Mergers and acquisitions: Have you considered everything?

It all comes down to improving your company – and your profits. After all, this is what business is about and this is what you and your stockholders expect from an acquisition: a stronger company and more investment return.

Without careful valuation of a target company, however, your company may lose in the end. Stock enervates, values plunge, shareholders bail. What options are available to ensure success?

Know before you buy

Sound fiscal policy requires knowing before buying. Few people purchase a car without first researching the brand: gas mileage, recall history and resale value are all considerations. In an acquisition the stakes are much higher, and while absorbing the cost of a poor car decision may be minor, absorbing the cost of a poor valuation is not. Below is a summary of When Mergers Go Wrong as we apply it to our practice.

Often termed, “The Winner’s Curse”, it is an unfortunate fact that too frequently, the acquisitor pays the target company an average of 10-35% in a preannouncement market value premium. The merger, then, benefits the shareholders of the target company, rather than your company. This makes sense, as, especially in struggling target companies, absent a recoup of their investment, shareholders would not approve the sale. In the long run, however, does it benefit you?

Our knowledge is your gain

No on can guarantee an outcome. We, however, base our practice on these strategies from an article in McKinsey Quarterly; their five guiding principles that help are:

  • Be shrewd: As noted in McKinsey, top-line synergies can often have an inflated value. Does your counsel know how to spot them and advise you properly?
  • Think future: Similarly, dis-synergies can lead to financial deflation down the road. Do you know what defensive strategies to employ before purchase?
  • When you assume, you make an…: You know the old adage about assumptions. Have you thoroughly investigated, some might say scrutinized, market share and price?
  • Benches aren’t just for baseball: What benchmarks are you considering? Have you overlooked or over-valued one or another? Performance, profitability and turnover are some things to consider, but what else affects long-term gain?
  • Be realistic: Rome wasn’t built in a day and synergies may not materialize as quickly as you anticipate. Have you assessed a realistic time frame for synergies? Based on diligent evaluation, is your expected timeline realistic?

Engage wise counsel

It’s transparently clear that business transactions can be murky. Both the target company and the acquisitor want the best financial outcome.

You owe due diligence to yourself and your shareholders. Retaining wise legal counsel who apply the above principles can ameliorate unforeseen pitfalls when acquiring a new business and help ensure the best possible outcome for all your business.

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