The Buy Side

Reaping rewards with internal M&A.
Enid TsuiDecember 28, 2006

When executives at Wienerberger, a €1.95 billion Austrian building materials company, needed to find someone to head up its M&A team two years ago, they went straight to the City of London. Having recovered from the economic slump a few years earlier, the City—base camp for most of the big global investment banks—was buzzing with dealmaking activity once again and recruiters at the world’s largest brick maker reckoned they would be spoilt for choice. But, as CFO Hans Tschuden recalls, they also knew that they had a lot of wooing to do.

Though Wienerberger offered plenty that investment banks couldn’t—like a very entrepreneurial, flat corporate structure—there was one crucial area in which Wienerberger couldn’t even begin to compete: pay. After all, the double-digit growth in bonuses that the bankers have been raking in each year on the back of the M&A boom has shown no sign of slowing. As an Austrian company, says Tschuden, “competing against salaries in London is the biggest hurdle we face.”

But Wienerberger needed to persevere, he notes. As a company “set on developing our geographic footprint”—its empire already spanned 24 countries following more than 100 acquisitions over the past decade—M&A was high on its agenda. After a six-month search and help from an executive recruiter, Wienerberger found Anton Ulmer, an Austrian M&A expert in his early 30s.

Having lived abroad for eight years—three in Germany with Morgan Grenfell and five in London with JPMorgan—Ulmer had already been pondering a move back home. Despite a pay package which, as Ulmer puts it, is “competitive” by Austrian standards but less than what he could be earning in the City, Wienerberger’s offer was too good to pass up, and he joined the company’s two-member M&A crew in June 2005. Ulmer hasn’t looked back. Since his arrival, he’s been involved in a string of acquisitions, including two in Germany—Jungmeier and Bogener Dachziegel—and Baggeridge Brick in the UK, which is just weeks away from the final stamp of approval from anti-trust regulators.

Wienerberger’s story is a familiar one. Amid renewed record-breaking dealmaking activity, corporate M&A expertise is growing—of the some 9,700 M&A deals announced in Europe over the past year, nearly 8,000 were handled without investment bank advisers, according to Dealogic. It was a similar case in 2005. (See table below.) And in a pan-European survey undertaken this summer by IntraLinks, a virtual data room provider, 64% of the 83 corporate respondents said they were hiring or planning to hire more M&A staff in the course of the year.

“We’re at a typical point in the cycle where corporations are feeling rich and aggressive,” says Davide Taliente, managing director and head of European banking at Mercer Oliver Wyman, a financial services and risk management consultancy. As companies pursue more M&A-driven growth, he explains, they usually want to start “internalising” M&A skills and bring in senior expertise from investment banks.

Part of the reason for this has to do with the investment banks themselves. New research from Thomson Financial shows that the banks are big beneficiaries of the current M&A wave, earning a record $22 billion (€17 billion) in advisory fees in 2006 from the $3.2 trillion of deals announced worldwide by early November this year. And needless to say, because a bank’s financial interest is in completing transactions, it’s not always the best source of independent deal advice. Getting a firm grip on the more straightforward parts of M&A transactions and handling them in-house is one way that will help acquisitive companies keep a lid on costs, and possibly improve their M&A track record at the same time.

Indeed, there are big rewards for companies—particularly “serial acquirers”—when they can improve their M&A management skills. A study earlier this year from Cass Business School in London and Towers Perrin, a consulting firm, found that, unlike previous cycles in the 1980s and 1990s, deals this time round are creating, not destroying, shareholder value. The reason? The researchers concluded that companies are getting better at learning from mistakes made in the past and bedding down processes. (See The End of the Merger Curse?, CFO Europe, May 2006.)

But internalising M&A raises fundamental questions about how companies motivate and manage their M&A staffers in ways that can ultimately improve their acquisition success rates. As companies like Wienerberger are discovering, it’s not just about pay.

The Dealmakers

That could mean, first of all, a change in reporting lines. More often than not, the development of internal M&A skills has been ad hoc, and because it can involve various fields of expertise—from corporate finance to HR—it’s often not clear where M&A staffers should sit within an organisation. Should they be centralised or decentralised? Should they report to finance or to strategy? While there’s no right answer, the M&A teams that have the clearest lines of access to the top strategy makers—particularly the CEO and CFO—have a greater chance of delivering the deals that create value.

One company that knows a thing or two about that is Bayer, a €27.4 billion German pharmaceuticals and chemicals company. Bayer’s 15-strong M&A department has been busy helping it close transactions amounting to nearly €40 billion over the past five years, including 13 divestments worth around €11 billion and seven acquisitions. The latter included two additions to its healthcare unit: Switzerland-based Roche’s over-the-counter business and, most recently, German speciality pharma company Schering, which will boost the unit’s turnover to an estimated €14 billion.

The M&A department in its current structure goes back to the 1980s, when it had an evaluation team that sat in auditing and an execution team that sat in strategic planning. Since the late 1990s, the two have been combined and now report to Johannes Dietsch, group finance director. Heading up the team is Frank Rittgen, who has 12 reports at headquarters in Leverkusen and two in the US, each responsible for specific portfolios. (In the summer of 2007, he’ll be adding one more, in Hong Kong.) Not all of the team, however, are former investment bankers. It also includes former consultants, some internal hires and a “talent pool” of junior staff hired right out of university, who Dietsch likes to see trained up and then moved on to other parts of finance after three to five years in M&A.

Given the competition from investment banks and other acquisitive companies, “it’s always very difficult to find good M&A talent,” says Dietsch. However, he reckons Bayer is in a more enviable position than other companies—but not because of the pay. Rather, as a high-profile acquirer—with between 75% and 90% of all of its transactions done without the help of investment bankers—”the prospects for potential talent coming from outside is excellent,” he says. It also helps that the M&A department’s role has become so pivotal in all of Bayer’s dealmaking. “There will be no deal signed without the involvement of the M&A team,” he explains.

But what about incentives? Can Bayer compete with investment banking’s lavish reward programmes? Dietsch says that it wouldn’t make sense for Bayer’s M&A incentive programme to mimic those at investment banks, basing annual bonuses on the number and size of transactions. That could lead the team astray, encouraging them to chase after only the largest of deals. It also wouldn’t reward them for those times when they decide to walk away from a deal—a decision that potentially can be just as important for a company as making an acquisition.

Bayer’s M&A staffers have on occasion received one-off bonuses following a successful acquisition, but the main reward package is no different from that found throughout the company. This is based on groupwide objectives such as share price performance. However, a part of an M&A staffer’s annual bonus package focuses on the quality of a deal’s execution and whether they achieve the objectives set out at the beginning of each year, including “soft” achievements, such as how well cross-functional internal teams were managed during a transaction.

Deal Sweeteners

Cadbury Schweppes is another company with a long history of acquisitions which has found that it doesn’t need investment bank-like rewards to keep its M&A team happy. “The rewards are not transaction-driven at all,” says Mark Reckitt, group strategy director of the £6.5 billion (€9.6 billion) UK confectioner, who oversees both the 11-member strategy team and the five-member M&A team. The annual bonus for his M&A staff is dependent on hitting group revenue and profit targets. “As we review individual performances, we will look at how they have managed the portfolio of transactions they have,” he explains. “This wouldn’t have a bearing on the bonus but on salary increases and career prospects.”

Those career prospects are a lot greater today than they once were, thanks in large part to “a smartening up of the whole M&A process,” says Reckitt, who joined Cadbury’s M&A department in 1999 after stints in both investment banking and retail. A year after his arrival, M&A at Cadbury underwent a big change, moving from being a “business unit-driven” activity—in which the CEO’s and CFO’s approval was needed only at the end of a negotiation—to a very centralised, rigorous activity with pre-agreed milestones monitored along the way. “It’s a lot more effective in that, generally, we now know what we want to buy, and when those businesses come up for sale we have a good hit rate of buying them,” he says. “There’s a lot less energy being wasted across the group on acquisitions that are not going to succeed.”

Since then, Reckitt’s M&A team has been putting its energy to good use. In the first three years after the new M&A approach was introduced, Cadbury spent $8 billion buying 21 companies. Of those purchases, the one that stands out is the $4.2 billion acquisition of Adams, the second largest gum business in the world, from US pharmaceuticals company Pfizer. While Credit Suisse provided support on the transaction’s financials, Cadbury’s internal team took care of its overall strategy and managed the due diligence process. That due diligence process found a company that was potentially strong, but whose performance had been slipping, partly because it was suffering from underinvestment as a non-core division of a pharmaceuticals company.

To this day, CEO Todd Stitzer—the head of M&A at the time of the Adams deal—refers to it as “a truly transformational acquisition,” one that increased Cadbury’s confectionery scale by 50% and helped it gain a stronger foothold in markets like the US and Latin America, thanks to brands like Chiclets, Trident and Dentyne. As promised at the outset, the acquisition became cash generative by 2004 and according to Reckitt, the synergies identified by the M&A team—$120m in cost savings and $60m in revenue—have already been achieved.

As for career prospects, Reckitt’s M&A department over time has also become an ideal stepping stone for high-flyers at Cadbury. “Joining the M&A team is a great opportunity for people who have an operating background to stand at the centre and display their skills to a very senior audience,” says Reckitt, noting that one member of his team is now head of commercial for EMEA, another is finance director for Cadbury’s confectionery business in the US.

Career opportunities such as those Reckitt encourages are what Mercer Oliver Wyman’s Taliente believes is the single most important way companies can woo top M&A experts from investment banks and elsewhere. “It’s not the money [that will attract people to corporate M&A],” he says. It’s partly about work-life balance, particularly for those who worry about burning out from working the marathon hours required in investment banking. But more important, “it’s the ‘call option’ that they will have on a very different senior career within the industry.” That call option could even mean a career path that leads to the CFO or CEO office.

Wienerberger’s Ulmer certainly sees it that way. He concedes that he misses London, and had to readjust to a different performance culture from what he was used to in banking, “in which you measure your success by the incentive compensation you get at the end of the year.” But the trade-off is that in reporting to CEO Wolfgang Reithofer on strategy development and to Tschuden on execution, he’s getting a vastly different exposure to business than a banker. He reckons he now has “more job opportunities by having made this move than I had before.” Those are opportunities he doesn’t intend to miss. “I’m not going to retire in this role,” he says. Give him two or three years, and “I’ll be in an operational role or a CFO role.”

Additional reporting by Janet Kersnar