M&A: Off To A Cool Start, But Be Ready

By Mark Fagan of Citrin Cooperman

Deal count and deal value was off to an underwhelming start in Q1 with a substantial decrease as compared to Q1 and Q4 of 2015.  Of the mergers and acquisition (M&A) activity that occurred in Q1 of 2016, much of it was within the B2B space (over 38 percent). There was also strong deal flow in the IT, healthcare and financial services industries.

screen shot 2015 08 31 at 3 41 10 pm1 M&A: Off To A Cool Start, But Be Ready
fagan mark M&A: Off To A Cool Start, But Be Ready

Mark Fagan
(Photo courtesy of Citrin Cooperman)

screen shot 2015 08 31 at 3 41 10 pm1 M&A: Off To A Cool Start, But Be Ready

Although this has been a cool start to 2016, the M&A market is still enjoying a robust appetite as compared to the six years pre-2015. Going into 2016, 63 percent of CEO’s in upper-middle market firms surveyed in a Citizens Bank Middle Market M&A survey are either currently involved or expect to actively pursue acquisitions in the next 12 months. While the survey shares results that more than half of decision makers are acknowledging that growth through acquisition is becoming the strategy of choice, there isn’t necessarily such a thing as a “done deal” any more. As we have found with our clients, and from other market sources, buyers and sellers are more willing to walk away from a deal than in the past. This M&A cycle comes at the heels of the Great Recession, which is a unique circumstance to past cycles. As a result, all parties in an M&A deal are less likely to fall into the trap of an overheating deal market. Also, although the mega-deals dominate TV and print, lower middle market, and middle market deals (companies with $20 million – $250 million in revenues) are responsible for the vast majority of the deals in 2015 and 2016.  According to the Citizen’s Bank survey, one third of the middle market is open to selling in 2016 – citing the current market climate may be more favorable than potential increase of global economic volatility and rising interest rates.

Currently, CEOs operating in most industries are pessimistic on significant organic growth in the US for 2016, and the same is expected from international sources of revenues. CEO’s looking to drive growth will need to include acquisitions in their plans. In the big picture, it looks like the technology, pharma and life sciences, and industrial products industries expect to see a lot of deal flow in 2016. The continued suppression of low oil prices will give some industries a boost in their gross profit to help fuel acquisitions, but low energy prices have a negative impact on as many industries as they help.

To be sure, most of what drives the M&A market is out of the control of a CEO. What is in his or her control is the attractiveness of the company he or she leads. There are many things a CEO should do to maximize enterprise value when the opportunity to sell comes along:

 

Create A Sustainable Company

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If the CEO is perceived to be irreplaceable, enterprise value will take a big hit. Make sure all parts of your company (sales, marketing, operations, and finance) are being run based on processes and procedures, not the talents or personalities of one or two individuals.

 

Develop A Culture Of Accountability

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Having a sound corporate strategy counts for nothing if you don’t have the means (and the people) to implement it effectively. Your entire organization must accept and embrace a higher level of accountability and the pressures that go along with constantly trying to raise the bar. This does not happen overnight, and needs to be reinforced through communications and actions on a regular basis.

 

Understand Your Customer’s Needs

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I was recently doing some research which led me to the homepage of an impressive technology company called Cognizant. It read “1/3rd of millennials believe they won’t need a bank in 5 years. That’s why we’re helping leading banking and financial services companies reimagine the bank of the future as a blended virtual and physical space, where business can take place anytime, anywhere”. Cognizant is thinking of their customer’s customers. How powerful is that?

 

Create A Talented Leadership Team

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Companies are defined by people. It sounds a little contradictive to my first point, but think of it this way: match talented and motivated employees with a sound business model, proper policies, and procedures, along with a culture of teamwork and accountability and the result will be something that will attract buyers. A good leadership team must be compensated at market rates, which will include some form of equity kicker in the event of a change in control.

 

Align Ownership

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The first step is to get all the owners on the same page. When an organization has several or even many owners, it is critical that the leader understands the boundaries that would produce acceptable terms for any sale. This would include retained interest, valuation, ongoing employment, tax considerations, and new duties and responsibilities. All too often, when ownership is not aligned in their thinking, a lot of hard work and cost can be squandered as a transaction falls apart.

 

Mark Fagan, CPA, is the Connecticut office managing partner for Citrin Cooperman, the 22nd largest audit, tax, and advisory firm in the country.  Mark brings over 20 years of experience advising clients in the construction, financial services, manufacturing and distribution, private equity, real estate, and technology industries on several issues, including mergers and acquisitions, profitability consulting, and business strategy.

The views, opinions and positions expressed within this guest post are those of the authors alone and do not represent those of CBS Small Business Pulse or the CBS Corporation. The accuracy, completeness and validity of any statements made within this article are verified solely by the authors.

 

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