Publications

• 30 Second Ideas
• Accounting Updates
• Alerts
• Articles
• Business Surveys
• Construction Edge
• Healthcare Edge
• Insurance Edge
• Legal Talent
• Manufacturing Edge
• Not-for-Profit Edge
• Quick Links & Good Ideas
• SEC Edge
• Strategy Insights Blog
• Surviving the Upturn
• Tax Highlights

Article Author:

Are We Coming Out of a Recession? Is it Time to Take the M&A Plunge?

The U.S. stock market is soaring, commodity prices are on the rise, and there are signs that consumer confidence is growing. The positive news is countered with growing bank failures, indications that banks are still not lending, persistent unemployment, and concerns over the U.S. government debt levels. Despite the mixed bag of economic news, there was a significant increase in M&A activity through the fourth quarter of 2009 and bankers report “deals are in the pipeline.” Two general trends have emerged in the makeup of M&A deals—companies that have to sell due to over-leveraged balance sheets and/or cash flow issues (discounted prices) and strategic acquisitions of solid performers (premium prices).

Economic uncertainty and still-tight credit markets keep us in an M&A environment where cash is king and a well-capitalized business might be well positioned to accelerate growth strategy or buy market share at a significant discount. The pace of recovery in the equity market valuations and rising M&A activity may be causing some companies to worry that they must move quickly to avoid missing out. However, the risks are considerable and every company should be prepared to fully vet every possible deal to avoid the pitfalls that can destroy value.

Link to a Strategic Plan

Often an M&A transaction fails because a company deviated from its core competencies. Every potential merger or acquisition must be assessed for the fundamental attractiveness of the target based on how the transaction will further the strategic plan of the company.

Instead of buying a company because it is available, is attractive in its own right, or appears to be a great “deal,” make sure the acquisition fits into the company’s overall strategy. A strong link between the strategy of the company and any M&A transaction is critical for success.

Know What You Are Buying

Regardless of whether the target is a competitor, supplier, or customer, do not assume you know the business. Transactions can fail because of problems that were not uncovered or were misjudged during the due diligence process. To help mitigate this risk, it is important that the due diligence process include more than just an analysis of the historical financial statements.

The target’s performance metrics should be compared to others in the industry, and industry trends should be analyzed for indications of future performance. There is no substitute for legal due diligence to help uncover potential litigation or onerous contracts. Careful due diligence can minimize unexpected events, but it will not eliminate them. A degree of risk is inherent in any M&A transaction.

Have a Plan for After the Deal Closes

Often a company is so entrenched in closing the deal that it fails to provide a solid integration plan. The lack of an integration plan before the transaction closes may undermine an acquisition’s strategic and operational advantages.

It is critical that integration planning start early in the process to avoid surprises later. The target’s eventual integration may have a tremendous impact on future performance or deal structure and addressing these matters early in the process may save time and money.

For more information, please contact Mark Robertson, Director, at 312-980-3263, or your Blackman Kallick representative.
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.