Stout Risius Ross
Growth through mergers and acquisitions remains a key growth strategy given slow single digit growth in GDP and other headwinds to organic growth and/or perceived risks of new product/new market development. This growth motivation, coupled with ample sources of low cost debt capital, have led to very high transaction multiples and deals that some say are “priced to perfection.” Sellers and intermediaries that represent them are driven to reduce execution risk, seek certainty of close, and minimize time in market through a well-orchestrated auction process. Many academics and consultants warn that as much as 50% to 80% of M&A transactions fail to add shareholder value, and media headlines have covered numerous high profile multi-billion dollar mergers that have failed to deliver the intended shareholder benefits, often due to factors that due diligence is designed to uncover.
Commonly cited high risk areas for transaction due diligence include: Intellectual Property, R&D, competitive analysis, accounting policy (historical and forecast results, revenue recognition, working capital), integration issues versus assumed synergies and other key business value drivers.
Interestingly, some of the most frequent items that are said to be disputed (or submitted as claims against reps and warranties insurance) include: taxes, financial statement presentation, legal & regulatory compliance, undisclosed liabilities, IP, customer contracts, and employee related issues.
Transactions with an international / cross-border component may increase risks geometrically (regulations, laws, customs) and at the most basic level foreign currency exposure in cost and/or revenue line items should be considered.
So the risks surrounding proper selection, execution, and integration of M&A targets are clear and may be equally or more challenging to address in middle market companies where, despite smaller size and often lower business complexity, there may be offsetting risks because of fewer professional resources and perhaps less developed reporting systems.
Participants commented on the increased use of sell side due diligence by PE firms to speed the process, increase perceived certainty of close, and reduce “re-trade” potential when portfolio companies are being sold.
The roundtable was moderated by Steve Sahara, SRR, hosted by Bryan Cave and sponsored by NFP, Victory Park Capital, and Baker Tilly.