Monday, January 13, 2014

M&A Red Flags

It may be useful to review some M&A red flags as the M&A market continues to improve. These signals are frequently ignored once the deal process starts. My on-going list is as follows:

1)    Do you believe in magic? Aggressive revenue based synergies are always questionable. Failure to consider competitor response to revenue gains renders the estimates useless.
2)    It is a great target: It may be, but it is still a bad acquisition if you overpay. For me, premiums greater than 40% over the pre bid target stock price are delusional.
3)    Trust me: New CEOs still in their honeymoon period can get some strange deals approved.
4)    Trying to get my mo-jo back: Underperforming firms seeking to regain their old growth status usually violate the first law of holes-when you are in a hole-stop digging. Such firms are not the best owner of the target’s assets and make the acquisition for the wrong reasons i.e. weak strategic rationale.
5)    Bid’em up: Revising upward your pre bid walk away price once the bidding begins. Frequently based on some newly discovered synergy, but always fatal.
6)    Don’t worry about it: Large transformational trophy deals with high levels of shareholder value at risk (SVAR). SVAR is the premium expressed as a % of the acquirer’s pre bid market value. Sometimes known as the “bet your company” acquisition strategy.
7)    What- me worry?  Coupling a large high business risk acquisition with a highly leveraged capital structure is questionable. Flexibility is needed to successfully implement the acquisition and withstand possible competitor responses.
8)    All the other kids have one: Late cycle acquisitions to catch up with peers.
9)    It has to work: Vague existential integration plans.
10)  Don’t confuse me with the facts: Weak or ignored due diligence.
11)  Tunnel vision: Ignoring alternatives such as doing nothing or selling out.
12)  We can trust them: Dealing with sellers who have questionable motives is always dangerous. Make sure you listen to your lawyers by including risk mitigation clauses in your documentation. If the seller objects-ask why.

The presence of any one of the above should be a cause of concern for investors and directors. Two or more should be enough to reject the transaction.

Good hunting, but be careful-it is dangerous out there.


No comments:

Post a Comment