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For private companies, M&A boom brings renewed focus to deal discipline

Mid-sized companies are more concerned than large companies

A blog post by Phil Colaco, chief executive officer of Deloitte Corporate Finance LLC

July 11, 2016

The red-hot market for mergers and acquisitions that dominated 2015 is showing little sign of letting up, but don’t expect mid-market firms to simply open the company coffers to beat back the competition.

Deloitte’s 2016 survey of M&A trends, in which mid-sized companies comprised half of the nearly 1,800 corporate respondents, reveals that the vast majority of respondents believe 2016 will bring similar or greater numbers of combinations than the previous cycle.[1] The report captured big gains in the number of companies seeking both major, transformational deals and smaller, strategic transactions.

But in some important deal-making areas, mid-market companies say they plan on being more disciplined in the year ahead. Mid-sized companies report in our latest survey that they are much more concerned than large companies about obtaining bargain-priced assets in future deals. In addition, they are more likely to say that a greater portion of their deals disappoint after they are consummated.

Private companies actually began signaling in 2015 that combinations would represent a diminishing share of their strategy.[2] In a tighter environment with fewer perceived acquisition targets, companies appear to be keeping one eye on potential targets while prioritizing organic growth, strategic alliances, and new products.

Despite deal volume being relatively flat so far in 2016, valuations for middle-market transactions have remained elevated.[3] The high valuations are primarily being driven by larger strategic (often international) buyers looking for inorganic growth and private equity groups looking to put to work capital which had been raised in prior years.

In an environment where valuations are lofty and targets are scarce, it’s even more critical for companies to inject discipline into their deal-making. Unlike large corporations, family-owned and other, smaller private companies don’t typically have the deal infrastructure in place to conduct regular assessments of potential acquisition markets. Even among the broader universe of companies in our survey, 78 percent pointed to insufficient due diligence as a key barrier to success in M&A transactions.

Such firms can take steps now to fill this gap. In terms of strategy, potentially acquisitive firms should have a running list of high priority targets. The creation of a list and a basic valuation strategy will allow acquirers to mobilize quickly when targets become available. Additionally, acquirers should have their advisors (legal, accounting, and financial) identified and prepared. For example, acquirers planning to fund acquisitions with debt should have a perspective on their own existing debt capacity from incumbent lenders. The ability to move quickly can differentiate acquirers in an M&A process.

For one, private company leaders can designate an individual or a small team to oversee and take responsibility for mergers and acquisitions, as prescribed in our latest Private Company Issues & Opportunities report. Such a team would engage in a range of tasks, from keeping track of deal valuations in their industry, to evaluating potential targets, to directing the integration process after deals are completed. Private companies can also work to support their internal team by building trusted relationships with investment bankers, private equity investors and other outsiders who monitor and view their industry from a broader perspective.

Given the slowdown in overseas markets, it may also be a good time to look further afield. The majority of corporate and private equity investors in our annual M&A trends survey said they would be looking abroad for new targets in the year ahead. Those companies on the hunt in international markets would be wise to get a handle on the myriad factors that can come into play with such deals. For instance, issues such as currency volatility, tax and legal environments, and the availability of local labor can either strengthen or weaken the argument for going forward with an overseas acquisition.

More companies might also find themselves on the other end of the transaction in coming months, given how attractive selling prices are at present. In the M&A Trends survey, just over half (52 percent) of corporations said they expect to spin off assets in the coming year.

Whether they’re buying or selling in the year to come, it’s crucial for private companies to get up to speed quickly on M&A activity in their respective sector. In our experience, the most sophisticated middle-market firms rely on internal resources as well as outside advisors for continual information about valuation trends, financing options, and potential interest levels from both potential acquirers and potential acquisition targets.

[1] http://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/ma-trends-report.html?cq_ck=1462315338498
[2] http://www2.deloitte.com/us/en/pages/deloitte-growth-enterprise-services/articles/private-company-mergers.html
[3] http://www.middlemarketgrowth.org/ma-madness-dealmaking-on-pace-for-record-in-valuation/

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Deloitte Corporate Finance LLC, an SEC registered broker-dealer and member of FINRA and SIPC, is an indirect wholly-owned subsidiary of Deloitte Financial Advisory Services LLP and affiliate of Deloitte Transactions and Business Analytics LLP. Investment banking products and services within the United States are offered exclusively through Deloitte Corporate Finance LLC. For more information, visit www.investmentbanking.deloitte.com.

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Phil Colaco

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