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PART 3: Why Do Businesses Buy Other Businesses? (M&A Motivations) - YouTube
Channel: Brett Cenkus
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Hi this is Brett Cenkus with Cenkus Law and Braaten Woods. I'm an M&A advisor
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and an M&A and lawyer. If you like this
video, check out merger-resources.com
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There's all sorts of videos, articles,
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Okay this is the third and final video
in a series about M&A motivations or why
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buyers buy businesses. The first one we
talk about synergy synergistic reasons
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it's a buzzword that's but it's not
going away in the M&A context things
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like cost-cutting and cross-selling
that's our synergy reasons and I kind of
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painted them as more defensively or
defensively oriented and then the second
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video will talk about expansion reasons
so buying competencies buying talent
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buying into new markets buying new
distribution channels things like that
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this third and final video is about
missus miscellaneous motivations so in
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their there they don't fit neatly into
offensive or defense that they're just
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sore for other reasons that I commonly
see companies play me a mini game but if
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buyers getting into it
so the versus bargain shopping and this
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you can think of as picking off assets
in bankruptcy start buying distressed
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companies some acquirers are really
really value driven and you get those
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values often out of bankruptcy but not
always those could be pretty competitive
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environments as well but just trying to
find opportunities where the business is
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distressed okay so that's bargain
shopping trying to pick up things and it
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tends to be assets buying operations
that are distressed can have all sorts
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of on seeing cost and consequences I
mean if teams have been sort of
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decimated and talent has walked out the
door already or it's got one eye on the
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door trying to buy a business that's I
mean it's just generally not viewed as a
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really kind of Pennywise pound-foolish
is the phrase I used two years ago it's
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basically like yeah that might be cheap
but it's cheap for a reason that's not
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really what I'm talking about I'm
talking about trying to buy just picking
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all
assets often not really buying
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operations per sitting people you're
just trying to get really really good
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deals and again it's in a distressed
context that's the first of our four
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miscellaneous motivations the second is
control and you'll often see companies
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want to control their supply chain for
example or or a vertical merger but
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vertical integration is acquiring
another company not a competitor who
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does exactly you know what you do and
competes against you but they're they're
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a there's someone up or down the chain
so they could be a supplier of something
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so an example of this is a AOL Time
Warner years ago they they came together
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and it was viewed as a great marriage
between content so that was Time Warner
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created content and AOL had distribution
or basically needed content they're
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seeing some of these deals now I think
82 team teams kind of back at looking
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for marrying those things up so
sometimes these kind of deals are driven
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by wanting to control the supply chain
and sometimes that's necessary because
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just to deliver a Apple have said this
before that they sometimes do deals like
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this because they really want to like
really be in charge of how the products
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are manufactured it's really important
to them I there's something to be said
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for for that other times though they're
driven not really off the idea that we
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just can't get what we want if we
outsource it we've gotta somehow control
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that it's more this idea that hey this
will be a perfect marriage and we'll
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have better economics we'll be able to
sort of one-stop shop you know we'll
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somehow get it was just it makes sense
to just vertically integrate like this
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like a restaurant why not if you're
running the restaurant why not own the
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farm okay
now this kind of thinking just that
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generally doesn't pan out in the world
of M&A if the reason is because running
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a farm and rest are two very different
businesses and the idea that somehow
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putting them together will give you some
sort of financial economic benefit is is
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is illusory
it's it doesn't turn out to be the case
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because you're still getting the same
costs of riding that farm insane costs
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of running the restaurant so if it were
such that you could put them together in
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eliminate a lot of overhead right or
slim down on the corporate office or
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have a little bit less marketing or you
know whatever it is then we would think
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about in terms of those synergy reasons
we think about it as consolidation and
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cost-cutting but down here if they're to
20 different businesses there won't tend
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to be that much synergy you may really
need separate ceos and cfos because
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they're totally different businesses and
so in the end you've got different
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businesses and they say in their same
cost structure there really aren't any
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huge cross selling opportunities or so
it tends to be these vertical mergers
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are really out of favor because they've
overtime prove it and not be that
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successful and we certainly live in a
world that that def where people value
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niching down focus on your core
competency being just really good at
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what you do rather than trying to be you
know own the world and so again this
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kind of control driven reason which
shows itself often is vertical
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integration can make some sense where
it's just so fundamental you can think
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of a restaurant where look we just need
these cows to be massaged in a certain
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way or something right it's like you can
imagine it's so fundamental to their
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value proposition that they just don't
trust anyone else to do it
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you know I would argue kind of against
that for some reason but I can imagine
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that and that could be a compelling
reason just about every other time you
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see this it's really tends to not tends
to not really pan out okay third
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miscellaneous reason is diversification
in so it comes to a couple different
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forms but if diversification if what a
business is doing is saying hey we you
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know we sell pet products and we and our
stores are just in the Midwest we really
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need to be sort of have some
diversification because what if that
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what the Midwest economies aren't doing
very well we really need to sort of
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stretch out spread out and be in the
south in the Northeast or something
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let's just say
that would be to me more like expanding
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into a different market and we would
cover that in video to this form of
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diversification is simply we need to be
in a different business okay and you do
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see it and you see it years and years
ago the big conglomerate eras up to the
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1960s or something
businesses would take the money in then
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they'd spread it out in a lot of
different ways and you'd see these
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businesses that were all sorts of
different things you know they were just
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I mean the conglomerates were all sorts
of different businesses and it'd be in
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financial services and retail and some
products and own restaurants and just
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kind of craziness and you're starting to
see it's interesting you're starting to
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see a lot of companies who are opening
up restaurants and coffee shops and so
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forth in today's world I pipes in but in
that instance where we're seeing it
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today it's it's a the Capital One has
these cafes they're not really I don't
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think trying to be in the coffee shop
business they're trying to use that as a
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brand tool as a marketing tool and
that's very different than saying hey
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we're careful when we made a lot of
money and we just also think that's a
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great business let's get a coffee shop
business and compete against Starbucks
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like that is diversification in a way
that the market doesn't really favor and
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has proven at least historically and
certainly in the past 4050 years not to
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be a great use of shareholders money and
if you're a public company corporate
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lawyers would tell you and you know
corporate or professors would tell you
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hey give me the money back and let the
shareholders go invest in Starbucks
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rather than going head-to-head with them
when you're in the banking business
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right so diversification of that that
type is it's generally out of favor and
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there's a lot of reasons that it is I
work for a company that made a
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diversification move they just really
fundamentally didn't like their core
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business right and what we went into was
similar but it was quite different and
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it wasn't in Ghent in jenshaw it wasn't
such an obvious next product we'd get
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into what it really came down to is the
we we didn't like the business wherever
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in and that one didn't turn out for who
well and part of that is because our you
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know our but our our company didn't
understand
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that conveyance is wildly different and
so there's a lot of risk associated with
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making like a can't entirely transfer me
transform into that position like that
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so that's number three number four is
and this is really there's it's hard to
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say there's any justification for this
one I've sort of bent over backwards on
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the last three talk about ways in which
they can work and give them some degree
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of credibility in the world and like
there's some place for those but this
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fourth one is exceedingly common but
it's one that you would probably argue
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has no place anywhere even though it
shows up all the time and it's one that
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no one will ever you will never be on a
conference listen listen to a analysts
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call or a stockholder call on public
markets in here a CEO admit this but a
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lot of M&A is driven off empire-building
it's driven off personal desire to grow
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ones Empire row at a be bigger company
sometimes you'll see C Suites trying to
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have more under their control because
that favors then they'll get more to be
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compensated higher you see a lot of
action in the public markets that really
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is driven if you've really pull it apart
and you're close enough to really
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understand the motivations it's it's C
Suites in teams just looking to expand
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their control of the world its ego
driven activity or its lack of anything
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else to do I mean not really they've got
plenty of other things to do but you see
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a lot of M&A is driven off I want to
bigger this and want a bigger that and
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it's it's justified for one of the other
eleven reasons that I talked about you
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know usually one of the first eight I
talk to any videos one and two but but
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that's a big driver and when you can't
find any other reason it's you might
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look for this one and obviously enough
to tell you how that one often pans out
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not super well so if you've got any
experience with any of these drop a line
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we'd love to hear from you would love to
talk to you about what you've seen work
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and not work and if you liked what you
saw today subscribe thanks for stopping
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