Uptick in M&A Activity Reveals Growth Opportunities
Posted March 7, 2011
It may come as a surprise that merger and acquisition (M&A) activity is picking up. Whether a company is on the lookout for strategic acquisitions, or is courting buyers, chances are getting better that a deal can be closed.
Globally, M&A activity in 2010 topped $1.29 trillion, up more than 23 percent from the previous year. Many of these deals are among international giants like Caterpillar, Chevron, Google and Unilever. But as the economy slowly improves, opportunities for growth through M&A are available for small and mid-sized companies as well.
Strategic vs. Financial
The current trend in M&A is toward strategic rather than purely financial deals. Buyers and sellers are often looking for a strategic match that complements their business, expands their geographic presence or eliminates a competitor. Struggling companies, including those emerging from Chapter 11 bankruptcy protection, remain vulnerable to take-over.
Although private equity firms had been less prevalent in the market, in part because there were fewer attractive companies to choose from, these firms, which are sitting on more than $400 billion in funds waiting to be invested, have returned to the market. They are investing in strategic new platforms and actively pursuing other strategic add-on investments.
Cash vs. Financing
Many companies that have made strategic acquisitions in the past year have done so using their own war chest of cash reserves. This has given them tremendous leverage in the marketplace, and, in some instances, the ability to acquire companies at a fraction of what they would have paid a year earlier.
However, for the strongest companies, including those with large inventories of equipment to use as collateral, and those with a healthy backlog of business, bank financing is becoming more available, even though the process is still arduous. The financial industry continues its risk-aversion mantra, so it may take several sources of financing to complete a deal where traditionally only one was involved. In addition, many private equity groups have moved into the financing arena in an attempt to deploy available cash, thereby creating additional financing alternatives.
Deal Structure
Acquisitions are generally structured in one of two ways:
- The purchase of the stock or ownership units of the target company
- A purchase of the target company's assets
Generally, a stock purchase brings all of the assets and liabilities of the target with it. An asset purchase allows the acquirer to pick and choose the assets it wants to purchase and the liabilities it is willing to assume.
Since the current economic environment translates to greater risks of unknown liabilities, unpaid vendors and potential unpaid taxes, an acquirer must give serious consideration to the structure of a proposed acquisition. An acquirer must also carefully analyze the integrity of the backlog, work-in-process, assignability of contracts and finished goods inventory. Comprehensive due diligence by qualified professionals is essential.
Earn-outs and Contingent Consideration
Another trend in M&A deals is the greater utilization of earn-outs and contingent consideration. The percentage of the purchase price that is contingent upon the future performance of the target has increased substantially. Buyers expect sellers to be able to prove their growth or performance projections before they are willing to write the check.
While the face of post-recession business growth has changed to become more strategic, opportunities remain to grow through M&A. With proper planning, structuring, due diligence and creative financing, a deal may be closer than you think.
Contact us to learn how to prepare for merger and acquisition activity.
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