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M&A: Families on the front foot as recovery boosts M&A activiy

By Marc Smith

Just a few years ago they were analogous to the gluttonous charicatures in a Hogarth painting, but M&A deals have been on the equivalent of a corporate Atkins diet of late.

The biggest deal this year involves a family-controlled Indian business in the telecommunications sector with a price tag of $11 billion.

In sharp contrast, when we last covered the family business M&A story in the summer of 2007, the largest deal was a joint $96 billion bid for ABN Amro by the Botin family-controlled Santander group in partnership with RBS and Fortis.

That deal, the biggest banking takeover in history, was also one of the least successful. Today, ABN AMRO has been split into one organisation owned by the Dutch government and one owned by RBS, which is in turn now controlled by the UK government. If ever an example demonstrated the excesses of a past era then that is surely it.

The M&A market is now returning to a more healthy state – globally, M&A activity totalled $858.8 billion in the first half of 2010, which represents an increase of 5.1% on the previous year according to research firm Mergermarket.

But Chris Hemming, global head of corporate finance and head of European private equity, says it depends on which part of the world you are standing in: "In Asia and Latin America there is an up-tick in M&A activity, but in Western Europe and North America things slowed down in Q2 and the general level of improvement seen in Q1 has stopped."

According to Hemming, Western Europe has been more affected due to a general malaise about government borrowing while some companies are suffering from poor trading performance. Everywhere, deal sizes have reduced as the banking liquidity needed to get the really big deals done is still not there to any meaningful degree.

"The playing field is being levelled due to the lack of leverage available to short-term financial buyers. Prices should therefore come down to commercially driven values rather than financially leveraged ones, which means family businesses are no longer so disadvantaged," says Hemming.

Indeed, many cash-rich family businesses have seized the chance to make strategic acquisitions at opportunistically low prices. According to Kavil Ramachandran, Thomas Schmidheiny Chair Professor of Family Business and Wealth Management at the Indian School of Business, the Essar Group's purchase of Trinity Coal (number nine on our list) is one such example.

"The Ruia family has bought the company for a cheap price but they have had global ambitions for a long time and have been trying to grow fast recently. I would put this down more to a growing confidence in themselves," he says.

However, having money to burn and a desire to expand doesn't always work. Family-run real estate giant Simon Property Group tried to acquire bankrupt rival General Growth Properties for $10 billion in February. Highlighting the company's cash-rich status, SPG's offer included approximately $9 billion in cash. But despite three very public attempts to win over the board of directors SPG ultimately failed despite topping the winning bid by $2.6 billion or 66%.


According to Mergermarket, emerging market, Asia-Pacific and European M&A were up 52%, 22% and 10% respectively in the first half of 2010 compared to the same period last year. The US saw a sharp decline in M&A activity with only $324.4 billion worth of deals announced – a fall of 17% on the same period last year.

In the family business world, our data show that Indian families were the most active taking four out of the 11 deals we highlighted, including the biggest. The acquisitions by Reliance Infratel, Hinduja Group, Reliance Industries and Essar Group are worth $14.2 billion in total. "The list reflects a growing confidence within the Indian business community and a growing respect for Indian businesses and their capabilities. Crucially, the younger generation is driving growth strategies, which I think is unique to the Indian market," says Ramachandran.

"In the past 20 years business in India has really changed as a result of liberalisation and many of the next generation have become involved during this time. The baggage of the previous, controlled regime has not affected them. They have grown up with a different mindset and developed the confidence to exploit opportunities in global markets."

Hemming agrees: "Companies in India are thinking much more about building global footprints and Indian businesspeople seem to be much more comfortable with the idea of international acquisitions, partly because one  of the biggest hurdles they face is bureaucracy and regulation at home."

European families also made four acquisitions totalling $17 billion, proving that even  companies with 12 generations of family ownership, as in the case of Merck (number three on our list), are still looking to grow and take advantage of the opportunities that exist.

"Merck has approximately 130 family shareholders and although the more family shareholders there are the more difficult it is to make a decision, Merck seems to have got its family governance and coordination right," says Peter Leach, founder of family business consultancy Peter Leach LLP.

"It is no easy feat to coordinate a decision about a major transaction of this size but in this case the family is an asset to the business, enabling speedy decision-making whilst retaining a long-term perspective."

Three of the four European deals involved cross-border acquisitions, which tallies with Mergermarket's finding that the first six months of 2010 have been the busiest since 2008 – transactions between regions made up 26% of global M&A activity by value.

Although the US saw an overall decline in M&A activity, American family businesses could well be the country's most active given they come in third on our list, making three acquisitions. Further, two of the three involved media companies, the sector that has been the most popular for family business M&As globally with three of our 11 deals involving firms in this industry (see fig 1).

Nevertheless the broad spread of industries – from retail and pharma to banking and energy – demonstrates that sectors across the board are seeing increased activity and that the global recovery seems to be touching all areas of business. There was only one pure diversification – Reliance Industries' foray into communications with its $1 billion acquisition of Infotel Broadband Services (number eight on our list). However, this says more about family politics than it does about global M&A activity.

In May brothers Mukesh and Anil Ambani, respective heads of Reliance Industries and Reliance ADA Group, scrapped the non-competition agreements that had been in place between their companies since 2006. The agreements had been a constant source of friction between the two brothers who are known internationally as much for their feuds as their business acumen.

"Mukesh saw the scrapping of the non-competition agreements as the best outcome. He sees himself more as an entrepreneur, leaving much of the management of the business to non-family executives, and thinks there is huge opportunity in the communications sector," says Ramachandran. Yet despite the growing strength of India's family businesses, over half of the deals we have highlighted involve companies in developed markets acquiring other companies in developed markets (see fig 2).

According to Ramachandran, this is no surprise given companies in developed markets are generally much more global and have more established capabilities than their counterparts in emerging markets. "The best companies will keep acquiring in any geography where they see opportunity," he says. Nevertheless, Hemming is in no doubt that emerging market activity will increase in the M&A marketplace over time.


When it comes to the families involved, the vast majority of the activity is being driven by family companies in their second or third generation of ownership (see fig 3). Only one of the deals, Merck's acquisition of Milipore, involves a family that has more than five generations of ownership.

"This highlights the fact that very few family firms survive beyond the third generation and in fact could be an indicator that family businesses who pursue growth through acquisition (as opposed to organic growth) have trouble retaining a 'family stamp' on operations, with entities eventually moving out of the control of the founding family as a result," says Leach.

This could certainly be the case at Heineken, where Alex Sharpe, family business consultant at Peter Leach LLP, says the family's share in Heineken Holding has fallen to 50.005% from 58% as a result of the deal. This begs the question, is expansion more important than control?

"This is an issue we see many families facing because in order to retain the same level of wealth through generations, substantial business growth is needed but sometimes this is not possible without the involvement of outside shareholders," comments Sharpe. "In these cases, the challenge is around the family reaching consensus on what they want from their collective assets and their vision for the future. Do they want to ensure growth at whatever cost or is the legacy of family ownership more valued?"

If a family intends to maintain a level of wealth through the generations, business growth – whether organic or inorganic – is needed. However, the wider expectations of the family must be managed and family members should be encouraged and supported in creating their own financial independence so that, according to Leach, the family is not fully reliant on the business.

Yet Hemming believes families can be confident at this point in time: "It is a good time for family businesses to make acquisitions. Prices have adjusted so you can get deals at better prices generally speaking. You have better visibility on future earnings and sellers are looking to rationalise their portfolio of businesses."

Ultimately, Hemming says the market today is one driven by strategic rather than financial buyers: "In 2007 there was an auction process where buyers had to move to a certain timetable and family businesses often didn't want to play on those terms. The market is now moving towards a narrower based M&A process where the buyer group is more internationally diverse, the number of bidders is 2-3 rather than 40-50 and people are having more one-to-one discussions."

The question now, concludes Hemming, is ensuring you have the networks in place to access deal flow when the vendor may only be talking to a couple of potential bidders.

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