Which M&A Strategy is Best – One Big Deal or Several Smaller Ones? Deloitte Debates DOWNLOAD

What type of acquisition strategy makes sense in today’s economic environment, one bold play or a series of smaller ones?

Today’s economic environment creates temptations that even traditionally risk-averse companies can find hard to resist. CFOs with access to cash reserves and low financing rates are eyeing large, possibly undervalued companies, as potential acquisition targets. Are these once-in-a-lifetime opportunities that should not be passed up? Or should CFOs steer their companies toward a more conservative growth strategy that calls for smaller, methodical acquisitions? Here’s the debate.

My Take

Steve Joiner, Partner, M&A Transaction Services, Deloitte & Touche LLP 

At the Deloitte CFO Conference, I led a panel discussion that included CFOs from two large, highly diversified companies with different approaches to a long-term M&A strategy calling for substantial growth with moderate risk.

One company completed a multibillion-dollar acquisition a few years ago. The transaction was a game-changer that allowed them to significantly expand in the consumer products industry. With a tight focus on integration planning and execution, their combined operations have done well even in a down economy. While this company has the experience and cash reserves that would allow them to take on practically any size deal today, they are sticking with a clear strategy that calls for a minimum 15% after-tax return. Their models show that it’s better to wait years for a deal that realistically can provide this return, rather than moving forward with a transaction that appears attractive and timely but is likely to return far less.

The other CFO’s company takes a different approach. They have completed more than 60 deals over the last five years. Few transactions were over $1 billion; many were in the $10 -$100 million range. This company elects to ferret out small to mid-size companies that produce quality products with broad appeal, but lack the marketing or distribution resources needed to take the products global. This company’s M&A strategy will not turn the dial on growth overnight, but that’s okay; they want to build long-term value.

Both CFOs cautioned their audience not to be swayed by a deal that appears to be a bargain unless it supports the business strategy. They recommended a rolling, multi-year growth strategy that provides flexibility when the right opportunities arise. Bottom line? Stick to your M&A growth strategy, stay within your risk tolerance level – and be patient.

A view from our Tax practice

Betsy Evans, Partner, M&A Transaction Services, Deloitte Tax LLP

Small deals can equal big tax issues. I recently worked on a middle-market deal where the target company had historically filed tax returns in only two states, even though it had operated in about 30 states for several years. Typically, the statute of limitations for states is three or four years, but it only begins when a tax return is filed. In this case, the target company’s liability extended back 10 years for some states. Bringing taxes into compliance can place additional burden on a buyer. If the target’s pre-closing tax exposure is significant, the buyer should consider negotiating the purchase price and indemnification provisions accordingly.

Of course, large deals come with their own potential problems. Large companies are more likely to have better controls over the tax function, but they are also more likely to operate globally and can have more complex tax planning and structures that must be integrated into the buyer’s tax structure. If the target is publically held, there may be issues around obtaining an indemnification for pre-closing taxes, which makes identifying potential tax risks up front even more important. When it comes to tax due diligence, one size doesn’t fit all; it’s important to tailor your due diligence process to the company you’re buying.

A view from the Life Sciences sector

Kevin Lynch, Principal, M&A Consultative Services, Deloitte Consulting LLP

It’s reasonable to say that competition for transactions in the Life Sciences industry is at an all-time high. There are three trends challenging many senior Life Sciences executives today in their quest to complete accretive transactions, both small and large. These trends are:

1. Shareholder imperative for productive use of capital. While many shareholders highly valued large cash reserves during the bottom of the financial system collapse, today they are placing greater emphasis on appropriate and economically productive deployment of capital.
2. Impact of continuing regulatory shifts on traditional profit pools and markets. Even before full impact of recent legislation takes effect, some executives are defensively changing their transaction strategies and positions to protect market share and profitability.
3. Consolidation across industry boundaries. While many companies continue to look for scale and core consolidation opportunities within their industry segment, some companies are making positional plays by acquiring cross-segment companies.

As a result, CFOs are revisiting their existing M&A strategies and long-term objectives. For many, core consolidation and sizeable deals remain a significant lever of choice. However, some CFOs are moving toward strategies focused on product, technology, service and geographic market expansion and are considering smaller deals to improve their market position and create real growth options.

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Library: Deloitte Debates
Services: Consulting
Industries: Life Sciences

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