Creating Value from Acquisitions: The challenges facing Liberty Media and Formula One.

The dramatic news that Liberty Media is in the process of acquiring the ownership of Formula One has dominated the news in the last week. Much has been written about the implications of this move and whether or not Formula One CEO, Bernie Ecclestone, and his new Chairman, Chase Carey, will be able to work together.

I decided to get some advice on the challenges of acquisitions from one of my colleagues at Cranfield. Dr Richard Schoenberg is an expert on mergers and acquisitions. I asked him about the general challenges such an acquisition may present to the parties involved. Richard’s observations are shown in italics, followed by my comments for the Liberty Media/Formula One deal.

Acquisitions raise many management challenges. Research conducted at Cranfield School of Management reveals that 50% of all acquisitions are ultimately classified as failures by the organisations involved and actually destroy shareholder value for the acquiring firm.

OK, so first point, although there is a lot of optimism around the Liberty deal the odds of it delivering are 50:50. Just because CVC Capital Partners made a huge amount of revenue doesn’t mean to say that Liberty will do the same. We’re now in a different time with different motivations. The Liberty Media acquisition values Formula One at $8.0 billion, although CVC Capital Partners will relinquish control, they will remain a shareholder.

There are two basic determinants of acquisition outcome. Are value creating synergies potentially available from combining the two organisations and can these synergies be realised in practice?

So what could ‘value creating synergies’ be here? Presumably Liberty is intending to make use of the F1 asset as a stream of content for its media platforms. Given that Liberty has its revenues primarily coming from the US, where F1 has little or no profile, we can only assume that the intention is for F1 to help Liberty grow in new markets outside the US where F1 is stronger. Synergies essentially mean that 1+1=3, that by combining F1 with the Liberty operation more value will be created through future revenues, earnings and perhaps cost savings, which moves us to the next point, integration.

Acquirers face a difficult challenge in deciding the degree to which the two organisations should be integrated following the acquisition; under-integration may hinder value creation, while over-integration may lead to organisational conflict and value destruction.

This is the fundamental question. CVC Capital Partners essentially allowed F1 to run how it had always run, with Bernie Ecclestone in charge they simply sat back and took the revenues. They were a holding company, with no desire to create synergies or integrate Formula One with their other businesses. However, Liberty is a very different operation. They are not an investment company, they are not focused on Formula One as a cash cow or revenue stream, but as a vehicle to help develop and strengthen their presence in the global media and entertainment industry. Therefore they need F1 to integrate with their platforms and media strategy going forward. If they are to secure the value of the deal in the medium and longer term, Formula One  cannot continue to be run as a totally independent operation.

A second common implementation issue is that of clashes of corporate culture, which have been shown to increase employee resistance as differences in the philosophies, values and practices become exposed in the post-acquisition period. Cranfield research suggests that differences in risk orientation between the two companies is the key cultural dimension to consider in M&A.

This is the big issue. Formula One has operated a hugely successful business model. Based, to begin with, on securing media rights for delivering a world championship series and then, more recently, growing revenues from the circuits – by focusing on those willing and able to pay tens of millions of dollars to host the race – and then by extending the number of races. For 2016 we have a record 21 races and many in the teams regard this as right at the limit of what they can achieve with their current personnel. The natural extension of the Ecclestone model is to put on more and more races from circuits who can pay for the privilege. However, growing the value of the business between Liberty and F1 will require a different model. One that is based on developing a wider social media platform and one that potentially allows greater engagement and involvement with a group that haven’t figured strongly in the Ecclestone/CVC model – the fans. This means that new ways of finding value in these relationships have to be found, whether through media subscriptions, apps to access the races through multiple platforms and ways to engage that build up the commitment of fans and the revenue streams for Formula One. This is where the clash, if there is one, will come. It will be a clash of business models. It may not happen for a year or so, but for Liberty to capture the value of the Formula One franchise it will have to happen, and this is where the value of the acquisition will be made or lost.

Finally, in the midst of these internal challenges, the customer can all too easily be forgotten. Typically, synergies are evaluated as net additions with the expectation that the existing businesses of both organisations will be unaffected and remain constant. This assumes, of course, that the loyalty of all current customers will be maintained post-acquisition. This may be a dangerous assumption unless the key factors underlying the customer relationship can be maintained or enhanced following the acquisition.

And this is the risk. In focusing on growth through developing new markets and thereby shifting the business model, Formula One may disconnect from its current audience of older, higher income individuals based in Western Europe. It could find itself losing this traditional base and unable to secure and monetarise revenue from new markets. This is an undoubted risk, but the alternative is to do nothing, to remain in the existing model and not to embrace the shift in technologies and markets that is creating a race for global leadership in the media and entertainment industry. In this case doing nothing could be the biggest risk of all.

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