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M&A Report: Finding the right option when facing an acquisition

By Lucia Walinchus

info-graphic_target-response-color“It’s a seller’s market right now. There’s not a lot of great acquisitions relatively speaking on the market and so when good opportunities come up, it’s highly competitive,” said Scott Fuzer, director of the mergers-and-acquisitions practice at West Monroe Partners in Chicago. “The last several years have been, especially about two years ago, just record-setting in terms of the volume of transactions. So a lot of the pipeline, if you will, has been flushed.”

Fuzer said that while the number of deals has tapered off, the dollar amount of the deals has risen, thanks to restricted inventory and private equity funds flush with cash.

“You’re probably getting a lot better purchase price for those organizations today then you would have say four, five years ago,” he said. “The last thing a private equity firm ever wants to do is give the money back to their investors because they can’t put it to work. That raises concerns about their ability to make deals happen.”

According to PitchBook, a Morningstar data company, in North America, 9,801 mergers and acquisitions came to fruition in 2016, down 24 percent from 12,832 in 2015. The total deal value stayed relatively flat at $1.4 trillion, down 7 percent from $1.5 trillion the year before.

The median of individual deals edged up 20 percent, from $30 million in 2015 to $36 million in 2016. The average value of a deal climbed 36 percent, from $373 million to $508 million.

In Europe, the trend was even more pronounced, with 8,543 mergers and acquisitions in 2016, a dip of 23 percent from 11,087 the year before, whereas total value rose 9.5 percent to $746 billion from $681 billion.

The elephant in the room – Amazon’s proposed takeover of Whole Foods – has pummeled grocery stocks and sent a chill down the spine of potential IPOs.

“That kind of stuff is exactly why a lot of my clients just get really scared of either being publicly traded or losing control of their company. Because I don’t think Whole Foods would have been in that deal or looking for it at all if it were not for that activist private equity investor who built up a 10-percent stake in Whole Foods,” said Stuart Sullivan, private banking manager for Arvest Bank in Oklahoma City.

The Amazon deal doesn’t really represent the typical targeted takeover, though, said Jerry Larson, managing director of public accounting, consulting, and technology firm Crowe Horwath LLP in Chicago.

“The mega-deals get a lot of the press, but it’s not the center of the bell curve of the M&A volume market. The center of the bell curve of the volume tends to be middle-market companies and small and midsized businesses is where the largest volume is. Not necessarily the largest aggregate dollars. But once you get into that space, the businesses tend to be private. So it’s more likely that they will be part of a strategy for an exit of a family or some other reason. Or that company selling out to private equity to obtain access to growth capital.”

So what’s the best move for a company when a potential suitor comes calling? Negotiate for a higher price? Try to find a better offer? Dilute your market share to avoid the sale?

All three experts agreed the answer depends on the individual needs of the company.

“When they come to me and say that ‘these people want to buy the company up, and I don’t want to sell to them,’ I’ll generally ask why. And it’s almost always around price,” Sullivan said. “They’ll say it’s worth way more than that. And I will say yes it is. With you. You are really the value of the company. Without you, this whole thing falls apart. Because you are the entire C-suite by yourself. And you own all the relationships that are important for the company. So if you get hit by a truck, it doesn’t matter if someone can buy this company. It doesn’t have nearly the cash flow that it does with you at the helm.”

Sullivan said selling the business is often the right move, though, for company founders.

“They can invent stuff, and they can carry the vision forward. But scaling is a whole different skill set. It’s very rare that a person who starts a business is the right person to grow it,” he said.

Another option available to a targeted company is executing a shareholder redistribution plan – a so-called “poison pill.” The tactic has been controversial since its introduction in the 1980s.

“The stock market reaction to adoption has been thoroughly inconclusive. Studies say it’s good, it’s bad, they really are all over the map,” said Peer Fiss, a professor of Management & Organization at the University of Southern California.

Fiss co-authored a 2014 study, published in the Academy of Management Journal, that looked at the effects after a company disclosed its intention to execute a poison pill.

“Just how we talk about that, your announcement, has an effect on the stock market. The stock market likes explanations or accounts that are more aligned with their expectations, and evaluate those data,” Fiss said. “But beyond that, it also matters who is speaking. Is it somebody who is obviously self-interested or who looks more reliable? And then, in what context.

“So if you’ve had a company that’s been doing really well, and they say, ‘look, we’ve been generating good returns for you, and now we’re adding a pill,’ really it’s for your protection,” he said. “The market liked that a lot better than if you have a company that has weak prior performance, and they’re saying now we’re adding a pill – that looks a lot more like management entrenchment.”

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