During the late nineties and even in 2000, it was considered smart to make large and aggressive (read overpriced) acquisitions. In fact, ris...

During the late nineties and even in 2000, it was considered smart to make large and aggressive (read overpriced) acquisitions. In fact, rising stock market prices in local currency terms even encouraged management to view large acquisitions and higher valuations as fashionable and eminently sensible; if everyone's buying, why shouldn't we? There were also so many cases where firms avoided acquisitions in falling (cheaper) markets and rushed after them in rising (more expensive) markets. "Why buy something when its falling — must be something wrong; but definitely do buy when its rising — means its ok?" Optimism and related unrealistic growth forecasts showed that only tremendous growth all-round was positive for acquisitions. Boards and management felt safe to recommend expensive acquisitions in a competitive environment, since they did not want to be seen as isolated and weak or sceptical. Those who challenged firms or prices that were quoted at 50 times or more of earnings (or even multiples of losses!) were chastised for not seeing the true vision of the future put forward by both analysts and their coverage investment bankers and shareholders alike. It is even remembered the day not long ago when investment bankers declined to advise on deals below the value of $1bn since such were considered too small and unfashionable and not important enough — or was it the lure of the bigger fees? Some buyers even refused to use smaller specialist independent boutiques as advisors for large deals, assuming them to be incapable or unlikely to understand the growth (high price) visions — despite their independence and industrial specialisation. Some buyers practiced what is known as the famous brand syndrome: use only a major branded advisor for important deals. "At least it looks good to our board in case of a failure." Getting the strategy right becomes fashionable again How the world has changed. Specialist boutiques are now growing in number and strength and investment bankers are being openly criticised for obvious conflicts of interest and are being made redundant on a massive scale, due to lack of deal flow, even on the horizon. Could all this have been avoided? Firms in all industries including the financial industry — especially wealth and asset management — are now seriously studying what their strategic priorities could and should be. Most are likely to either fill their perceived gaps in their product or geographic offering with some wanting to optimise their existing platforms, or previous over-investments, by participating in the theoretically more likely consolidation tendency developing in both Europe and the US. But it takes two to tango and even more courage to overcome the emotions and pride associated with admitting a strategic weakness — i.e., the need to be consolidated. Nevertheless, nothing is taboo any more and boards and CEOs are more willing than ever to discuss strategic options and undertake discussions to alleviate their pressured balance sheets and persistently low share valuations. Getting the strategy right is now the first priority for most new or succeeding CEOs. A series of low-priced disposals is emerging as the next M&A cycle, as compared to the abundance of high priced acquisitions experienced in the last. Buyers alone must and do decide prices — there is no such thing as a merger! Most acquisitions are just that, acquisitions, and not the mergers they or their investment bankers or their lawyers call it. Whether done by paper exchange or cash, valuation ratios must be realistic. It must be admitted that only one side is always in charge, either from the beginning or eventually when the losses mount up. The buyer is always and ultimately in charge, or at least he is always financially responsible. Therefore, he decides and should decide the price of the deal — even though he may not always realise or feel it. Many buyers think the seller decides by holding out but in fact without a buyer's price there is no deal. The buyer always decides but has not always taken his responsibility seriously, or early enough. Many cases bear witness to this. Simple discounted cash flow analysis is sufficient to determine the reasonableness of an acquisition price, even accounting for a certain justifiable strategic and/or rarity premium, but overlooking sanity, the world exaggerated prices. There was a time when every person was going to have ten mobile phones and ten bank accounts — if we were to seriously believe the cumulative forecasts for these industries. Everyone loses, even the large previously prominent advisors now chastised for their embedded and implied conflicts. But the future is more important than the past and acquisitions will not disappear. They always have an economic and industrial role to play and will be more important, although perhaps of lesser value or frequency, in the future — irrespective of who advises the buyers and sellers. Traditional auctions are not performing well for investment bankers — there are alternatives but are boards patient or courageous enough? It is initially perhaps understandable that some boards will feel not exposed when they have a serious disposal to carry out and when they choose a process of auction to dispose of an asset. They feel that choosing a major investment bank to sell the firm through such a process will not only obtain the best price but also absolve the board from any risk by placing, at least emotionally, responsibility on the investment bankers' shoulders for the result — if good, and especially if bad — as is increasingly the tendency and case these days. Auction processes may be appropriate for industrial factories or commercial enterprises but not so for the financial industry, especially not for the wealth management segment. There are serious flaws in this outdated auction approach in the current market, especially for financial services and wealth management. One underlying major error of assumption is that the moment someone wants to sell is assumed by the seller to be coincident with the desire of others wanting to buy and in great numbers and moreover for great/high prices. Furthermore, when competitors are invited into auctions they often agree to participate only to learn about competitors or to enter a low ball just in case bid or no bid at all; they are rarely stimulated enough to be strategically interested and are rarely willing to champion the cause at a high level, such that the bid gets stuck in the corridors of power without an enthusiasm needed to see it to a successful conclusion. Many advisers on auctions of properties mention that the incumbent management will choose the buyers and price is not of first importance. Then why auction? Why limit the interaction with buyer and seller management in the auction process to a minimum or almost none at all? These auction processes are outdated and don't even necessarily produce the best price for selling shareholders. No one seems to care about the clients of the underlying business and how they will react when it becomes, as invariably it does, public knowledge that something to which they had depended is being auctioned without their formal knowledge. Good prices can still be achieved, clients can be happy and shareholders relaxed There is an alternative approach requiring a certain patience and deep specialised market intelligence. Whether buying or selling an asset, the most important ingredient for success is to identify the best likely party to champion and want the deal — leaving the exact timing as a secondary issue. Extensive industry knowledge, trends and intimate analysis of the business development stages of likely buyers or sellers are critical. The seller or his specialist adviser who identifies a seriously interested potential buyer needs also to identify the individual business board level executive championing the deal and needs to establish the true strategic fit at an early stage, before going too far. Extreme confidentiality is paramount, so as not to have a backlash from any delayed results or failures in price or structure. Imagine what boards or shareholders will feel when a certain price expectation is not achieved or significant delay is announced or leaks (most do leak). A good price for a bilaterally negotiated deal is a far more favourable result than an underperforming auction carried out a few weeks faster. When buying, establishing a short list of likely targets and their respective key decision makers and drivers, as well as obtaining the buyer's board pre-approval of likely deal dynamics, will enhance deal success. The majority of buying attempts fail in the financial industry owing to poor senior internal preparation and poor pre-matching of parties' strategic fits and likely deal — all done discretely. Buying privately doesn't assume a better price and buyers in such a mode should focus on getting the deal done at a fair price for both parties than just at a cheaper price emerging from their privileged position, as no price advantage can be assumed in a private deal. It's more professional to set the right price or sell at the right price than presume any price advantage; often auctions produce lower prices than bilateral deals for the sellers but buyers are prepared more or less to pay a fairer price in a bilateral deal where they are not rushed into a process and limited window of preparation. Focused buying or selling is the intelligent response to the bear market in mergers and acquisitions: adapt market intelligence to private processes and you will certainly succeed, especially when exercising patience.