While working on a recent transaction where we represented a seller who was looking to complete a Management Buyout sponsored by private equity groups, one of the potential equity sponsors told us,  “We will only invest in this transaction if there is another investor group who invests along side us.”  “Is that to minimize your risk,” I asked.  “No, it is our requirement to have a co-investor because it validates our investment philosophy.”

In other words, like sheep who flock together, this investor group was satisfied with an investment so long as someone else came to the same conclusion.  “But what if you like the opportunity but do not find a co-investor,” I inquired of the group.  “Then we walk away from the opportunity,” I was told.

This group, and many others with same investment criteria, are not willing to trust their own instincts but need validation from others.  Ultimately, this is a sheep mentality… following others at all costs.

Eagles, on the other hand, hunt and soar alone.  They find their prey and seize the moment.  Eagles have the courage and temerity to make their own decisions based on their own standards and criteria and seize the moment regardless of what others around them are doing. Read the rest of this entry »

When stock consideration is involved in a merger or acquisition, the type A reorganization is a popular way to structure the transaction for income tax planning and compliance purposes.  Relative to the other reorganization choices described in the Internal Revenue Code, the type A provides flexibility that is not found in the other types of reorganizations.  The principal benefit of having a transaction meet the requirements of a type A reorganization is the deferral of income taxes.  If the transaction is properly structured, to the extent that stock of the acquiring company is received, there is a deferral of income taxes (i.e., cash or other “boot” received will be subject to tax).  Just like the other exchange provisions of the Internal Revenue Code, there is a tax basis being carried over to the stock received.

Under section 368(a)(1)(A), the Internal Revenue Code defines a type A reorganization as a “statutory merger or consolidation.”  Besides meeting the definition of a statutory merger or consolidation, there is a continuity of interest requirement.  As provided by the treasury regulations, this requirement will be met if at least 50% of the consideration received is stock (under case law, 40% stock consideration will meet this requirement). Read the rest of this entry »

In these times of unprecedented economic turmoil, an opportunity exists for small businesses to utilize the current financial “perfect storm” to grow through strategic acquisitions.

With changes in the economic climate and the halt in highly leveraged lending, companies that were patient during the M&A boom are now poised to make strategic acquisitions that can strengthen current operations, increase market share, decrease customer concentration, add new product lines and position them for significant future growth — all without the heightened competition experienced over the last five years.

Less competition from financial buyers: The window has closed for the highly leveraged transactions popular with Private Equity Firms during the M&A boom of the last few years. With these financial firms reassessing their approach and struggling to raise debt, it removes them from the market and/or diminishes their buying power.

Healthy companies have a better balance sheet and better banking relationships: Quite simply, companies that were patient will be rewarded for keeping cash high and debt low. Banks, some that are frozen to new lending, look for ways to cultivate existing relationships with healthy customers. Read the rest of this entry »

For Corporate Buyers that Pursue a Disciplined Approach: 2009 is the Time to Buy a Company

Corporate executives at middle market companies understand that meeting investor demands for growth is difficult to achieve organically. Therefore, making strategic acquisitions are critical to building scale and growing revenues.

The impetus for pursing an acquisition have become even more compelling in light of the current challenging economic times, which has put downward pressure on valuation multiples. Indeed, a recent Boston Consulting Group report entitled “The Return of the Strategist: Creating Value with M&A in Downturns” underscores why a weak economy is often an ideal time to acquire a company.  Key findings of this report include:

• Corporate buyers are uniquely positioned to take advantage of the tough economic times, since they possess the cash to complete transactions, whereas the financial private equity buyers have been restrained from borrowing in the wake of the credit crisis.
• Acquisitions completed during recessions are twice as likely as upturn deals to produce long-term returns in excess of 50%, and, on average, create 14.5% more value for acquirer shareholders.
• The best type of company to buy during a recession is one with strong finances and relatively weak profitability.
• Corporate buyers can also increase their returns and likelihood for success by acquiring relatively small targets.
• Surprisingly, acquirers can also create value by paying above-average premiums, provided the underlying rationale for the deal makes sense.
• Acquirers in difficult economic conditions are better at identifying targets with unrealized potential, probably because of the disciplining power of downturns, when every dollar counts.

Yet, despite the promise of adding value from a discounted acquisition, the reality is still that the majority of acquisitions will fail to result in any cost savings or merger synergies. So, how do the top value creators in downturns pick the best targets? Read the rest of this entry »

Corporate Buyers Should Answer 5 Key Questions When Preparing a List of Acquisition Criteria

Corporate buyers appreciate that acquiring another company is an effective way of achieving growth, which can compliment organic growth. However, before proceeding with any acquisition process, research in the area of Pre-Acquisition Best Practices has shown that 5 key questions should be considered by acquirers.

By answering these fundamental questions, a corporate buyer is then more readily able to detail a List of Acquisition Criteria. In turn, the List of Acquisition Criteria shapes the buy-side mandate given to an investment bank, which will then proceed to systematically contact both sellers that are actively for sale, as well as the much larger group of off-market target sellers.

• Acquisition Purpose. First, what is the purpose, motivation or intent that causes an acquirer to undertake buying another firm? Acquisitions are often employed by acquirers to achieve economies of scale, to expand existing product/service lines, or to penetrate additional markets. These goals are a reflection of the broader corporate strategy for how you want to grow your company. Read the rest of this entry »