Mark Brady, ’91, is the managing director and global head of mergers and acquisitions at William Blair & Company, a global investment banking and asset management firm headquartered in Chicago, with more than $93 billion in assets under management. As a proud alumnus with over 25 years of investment banking experience, Brady credits the economic and financial tools he gained at Booth with providing him a powerful means of understanding markets, prices, and incentives in the M&A environment. Here, he draws lessons from a successful acquisition and gives advice—for both buyers and sellers—on getting deals to close.
In a deal involving William Blair, Mars—the makers of M&M’s—decided to acquire the Wm. Wrigley Jr. Company, the chewing-gum conglomerate, for roughly $23 billion. Both companies were multigeneration-family-run businesses, and a merger between them would unite two of the best-known consumer brands: Mars candy and Wrigley gum. As part of any deal—like that of Mars-Wrigley—is the potential for one or the other side to suffer a loss of market position in the event the transaction doesn’t close. Mars and Wrigley felt comfortable about the similarities their products and cultures shared. We had the world’s two largest confectioners coming together from a distribution standpoint. We had to really think through, as representatives on the Wrigley side, whether and how Wrigley would be hurt with customers or suppliers if the deal didn’t go through.
Luckily for us, the deal was completed in a matter of weeks after it was announced; but for purposes of building protection for Wrigley, the transaction had a built-in $1 billion reverse break fee should Mars have walked away from the deal. Meaning, had Mars breached its agreement to buy Wrigley, it would have had to fork over $1 billion to Wrigley.
The Mars-Wrigley deal offers some important lessons about which deals are likely to succeed and which aren’t. In most successful mergers, the transaction agreement often has termination fees that help align the interests of the target and acquirer. By having a target termination fee built into the contract negotiation, the acquirer is able to rest assured that the fee will deter its target from considering rival bids unless the price is materially higher. A reverse break fee works in a similar vein but protects the seller in case an acquirer decides to opt out. Due to the target termination and reverse break fees, both buyers and sellers are more committed to, and serious about, closing a deal.
Many studies have shown that only about half of all acquisitions are considered successful, and given that many deals actually destroy shareholder value, getting to what I call “deal certainty” involves strategically thinking about a few key elements:
First, consider the right amount of competition among potential buyers if you’re on the sell side. William Blair has an average deal size that’s roughly $500 million, and sometimes, a seller wants to consider no more than 20 buyers—what I would call a “targeted process.” This results in a healthy amount of competition among the buyers—and yet buyers believing they can win the bid process.
Second, I offer the following advice: if you’re a seller, be realistic about the performance expectations you communicate to your potential acquirer. These expectations should be conservative. Too often, sellers feel compelled to project unrealistic growth or margins. Being realistic increases the chance a deal closes.
Third, once a seller determines that his or her prospective buyer is serious and has secured financing, setting the stage with this buyer about strategic alignment is crucial for moving toward deal certainty. Rigorously understanding how an acquisition will use the assets of both parties to create transformative value in the market is paramount to mitigating the risk of an acquisition falling through the cracks.
Though failed deals impose a hefty toll on acquirers and targets, thinking through some of the things I and my team at William Blair do on a daily basis can help you edge your way closer to successfully closing a deal.
To learn more about Mark Brady, check out his recent interview on the merits of a "buy and build" strategy, and visit his official website.
—By Alex Verkhivker
May 1, 2018