From Jeffrey's Desk...

The New Year begins with an unprecedented growth in the size and number of business mergers and acquisitions. For an owner, this market can present a multitude of opportunities. Yet, how do you find the right buyer or strategic partner? Senior Consultant Dana Schneider helps address the question by providing us a review of buyers motivations.

Look for the next Mage Page to include an article dealing with post-merger issues and the announcement of our next Breakfast Seminar. Our first Breakfast Seminar of the year 2000: "Transitioning Your Family Business" was a success despite the best efforts of Ole Man Winter. If you were unable to attend and would like a copy of the materials please contact us at info@mageusa.com or call and Michael Lynch will be happy to forward to you the complete package.

All things considered, 2000 should be another great year to sell a business. But before shareholders sell their business, they must determine both personal and corporate post sale goals. Does the management team expect to remain with the business, retire, or seek other ventures? Is it better for the business to be sold to a strategic buyer or a financial buyer? Different types of buyers have very different strategies, valuation techniques and methodologies, therefore it is important for the shareholders to fully investigate their goals and objectives before seeking a buyer or a merger partner.

The current value of domestic M&A activity marks the seventh consecutive record year. According to Thompson Financial Securities Data, announced merger activity in the United States last year totaled $1.75 trillion, up 7.4 percent from 1998's record of $1.63 trillion. PricewaterhouseCoopers expects this coming year to be larger, reinforced by AOL's record-breaking merger with TimeWarner.

Current market fundamentals, including an unprecedented supply of capital used for growth investments, the public markets' tremendous reward for rapid growth, a shortage of talented professionals, and a rapidly changing technological environment, will continue to drive companies to pay top dollar for key acquisitions.

The public markets including the NYSE and the NASDAQ are at, or near their all time highest values, providing members with equity to make acquisitions, a potentially non-taxable event.

According to the Private Equity Analyst Newsletter, in 1999 the money invested into venture capital firms increased 89 percent, to $36 billion, over last years' record of $19 billion. The entire private equity money raised for 1999 rose to a new all time high of $96 billion. The venture capital firms are under pressure to continue their success. They must maintain or increase the number of companies that IPO. To accomplish that, they must invest in companies that have strong prospects for rapid growth, often through acquisition.

Whether growth is driven through an internal or external strategy, investors continue to chase public companies exceeding analyst expectations. Acquisitions can be a management's quickest way to accomplish the desired rapid growth, consequently increasing corporate value. As corporate value increases, additional acquisitions using stock, actually become less expensive.

Non-farm payrolls continue to grow faster than economists polled by Reuters forecast. The jobless rate remains near all time low levels at 4.1 percent. Companies simply cannot hire the best talent to help them accomplish their objectives. Many times they can only access the necessary talent through acquisition.

There are two general categories of buyers: financial and strategic.

Financial buyers are more concerned about their return on investment, the strength of the management team and the size of the market. They prefer to maintain current management and provide the tools and assistance for growth. Industries providing opportunities for strong earnings growth and multiple expansion are usually their focus. Debt is usually used to increase the buyer's return on investment. The moment the acquisition is made, the buyer begins to plan its exit strategy, driven by the prospects of maximum return.

Strategic buyers typically have very different reasons for making acquisitions and generally pay a higher valuation but may also play a much larger roll in, and sometimes replace, management. These buyers seek to reduce post merger integration risk and roadblocks, often making many changes to their acquisitions. These changes could range from Benefit Plans, Compensation Packages, operational procedures and even organizational structure, based on the acquirer's strategic objectives. In any event, layoffs are more the rule, than the exception. Depending on the buyer, senior management may be invited to stay with the buyer, or expected to resign.

There are generally four different types of strategic mergers: horizontal, vertical, related and new growth. All of these approaches are utilized by several of the largest and most respected corporations to increase their corporate value and achieve strategic goals.

A horizontal acquisition strategy is exemplified by Waste Management Incorporated's approach to initiating their rapid growth. WMI has a history of buying many competitors and other related businesses in different geographic areas in order to increase market share and revenue. Horizontal mergers consist of industry consolidation and roll-up strategies where companies acquire their competition.

An example of a vertical acquisition is AOL's merger with TimeWarner. AOL will be able to provide its customers with access to new content, products and services, increasing their value to customers.

Charles Schwab is utilizing a related acquisition strategy to help maintain their growing customer base by acquiring US Trust. This related acquisition is being employed to provide additional services, such as private portfolio management, to their most successful clients.

New growth acquisitions are typified by companies purchasing others with different customer bases and services. The motivation behind a new growth acquisition is the desire to enter new markets or diversification. A recent example of this type of strategic acquisition is the General Electric/NBC deal. GE now operates in a new market, reaching new customers with a new set of products.

Each of these strategies has a different effect on valuation, integration and management. Because over 85 percent of mergers fail, it is important to understand the objectives of both the shareholders and management. This will help to determine the most appropriate buyer, increasing the probability for all around success.

According to Jeffrey Davis, "Before any decision to sell is acted upon, management must commit to the establishment of a process that will guide the amalgamation of the company into a new entity. Critical to success is the part an integration team plays in the development of the new company's culture and identity." With this in mind, an owner can evaluate potential buyers by the resources that they can bring to bear in terms of transition management. Davis asks, "Is the buyer interested in participating in an integration team that will be seen as non-partisan by your employees?" The goal is to realize the full potential of the combined companies through the participation of all employees in engineering the change, even in the elimination of redundant positions. The challenge is to identify, and create the culture that will allow the new corporation to prosper.

Dana Schneider
Senior Consultant