Which M&A Strategy is Best – One Big Deal or Several Smaller Ones?
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.
Make one big play.
Seize the day. Grab market share with one big play
|Why mess around? The fastest route to higher market share and lower operating margins is to buy a competing or complementary company and harvest the synergies.||Sure there’s big upside potential, but it’s a strategy that’s hard to pull off. Historically, most M&A deals don’t capture the synergies and value promised to shareholders.|
|Check out the numbers. U.S. population growth is slowing as well as per capita GDP. In a constricting market, you need to grab your share of the consumer’s wallet before someone else does.||It’s not as simple as buying market share. Instead, look for pockets of growth and test the water by buying smaller companies in a few high potential sectors and markets – in the U.S. and beyond.|
|You may never see times like this again. High-yield debt markets are open. Many businesses are cash rich. Some marquee companies are undervalued. It’s a great time to buy.||Uncertain times bring great opportunities – and great risks. Some companies are undervalued because they are overleveraged from previous acquisitions. Don’t make the same mistake they did.|
Make several small plays.
Don't put all your eggs in one basket.
|Doing smaller deals allows you to fly under the radar. A bold play begets other bold plays, often from your strongest competitor.||That’s why you have to do your homework before you announce. A well-timed and strategically planned acquisition can catapult you well ahead of the competition.|
|Doing smaller deals over time allows your company to move up the execution learning curve. One big play can be too distracting.||With all eggs in one basket, you can dedicate your resources to doing it right. One big play is less distracting, not more.|
|Don’t forget the Feds. The FTC is on the look out for anti-competitive behavior. It seems harder than ever to get deals approved. Why draw attention to yourself with a big deal?||Then why go through it more than once? One big deal and you’re done.|
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:
- 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.
- 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.
- 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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