Finance & Markets
REGIONAL ECONOMIES Delivering value Avoid making the same M&A mistakes as Just Eat
through the roof. A record $6.1 trillion of acquisitions were completed globally during 2021. Many were overpriced, and the new owners struggled to generate any sort of value from their subsidiaries. The same businesses, making the same returns, would likely sell for around one-third less in 2024. The lesson is that you should pick the timing of your deal carefully. “Research shows that between 70 and 90% of M&A fail to deliver on expectations” 2 Beware high prices It wasn’t just poor timing that elevated the price JET paid. It believed Grubhub had also been talking to its rival Uber Eats about a potential sale. That pushed the price to astronomical levels. During JET’s subsequent attempts to divest Grubhub, Uber Eats showed no inclination to bid for the company. One wonders whether it was ever really interested. The lesson is that price really does matter. A high price makes subsequent value creation unlikely, and allowing yourself to be spooked into bidding against a ‘ghost’ is inadvisable. 3 Stick to the strategy Looking at JET’s decision to acquire Grubhub begs the question, what was their strategy? It appears that it was to become the biggest company in the industry outside of China. However, being the biggest player in the market is of
deal cost $7.3 billion after demand for food deliveries soared during the pandemic. But it proved to be a costly mistake for both parties. Grubhub’s share of the US market soon shrank to just eight per cent (down from 70 per cent at its peak). JET spent more than two years trying to ‘dump’ its dire investment, finally selling Grubhub for just $50 million in November 2024. By that time, JET’s own value had plummeted from $30 billion to $3 billion and it was acquired by South African- owned investor Prosus months later. Many mergers end this way. The pages of the Financial Times are littered with ambitious business owners who showed more of an aptitude for destroying value than creating it. It doesn’t have to be like this. There are general rules that firms can follow to avoid such a dismal outcome. Here are four key lessons to avoid common value traps. 1 Timing is crucial The timing of JET’s deal for Grubhub – in the wake of the COVID-19 pandemic – contributed to its failure. The previous year saw a surge in demand for takeaway delivery services during a series of lockdowns. Grubhub made its one and only quarterly profit in 2020 as a result. Optimists believed this level of demand would continue to increase after the pandemic. Instead, demand for takeaway and grocery deliveries fell to almost pre-COVID levels. JET struck its deal with Grubhub at the top of the takeaway delivery market. Since then, losses have flowed across the industry. Alongside this, the timing couldn’t have been worse in terms of the M&A cycle. Following the pandemic, pent-up demand outstripped the supply of businesses that were available for acquisition, and prices were driven
TO THE CORE
1. Boards often approach M&A as a shortcut to growth as they are under pressure from investors. However, many deals destroy value because they fail to follow private equity’s rules for success. 2. Timing is crucial to avoid overpaying, as many did in the wake of the COVID-19 pandemic. High prices make it harder to create value. Buying more but smaller firms is often a safer strategy for growth.
by John Colley
F inancial firms that have a reckless attitude towards risk represent a significant threat to the wider ecosystem. They can cause systemic crises powerful enough to destabilise regional and global economies. However, they often view organic growth as too slow, putting pressure on boards to run the gauntlet of mergers and acquisitions (M&A). This allows companies to expand more rapidly, but carries much greater risk. Research shows that between 70 and 90 per cent of M&A fail to deliver on expectations. Worse still, 60 per cent destroy value and half of acquired assets are sold off again within five years. Just Eat Takeaway’s (JET) decision to buy its US equivalent Grubhub in June 2021 is a prime example. The 3. Only pursue deals that align with your strategy and deliver clear benefits. Identify plenty of targets and, if one appears too risky or expensive, move on.
Warwick Business School | wbs.ac.uk
wbs.ac.uk | Warwick Business School
58
59
Made with FlippingBook Learn more on our blog