Inorganic growth activity expected to rise

Written by on August 6, 2010 in Mergers & Acquisitions - 2 Comments

By Ron Morgan, Co-Founder and President of Commercial Services at MorganFranklin

 

Reflecting the lackluster performance in mergers and acquisitions, more than 80% of dealmakers reported a fair to poor M&A market according to the last three surveys conducted by the Association for Corporate Growth (ACG) and Thomson Reuters.

This report should come as no surprise to those in the industry. Over the past three years, company value became increasingly difficult to pinpoint. As asset values fluctuated and business slowed, owners chose to hold on to their companies until clear value returned.

A separate survey recently conducted by MorganFranklin and the ACG National Capital chapter attempted to measure the pulse of M&A activity in 2010, and the preliminary results tell a far less gloomy story than in previous months.

Of the industry leaders surveyed, 92% anticipate being involved in a transaction in the second half of 2010 or 2011. The majority of survey takers (54%) anticipate that acquisitions and divestitures of businesses will be the most active transactions. Even as the deal market rebounds, most survey respondents (54%) estimate that valuation expectations will continue to be the most significant challenge facing companies engaged in transactions.

This recovery period, as lasting as it may or may not be, has proven to be a buyer’s market. While liquidity remains an issue, companies are beginning to sure up balance sheets and increase value. In fact, 75% of survey respondents anticipate that growth of business and market share will drive transactions as companies that weathered the storm successfully regain confidence and re-enter the acquisition marketplace.

Fortunately, the long-term outlook is even brighter. Nearly 80% of those surveyed anticipate that M&A activity will return to level-highs seen in 2006. But as we have learned throughout the “Great Recession,” there is often a catch. For example, in this case, most do not expect a full recovery in M&A activity before 12 to 24 months have passed.

Closing a deal isn’t the end game. It’s successful integration. According to respondents, the most significant post-close acquisition challenges are expected to be:

  • Human capital integration
  • Cultural differences
  • Process integration

As the M&A market demonstrates a rebound in activity, one thing remains constant: appropriate due diligence will ensure the most successful transaction possible. Early in the deal life cycle, companies must determine value drivers and integration risks, which can be easily overlooked in the race to close. Ignoring signs of operational health and simplifying integration planning can cause deals to turn sour in periods of hasty growth. If this recession has proven one virtue more valuable than others, it is a lesson that has been preached since the first grade: Do your homework.

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2 Comments on "Inorganic growth activity expected to rise"

  1. Bob Hostetler August 9, 2010 at 12:51 pm · Reply

    My personal experience agrees with the survey results. A couple of additional observations include the fact that companies are currently hoarding cash. Motivators to reduce cash positions usually have a quick positive EPS (earnings per share) upside. First, and perhaps obviously, is for share buybacks (treasury stock). Second is for strategic acquisitions (to the point of the article) towards “buying” some positive EPS via acquiring top line revenue and gutting OPEX to the extent possible via eliminating duplications. Other M&A seems to either be targeted towards adding a new technology or vertical to an established horizontal presence at a bargain price point. These current trends towards buying low and further reducing expenses seem to explain part of the “jobless recovery”.

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