Interest in mergers on the upswing in post-election era
While any long-term economic impact of the new administration remains to be seen, KeyBank research shows a post-election uptick when it comes to middle market business leaders’ interest in mergers and acquisitions.
KeyBank regularly surveys more than 300 leaders of businesses with revenues between $20 million and $4 billion. Nearly a third of the middle market business leaders surveyed post-election indicated they are likely to complete an acquisition in the next six months, up 21 percentage points from pre-election results.
When we surveyed leaders in late summer 2016, 15 percent of those surveyed stated the election results would have a high impact on their company; post-election, that percentage increased to 22 percent.
KeyBank’s research shows enthusiasm for M&A is particularly notable among leaders of larger middle market businesses—those with revenues between $500 million and $4 billion.
When the M&A environment heats up, there is an understandable sense of urgency. Competitors who have the same strategic focus are likely to start looking at the same targets, which could lead to reactive acquisitions.
That sense of urgency, however, should be tempered by staying the course in terms of your company’s overarching strategic focus. Expanding through acquisition is a significant investment of capital and other resources. A good deal can get your business moving even more rapidly; a bad deal can derail your business.
Avoiding buyer’s remorse boils down to having a disciplined approach to acquisition that begins well before the actual due diligence process.
To avoid spending time, energy and money chasing the wrong opportunities, start your diligence with a short list of acquisition targets with characteristics that meet previously established guidelines. In short, know what you want to buy before you start looking.
Here are some suggested guidelines:
You know your business. Pick targets that let you put your industry expertise to work. Diversification is a good goal, but not if diversifying moves too far from your firm’s core strengths and strategy.
Be very clear on what you will get with acquisition. For example, know exactly how your business will benefit by being in a new geographic market, by having access to products that complement your products or by strengthening your business by adding top talent.
Likewise, know what you will give up in order to obtain the full value of the deal. In some ways, a successful acquisition means making two plus two equal five, not four, because you are able to boost output without increasing expenses. Look at the combined operation for potential consolidations from both sides of the table.
Set strict financial limits and expectations to ensure a disciplined deal that doesn’t damage your company. Review your business financial picture so you know—in advance of identifying targets —how much equity you are willing to contribute and how much leverage you are willing to incur.
Have a general sense of your return on investment, and then refine that ROI for each potential target, factoring in the financial impact of previously identified benefits.
Take business culture into consideration. Cultural fit is more than a general shared understanding of how business is done. Cultural fit relies on a clear understanding of how a prospective acquisition functions, from operations to customer service to employee communications.
Adhering to these guidelines will ensure a disciplined due diligence process. Due diligence is its own discipline that combines a sense of urgency with scrutinizing and challenging all aspects of a potential acquisition.
While the guidelines above improve the probability targeted companies are appropriate, significant resources still need to be allocated to the process. Business leaders need to oversee a process that includes knowledgeable and capable employees and trusted outside professionals.
An undisciplined due diligence that is not well-led and resourced can result in buyer’s remorse. Examples of buyer’s remorse include over-paying, a poor cultural fit that creates inefficiencies, obsolete inventory, environmental problems, legal issues and loss of a major client.
In the end, disciplined due diligence will protect against excessive urgency caused by a hot M&A market. Because M&A is usually a major investment that fundamentally changes a company, you can’t afford buyer’s remorse.
James Barger is president of KeyBank’s Rochester market. He may be reached by phone at 585-238-4121 or email at firstname.lastname@example.org.
2/17/2017 (c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email email@example.com.