Economic gloom abounds these days, but there is one ray of sunshine: the mergers-and-acquisitions market. Companies have more acquisition opportunities now than a year ago, when deep-pocketed private-equity firms dominated the scene and steep valuations kept many companies on the sidelines. “For a strategic buyer, this is the best time in two years to be buying,” says Nick Chini, managing principal at Bainbridge, a consulting and M&A advisory firm.
Valuations are returning to earth as the economy slows and private-equity buyers retreat, says Chini. True, the deep freeze in the credit markets has sharply curtailed deals north of $1 billion or so. But for transactions under $500 million, “there is plenty of capital, especially for strategic acquisitions,” says Chini. Moreover, companies that can access the debt markets will enjoy favorable interest rates, thanks to the Federal Reserve’s many rate reductions in the past year.
Not all industries have bargains, though, and not all sellers will be eager to settle for lower prices. And given the uncertain economic outlook, companies must proceed with caution. Acquirers should evaluate their own financing needs before embarking on a shopping spree, making sure they can fund their operations even if traditional financing becomes difficulty to find, warns Jeff Horwitz, partner at law firm Proskauer Rose LLP. “Liquidity is king now,” he says.
As any savvy shopper knows, just because something is cheap doesn’t mean it’s a worthy purchase. A target’s strategic fit with the acquirer is as important as ever, says J.D. Sherman, CFO of Akamai Technologies, a Cambridge, Massachusetts-based Web infrastructure company. “Don’t let bargain-basement prices change the fundamentals of your acquisition strategy,” he says.
“The trick is in understanding what you need, and at what price you will walk away,” says S.L. Narayanan, finance chief at Symphony Services, a provider of software engineering services based in Palo Alto, California. This may be standard advice, but it is particularly germane now, he says, because “when valuations are down, it can be especially tempting to look around.”
Thorough due diligence and rigorous downside-scenario planning are also critical in a market where some sectors have yet to touch bottom. “CFOs have to be prepared for a deeper downturn than they may currently be expecting,” says Robert Filek of PricewaterhouseCoopers’s transaction-services group. “You don’t want to make a major strategic move and be surprised by a worse short-term economic picture than anyone expects.” Given the dwindling competition for deals, acquirers may be able to negotiate longer time frames for due diligence than before, when auctions dictated strict timetables.
In their due diligence, finance teams should put assumptions about synergies to the test and understand the target business from an operational perspective, not just from a financial viewpoint, says David Williams of Deloitte’s Financial Advisory Services practice. “Many companies approach due diligence by dotting the i’s and crossing the t’s,” he says. “Instead, I would focus all of my time making sure the strategic value is there.”