In this issue, we examine some of the critical aspects of mergers and acquisitions, and we bring you some practical advice on how to avoid some of the common pitfalls from Bob Borghese, a noted M&A authority and faculty member of The Wharton School.
Also, to provide you with a macro economic perspective for the emerging business sector, we are introducing a new column, Outlook. This column features analysis from Bill Dunkelberg, a nationally recognized expert and Chief Economist for the venerable National Federation of Independent Business.
As always, we hope you find this information valuable. If you have any thoughts or suggestions, please let us hear from you at insights@antiphony.com.
Making M&A Work for You 
Robert
J. Borghese
is a corporate and transactional attorney for emerging growth companies.
He is on the faculty of The Wharton School and co-author of M&A
From Planning to Integration: Executing Acquisitions and Increasing Shareholder
Value. Recently, he has appeared as a featured guest on CNBC's Power
Lunch and CNNfn's Money Gang.
In the mid-1990's, M&A activities took place at a record pace. In addition to the high volume of small to mid-sized transactions, the millennium ended with a string of large, high profile deals with never-before-seen valuations such as the Citicorp-Travelers merger, the Daimler-Chrysler merger, and the AOL Time Warner merger.
The slowing US economy and declining corporate profits drastically reduced the high stock prices and readily available credit, which fueled the most recent M&A activity. This trend, coupled with the unwinding of many of the mega-deals of the 1990's (including Citigroup, Tyco, FleetBankBoston), has left many companies considerably more cautious about pursing M&A opportunities.
However, for companies that can raise the necessary capital, now may be an ideal time to pursue M&A activities as corporate valuations are beginning to return to more realistic levels and distressed companies can be had for bargain-basement prices.
For companies that choose to embark down the M&A path, care should be taken to avoid the most common reasons that these transactions fail:
- Lack of a clearly articulated growth strategy and failure to think
through how an acquisition strategy fits into an overall growth strategy.
To be successful, companies must have a more compelling strategic rationale
than merely to achieve scale in a consolidating industry.
- Overpayment for acquisition targets. Overpayment typically results
from failure to rigorously assess the target's intrinsic value, and
the cost-savings, revenue growth and other synergies that are projected
to result from the transaction. In many cases, expectations of cost-savings
and cross selling are unrealistic, and inevitably take more time to
materialize than originally expected.
- Rushed due diligence and failure to carefully investigate strategic,
financial, legal and operational issues. Typically, financial and legal
due diligence are adequately performed (due in part to the retention
of outside experts), but strategic and operational due diligence often
fall short.
- Lack of attention to the cultures of the combining companies and underestimating
how difficult it will be to assimilate the disparate corporate cultures.
- Failure to carefully monitor and manage the process of integrating the two companies. Integration is a full-time job that begins with due diligence and runs through the ongoing management of the combined entity. To be successful, companies must empower broad based action with a mix of participants from both of the combined companies.
The Metrics of M&A Jeffrey Babin, Antiphony (jbabin@antiphony.com)
Navigating the intricacies of an M&A transaction requires specialized expertise.
The first phase of the M&A lifecycle encompasses the sourcing and screening of potential M&A candidates. At Antiphony, we've developed a specialized M&A process that is a core component of our proprietary Relaunch™ methodology. This structured framework helps identify, qualify and move prospective acquisition candidates through an M&A pipeline that is much like a traditional sales process.
Some of the key first steps for getting started with your M&A activities are:
| • | Develop both strategic and financial acquisition criteria. |
| • | Identify a specific acquisition team to drive the sourcing of potential candidates. |
| • | Brainstorm acquisition sources. |
| • | Create formal metrics to serve as a ranking system for assessing potential candidates. |
| • | Measure the yield (number of companies converted) at each stage of the screening process to ensure efficiency and effectiveness. |
M&A from Planning to Integration: Executing Acquisitions and Increasing Shareholder Value
Robert J. Borghese and Paul F. Borgese (ISBN: 007137521X)
A practical, step-by-step guide that addresses key issues such as how to perform thorough due diligence and avoid M&A pitfalls.
Sentiment "Heats" Up and the Real Economy Follows
William C. Dunkelberg, PhD., is a national authority on entrepreneurship,
consumer behavior, and consumer credit and government policy. He is Professor
of Economics at the School of Business and Management, Temple University,
and has served as Chief Economist for the National Federation of Independent
Business since 1971. Accounting for over 50 percent of GDP, the health of small business is a critical determinant of the economic outlook and so far this year, the news is good - the giant is stirring. Nothing is "surging", just improving modestly, sometimes erratically. But the direction is UP.
There appears to be enough strength in the economy to allow the Fed to start taking back the "911" cuts, leading the federal funds back toward 3%. Inflation looks a bit shaky - the recovery will stabilize goods prices (which declined about 4% in the past year), exposing service inflation (which was about 5.5% over the past year). This will make a Fed rate hike a welcome event to many economic observers. Some will see the Fed move as "concern" about inflation, others will see it as diminishing the likelihood that inflation will re-appear. In the meantime, rising oil prices will produce the usual "inflation scare" in the financial markets. As a "tax hike", rising oil prices will not be particularly helpful to the recovery, but growth will plod ahead for the year.
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