Doing Deals in Tough Markets - It is the Best of Times - It is the Worst of Times

There are plenty of motivated sellers-especially private equity firms seeking to liquefy their portfolios. Debt financing is plentiful-at least in the U.S.  The domestic stock market is rising- at least for now. The financial markets are, however, driven by central bank liquidity injections, and not fundamentals.  Many buyers are hesitant given the troubled world economy. Consequently, M&A volumes are at their lowest levels since late 2009.  Recent goodwill write offs on prior acquisitions and lackluster growth support this hesitancy.  Nonetheless, good deals are often done in tough markets. The key is to employ a cautious policy utilizing a bear deal market menu of options. Unlike the bull market menu which focuses on winning the deal and financial engineering, the bear market menu is more risk management focused.

The key components of this menu include:

•  smaller fill-in transactions
•  low leverage with limited amortization during the initial years
•  limited covenants
•  seller notes
•  loss sharing provisions employing contingent consideration to bridge pricing  gaps
•  strong due diligence
•  strong lock-up provisions to minimizing losing the deal to competitors
•  expense reimbursement for legal and due diligence if the seller pulls the deal post letter of intent
•  detailed integration plans to achieve immediate cost cuts
•  strong closing conditions allowing you to walk from the deals should conditions worsen.

Beware ordering off the wrong bull market menu to minimize getting indigestion. Many potential sellers may resist some of these buyer-orientated provisions. Prospective buyers need the discipline to terminate discussions and not get carried away.  Discretion is the better part of valor in this market.

Joe