I was going through some old books at home, looking for something to read on a lazy Sunday morning and stumbled upon an old book titled "Deal from Hell: M&A lessons that rise above the ashes" where the author, Robert F Bruner, outlined views views and merger failures and what he thought of the failures.

Just like when you go through an old album, you just can't put it down.

Anyway, I thought that it would be interesting to look at some of his findings and compare them with the M&A that has happened ("SapuraKencana Merger") and the M&A that might happen (the CIMB, RHB & MBSB proposed merger).

Robert F Burner, in his book outlined 6 causes for merger failures. And merger failure does not mean that the merger itself did not materialise, but rather a merger that resulted in a destruction of market value, financial instability, impaired strategic position, organization weakness, damaged reputation and violation of ethical norms and laws. In other words, post merger mess ups.

Based on the recent performances of both the fundamentals and share price of SapuraKencana, I definitely do not think that the merger was a failure. I thought I would also throw in the proposed mega bank merger to see how does it stack.

1. The business and or the deal were complicated.

SapuraKencana: Although the terms of the merger appeared complicated with all the SPV, share swap and pricing and swap ratio, it actually was a very straightforward deal.  Two companies of almost equal size (approx RM6 billion each) decided to get together. The valuation was done such that Kencana was valued just slightly  more than Sapura, which would give the shareholders of Kencana slightly above 50% shareholding in the new entity and Sapura shareholders slightly below 50%. Oh by the way, since the valuation was being done, the price was set at premium to the historical prices of both companies, so on the onset, both shareholders did not lose (and since the share price did not drop, both shareholders did in fact win). That was it.

Business wise, both companies were in the same industry doing complimentary things. I did not expect any major system upgrades and changes in the business model had had to be made. This 'no-complication' enabled the people on the ground to quickly focus on business rather than spending too much time on integration.

Mega Bank Merger: In my view, it has the potential to be uncomplicated and straightforward. There is one common major shareholder who is EPF would could make quick decisions. I have a feeling it is not going to be done by purely cash.  My reason is, firstly,  CIMB, like many other banks under Basel regime, would be holding cash dearly to meet the various threshold. Secondly, the share swap deal allows flexibility to assign premium much easier than cash. In the cash deal, the premium would have to be realized, in a share swap deal, the premium is on paper. If the merger decide to follow the SapuraKencana route, they may use a SPV which would use a combination of share-swap and cash to buy the businesses of the three, and if they can convince some financiers to lend them the money for the cash portion that even better as it is almost akin to a 'leveraged buy-out' by the existing shareholders. If you need more info on the, drop me an email on the comment box and I will send you my lengthy opinion.

Business wise, this is slightly a different story that the SapuraKencana deal. In the SapuraKencana deal, the merged entity was going to be involved in a rapid-growth (albeit very risky) and margins that are big enough to absorb any temporary operational slack during the transition period. The focus was on boosting the revenue by getting more contracts. However, in the Mega Bank merger, the industry is considerably more mature than the oil and gas industry in Malaysia. Margins are very competitive and operational efficiency is the key to avoid failure.  Slacks in the operations during transitional period post the merger (if it happens) could attack the bottom line very quickly. Nonetheless, to be fair, both RHB and CIMB are seasoned acquirers so they both should know how to handle the business transitions pretty well.

The other 5 causes and analysis is here.

Happy investing peeps.