M&A Trends

A  recent article in M&A Today offered some observations concerning current and future M&A trends.

“The business world is constantly changing.  For the first half of the 20th century, vertical integration was the objective in which, oil companies, for example, owned the entire process from drilling to retailing at the gas station.  From 1950 to 1980, diversification was in vogue.  Recently, the trend is to outsource everything except the core business.  One of the new business models known as the new profit imperative is to go downstream and get closer to the ultimate customer.”

Today’s M&A Climate

Many companies still look to acquisitions as the best way to increase both capability and market share.  Acquisitions generally add complementary products, new technology or increase geographic coverage.  Interestingly, today’s companies are investing in new ventures, while, at the same time; divesting themselves of some of their original businesses.  Since these “original” businesses now have low margins and slow growth, they are being sold off.  Quite a few of the large public companies have spun off some of their original core businesses.  One company – Perkin Elmer – sold off all of its businesses including its name and reinvented itself as PE Biosystems.

“The previous M&A drivers, such as the need to grow externally as well as internally; the pressure for industries to consolidate; and the ongoing globalization, are all prevalent.”

Tomorrow’s M&A Climate

1. “Strategic acquirers will not only be more particular and demanding about the fit of the target company, but they will continue to divest divisions with the least potential or with low returns.”  Edward C. Johnson of Fidelity Investments summed it up best: “My own rule of thumb is that a business has to be good for the customer (quality), good for the company (profitable), and good for the employees (rewarding).  If we only achieve two out of three, we have not succeeded.”

2. Gone are the high prices of the late 1990s.  “The structure of the transactions will have a higher cash component, but there will be an emphasis on more contingency factors or tighter representations and warranties in an attempt to minimize risks inherent in the deal.”

3. Intangibles will be more important than ever.  Areas such as “the brand” will be more important.  Branding represents a company’s “credibility, its true identity, its meaning, its uniqueness.”

4.  “The use of strategic alliances and joint ventures will be used more frequently as a forerunner or in lieu of acquisitions.”  Technology changes so quickly today that one company, especially in hi-tech, can’t do everything.  Alliances and joint ventures provide earnings without the dilution of acquisitions.

5. The requirements of the new Sarbanes-Olxey regulations will impede a lot of acquisitions, according to industry experts.  This increase in regulatory requirements due to this new law may not only slow down the process, but may actually kill a lot of deals. This is especially true when public companies acquire a privately held one.  Sellers of these companies are going to provide a lot more audited financial information.

6. Over the years, many mergers and acquisitions have been within the same industry.  There is a trend towards merging companies that can “piggy-back” ancillary services.  The recent attempt by Comcast to merge with Disney is a good example – distribution merging with content.  Another excellent example is General Electric.  They manufacture jet engines, turbines, medical equipment, finance it through a GE finance unit, and then service it through another GE division.  The trend seems to be that more manufacturing companies “will acquire relevant service companies as a way to capture more profitable businesses.”

More recently there has been a trend to outsource everything but the basic business.  One thing is sure in the world of mergers and acquisitions – change will always be taking place.  It is important that sellers and their advisors stay abreast of these constantly changing trends.