, or we don't need two CEOs and two CFOs we can get rid of a load of cost there. It's a really nice thing, and that actually boosts my EPS, my earnings per share, which is what we look at a lot when it comes to, uh, the theory around one company buying another. But this example here— cost synergies are so important, we spend so much time looking at it in the world of M&A— but this example is a little bit more specific. This is an example of Hilton Grand Vacations buying Bluegreen, for $1.3 billion earlier this week. Now Hilton Grand Vacations, it was spun out of the hotel group that we all know, and what it actually does is it does timeshares. You know what a timeshare is, Anthony?

I don't feel like I'm wealthy enough or I'm in those affluent circles enough to be talking timeshares, but I think I know. But yeah, enlighten me.

So timeshares are fractional ownerships of holiday properties. So, you know, if you're not quite wealthy enough or, um, active enough to, to go out and buy your holiday property, you can go and buy 1/26th of a holiday property and get it for 2 weeks a year. It's quite an old-school concept. It always reminds me of my parents, uh, not that they have one, but it's, it's that kind of generation. I don't think it's particularly cool. Unless I'm missing out on something.

Well, I don't think it cuts to that idea that if you're young, the idea is that you want to travel and you want to experience culture and cuisine and meet new people. It kind of flies somewhat counter to that, which is why it makes this hookup particularly interesting, I guess, whether the timeshare thing will fly.

But yeah, yeah, it's got a kind of vague air of the shuffleboard and bridge club. But maybe I'm being Maybe I'm being too cynical, but anyway, so the Hilton Grand Vacations, they made a tie-up with, uh, this company Bluegreen. There is complementarity again from a revenue perspective, or at least from a portfolio perspective. Uh, so Hilton have properties in some parts of the country, Bluegreen have properties in others. Bluegreen are more focused on outdoor adventures, Hilton are more focused on beach resorts. So you can see the rationale there. But I just wanted to, I just wanted to talk about this marketing synergies piece. So I'm just going to read a little bit of blurb from the, from the deal announcement saying potential synergies played a key role in the valuation. Hilton Grand Vacations Chief Financial Officer Dan Matthews said Monday on a call that Bluegreen's pipeline of new buyers and their partnership with Bass Pro made the company an attractive target. And then they go on to say that because Hilton's such a well-known brand, what they're just going to do is they're going to plug Bluegreen into their marketing system. Right. So Hilton have got the marketing firepower, Hilton have got the brand reputation. They spent a lot of money generating this synonymous with hotels and then synonymous with, with timeshares. So why not buy a company that doesn't really have much of a market presence or as big a market presence cut their marketing budget by 100%, saving loads of money, and just plug them into— this is their words, not, not mine— plug them into the marketing engine. You've got a marketing flywheel that works. You know, this is going to be not only a massive, massive marketing synergy from a cost perspective, but also potentially has revenue benefits as well. So it's a really, it's a really neat little example of a particular type of synergy or a particular type of benefit that we can talk about when it comes to deal rationale.

Yeah, and one example I wanted to highlight was one that's more relevant for finance in terms of the companies and asset management, but to highlight a potential problem to get your thoughts on, which is, um, some— or something that a lot of the students in the UK at least might be familiar with is a newsletter, community-based finance newsletter called Finimize. and very popular in recent years in regards to teaching, I guess, the bright, intelligent university-based students about teaching them about how to manage their funds, how to invest in the stock market, and introduce them to other products that they might be interested in, in time. So these being ETFs or mortgages or things of that nature. And so they had a really big following. I think their following is more than this now, but it got up to a million people on this newsletter, which is phenomenal. And they did a— they got bought out probably 18 months ago by Aberdeen Asset Management, um, which is itself, you probably know, has gone through a massive rebrand, um, Aberdeen now. And so they've tried to refresh and become more modern. Their logo has had a lot of criticism actually. It's almost so modern you can't really tell what it is. Modern. But they decided to buy Finimize in order to get access to tomorrow's affluent kind of user of financial services and products. The one thing there is, and I know from the inside that they used to be a WeWorky kind of brick wall, bring your dog into work kind of vibe because their voice was that of a young person. So you have to speak in that way. Abodeen Asset Management is coming from the absolute polar opposite. So they were sensible enough to understand that, look, we can't pivot that much ourselves with our marketing department. Let's just buy someone who can. But then when they get absorbed, the WeWork office is gone. Well, literally and metaphorically, it's gone now. So they've been absorbed and then they have to go into an office where I've got my Crocs on, and my little mini greyhound going to work and then everyone else is wearing belt and braces and is about 60 years old looking at me going, who the hell is this joker? So surely there can be often friction or do you just run them as two separate entities? Is that the secret to keep a harmonious relationship rather than actually forcing them together in terms of a cultural fit?

It's a, it's a really interesting point. We can maybe do a podcast at some point in the future about how and why acquisitions fail post-integration, and culture is one of the biggest things. And, and obviously, theoretically, you would love in the majority of circumstances to fold the acquired company into your company because you get to benefit from these, these lovely synergies, and you get to integrate tech systems and IT and IT systems and marketing and all of that kind good stuff. The flip side is you could keep them separate, and that's obviously got the benefit that you can keep two separate cultures. But then the danger comes— well, firstly, you may not be able to benefit from synergies, certainly some of the cost synergies that we speak about. But secondly, you start potentially looking like a kind of like a conglomerate, and conglomerates never get a particularly favorable treatment from investors that often see it as a kind of hodgepodge of different strategies, legacy companies from different owners and things like that. So it's a really, really tricky one to get right. And actually, I would contest that culture is probably the biggest reason why acquisitions tend to fail, especially as you said, between an incumbent and a new upstart with the differences in their outlook and their speed of work and things like that.

Maybe to finish, I could ask you like a quiz question. I've not prepped you for this, so I'm not expecting you to be right, but just ballpark, finger in the air, if we were to take all M&A deals en masse, what's the percentage probability that they might fail regardless of size?

Yeah, it's, it's a really good one. So, so it depends, it depends what you count as failure and what I would count as failure is that it is that the acquisition, if we can measure this, the acquisition is earnings per share dilutive and not accretive, right? So that, that would be the kind of solid rule of thumb. Then if I'm being pernickety, I'd say, well, after 1 year, after 3 years, after 5 years, and what other— how do you isolate the impact of the acquisition from all the other stuff going on within the business? So it's very difficult to actually say whether acquisitions failed or succeeded. Depending on who you speak to and depending on the, the, the, the stat that you hear, I've heard everything from 50% to two-thirds of acquisitions end up not being EPS accretive. Now that is a massive number, and it kind of slightly calls into question the whole notion and rationale behind M&A. But let's also think about all of the other stuff that goes into buying a company and all of the other benefits that may come out that may not necessarily hit the bottom line, certainly when within a short, medium, or measurable term. So it's a, it's a, it's a question that we, that we think about a lot in the industry because it certainly is a higher rate. Let's not assume that because one company buys another, that's going to be, you know, they're going to sail off into the sunset and have a wonderful relationship. But there's certainly obviously some fantastic cases of brilliant acquisitions.

Yeah. Okay. Well, look, I'm going to pick you up and lift your feet away from the fire for now. I thought the interesting thing is what I love is when you explain it is the process, the rationale of the thinking to get to then the reasons of why you don't need a specific number. And I thought that was actually, that was a really good example for any of your students listening. Of how to go about an interview question when you're asked for a specific number, but they know you can't give one, but just the logical sequence of events that you described make complete sense. So yeah, I thought that, thought that was great. But look, we'll wrap, we'll wrap up episode 2 of 4. So next week, number 3 coming. Don't forget you can go back and listen to the first one. You definitely should. And we also continue to have on a rolling weekly basis now every Thursday, our M&A Finance Accelerator simulation. I'm going to drop the registration link in the show notes. If you've never done anything like that before, fear not, you don't need any prior knowledge at all. We welcome everyone and anyone from all backgrounds. That doesn't matter what you study, uh, take part, have a go, and see if M&A is for you. But Stephen, thanks as always.

Thank you very much.