Recently I participated in the M&A Master Class webinar alongside Andrew J. Sherman, author and Partner at Jones Day. What an incredible opportunity to listen to a leading authority on M&A, up close and personal. This session took listeners through not only his views on the current state of the market but also key steps to prepare for selling a company. The slides to his presentation are posted on the Firmex website, but I thought I would re-iterate his views on the current state of the market, which he took us through in our conversation.
He characterized the global M&A market in four trends:
TREND 1: CLOUDY WITH A CHANCE OF SHOWERS
Too many players in the US and North American markets are sitting on the sidelines, unwilling to rise above the cloudiness in the forecast. This has had a significant impact on both the number of mergers and acquisitions being initiated as well as transactions taking longer to close. When transactions take longer, momentum is lost, and deals can get de-railed. As well, post-911 and post-Madoff, there is definitely a wider/deeper approach to due diligence – no one wants to be duped. This is a reflection of how clients are using Firmex data rooms, and why Firmex is such an integral solution to the M&A transaction business.
TREND 2: USING EXCESS CASH TO BUY vs. BUILD TECHNOLOGY
There is an excess of companies sitting on large amounts of cash, estimated to be as high as $2.5 trillion at the Fortune 500 level. Companies like Microsoft and Google are estimated to be sitting on amounts in the $50 billion range alone.
Shareholder patience is being tested since there is little return on idle cash. Companies are waiting for the right opportunity to invest. We are also seeing a trend called “innovation interruptus” which means corporations are being told to lower their risk and buy companies or products rather than build them from scratch. This should buoy M&A activity. Another positive trend is there will be a large amount of inter-generational wealth going to be transferred with the aging of the Baby Boomers – as high as $30-$40 trillion. Owners children are not interested in carrying on with the family business, which will need to be sold. These are big numbers!
The pipeline of transactions is currently clogged up – and shareholders will only have so much tolerance to companies sitting on cash. Companies need to start putting their cash to work, and businesses with aging Baby-boomers need to be sold.
TREND 3: SLOW DOWN ON CROSS BORDER TRANSACTIONS
In 2008-2010 there was a significant uptake in cross-border transactions, including a number of Canadian and other foreign companies looking to acquire inexpensive US companies and assets. It was like America was on sale.
In the last 3 to 6 months, there has been a slow down of cross-border transactions. This is largely due to the stabilization of US corporate EBITDA multiples in late 2010 and 2011, and growing uncertainty in the economy. Sellers will have to downwardly adjust their expectations or expect more performance-related compensation or deferred compensation.
TREND 4: DEALS ARE TAKING LONGER TO CLOSE
As many as 60-70% of transactions fail to meet their pre-transaction objectives. Buyers have become more cautious and are taking due diligence very seriously which is extending the time it takes to get a deal done. Hopefully with the right due diligence practices in place, the buyers will have more successful outcomes with their acquisitions and grow more confident.
Andrew went on to discuss key issues in selling a business, starting with the motivations of the buyer and seller, a review of a strategic approach to preparing to sell your company and ending off with some pitfalls to avoid along the way. This was both an informative and collaborative presentation which left me excited about our next session on October 20th, Buy-side M&A: Qualifying your Seller & Finding Value.
Extended learning: View our catalogue of past webinars.