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 News | The End of the Acquisition BoomJanuary 1999 I want to start the final year of the millennium with a warning (no, not Y2K, another warning). I also want to discuss the implications for those considering a corporate acquisition or sale. The warning is, the end of the long acquisition boom of the 1990's may at last be at hand. Acquisitions are a very cyclical business. Every boom, or slump, is certain to end. The difficulty is to anticipate when and to prepare for it. The current boom is a result of abundance of both equity and debt capital, permissive enforcement of anti-trust laws, push by large corporations for closer relationships with fewer suppliers, rising costs of technological change, globalization of business, world-wide prosperity, the turn by financial buyers to strategic acquisitions, and willingness of corporate buyers to pursue contested takeovers. Some of these developments may continue for a long time. However, others seem in jeopardy. Lending standards have clearly tightened. In equity markets, downside risk is the greatest in many years. You don't have to be Bill Gates to notice a change in anti-trust enforcement. Numerous proposed transactions have been rejected, approved only after acceptance of onerous conditions or delayed so long that they collapsed. Economic uncertainty in Asia and the developing world is obvious. The consequence for the United States is the drying up of export markets and increased competition from imports. What does this mean for buyers and sellers of corporations and their professional advisors? The problems in knowing stem from the difficulty of predicting exactly when the boom will end and for the tendency of price changes to lag a change in the level of acquisition activity. Buyers face a high stakes dilemma. If they continue to acquire aggressively, they risk overpaying, being unable to earn their target return and inheriting multiple operating problems. If they conserve capital in hope of bargains at a later date, they risk losing the best prospects to competitors. Sellers must negotiate with buyers facing this ambivalence, while deciding whether the best offer today will be better or worse than the best one tomorrow, and if there will even be an offer tomorrow. This won't be an easy environment in which to make decisions. Knowing whether, when and how to buy or sell could get a lot tougher and fraught with more risk. I believe buyers will need to think much harder about how well proposed acquisitions fit their strategies, what the alternatives are and whether an acquisition is really the best choice. Timing will obviously be critical. Due diligence will have to be done with greater care. Synergy will have to be tangible and immediate, not just a buzzword to justify a questionable deal. Valuation will have to be more than figuring out the least the seller will take. Preparation for negotiations will have to include a thorough assessment of the sources of risk and how to protect against them. Sellers will face equally daunting problems. Decisions on whether and when to sell will grow riskier. Price will have to be assessed rigorously, on the basis of what is possible, not just what is wished. Buyers will need to be selected with utmost care, to assure they can add enough value to make a deal happen in a tough negotiating environment. |
