Debunking Myths About Today’s M&A

There are number of myths surrounding growth and value building strategies that business owners and executives commonly fall prey to. These myths may prevent leaders from taking advantage of growth opportunities which can lead to greater business success. It is important to recognize that the following statements are not true for growing businesses:

Myth: Successful acquisitions are primarily driven by the economy.

The economy, of course, can have a significant impact on the ability to predict a target company’s future earnings (visibility) as well as on the availability of financing (credit). Acquirers today should carefully consider industry cycles and growth potential and evaluate their cash positions. But much more important to the success of an acquisition is specific strategy and execution. An acquisition that builds on the strengths and capabilities of the company and produces an “accretive” rather than a “dilutive” result will be successful. For this reason, even in a poor economy, successful acquirers are improving their companies by finding synergies that reduce the company’s cost structure, create economies of scale that utilize assets more efficiently, strengthen the management team, or permit faster revenue growth. These synergies can often be found despite difficult economic times.

Myth: A poor economy means it’s time to batten down the hatches.

No doubt, some businesses may need to cut costs and maintain cash to stay viable, or to cover working capital or capital equipment needs until sales return. However, companies that have the ability to pursue larger growth strategies should not wait. There’s an old but true adage: “You can’t shrink a company to greatness!” First steps may include increasing efficiencies by eliminating non-value-added steps, building cash reserves to reinvest, or adding to the management team. Ultimately, however, these steps also need to support revenue growth. In industries that are not experiencing sufficient organic growth, acquisitions are frequently a better growth alternative. While acquisitions are always risky, they are not just a strategy to be pursued during strong economies. Tough times present cost-effective opportunities to acquire overleveraged or undermanaged businesses from sellers who need cash or need to focus on their core business. Smart companies who have cash and are not overleveraged should continue to use acquisitions as a key strategy for business growth and positioning, helping them to be better tomorrow than they are today.

Myth: Financial buyers, such as private equity groups, have the upper hand when making acquisitions today.

In fact, strategic or “synergistic” buyers will likely dominate the M&A landscape over the next few years, especially if they have built up cash reserves, are not reliant on the capital markets for funding, and profit from true synergies. Private equity groups generally have a higher cost of capital because they need to return a higher percentage to their investors, and they primarily generate their returns from financial leverage, cost cutting and revenue growth. On the other hand, synergistic buyers generally have the significant advantages of both lower cost of capital and a greater opportunity to generate a portion of their returns through synergies and economies of scale, even in industries where growth is slower. Accordingly, strategic consolidations are becoming more attractive in various industries.

Myth: Successful acquisitions depend primarily on technical skills and experience.

Acquisitions are the most complex business transactions and there are dozens of skills needed, including valuation, accounting, tax, legal, government regulation, integration, negotiations, due diligence, equity and debt structuring, and all of their subsets. M&A advisors, along with good attorneys, accountants and other advisors, handle the details of the process so that the acquirer can focus on learning about the target business and developing a plan to make it successful. However, for everyone involved, trusting and effective relationships are even more important than technical skills.

Every transaction has its practical and emotional ups and downs – confrontations that require good counseling, coaching, mediation and negotiation. And it’s important to recognize that transactions, like other relationships, often fall apart not because of deal terms or structure, but because trust and confidence are not fostered between the parties. The risks of failure are greater today because transactions are taking longer to close and people need to work effectively together for several months. Relationship building matters in today’s deal market and careful diligence, disclosure and direct conversations are paramount to building trust. The reward is that good relationships often lead to a better cultural fit, a key driver of acquisition success.

Jim Gettel and Lou Banach are Managing Directors of Schenck M&A Solutions and each have over 20 years of experience in helping businesses with strategic growth. Schenck M&A Solutions is an advisor to privately-held middle market companies in strategic acquisitions, divestitures, recapitalizations, turnarounds and planning.

February 2010