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Feeling the urge to merge

As consolidation continues, the principles behind good merger and acquisition (M&A) practice remain unchanged: research; proper commercial, legal and financial due diligence; good negotiation skills with special care over the acquisition agreement; comprehensive, sensitised cashflow projections; and fully planned integration.

Multiples for resellers and associated technology industries that perform well at EBITDA level have remained encouragingly high for those that survive. But beware more companies enter administration as the economy comes out of recession than during the recession itself.

Most firms have completed their cost reduction programmes and service industries have been under pressure, ensuring that resellers make whatever cutbacks are achievable while trying to maintain customer service. The result is further consolidation in the sector.

As a buyer, I continue to search for distressed opportunities even though competition among efficient buyers has maintained reasonably high prices. A distressed business does not necessarily mean a bargain.

Special attention must be paid to shares and assets.

There can be quicker completion, lower professional fees and decreased risk, and stakeholder requirements may be reduced. The flexibility allowed by making two offers may tempt the vendor itself to seek tax advice. Also, the fee pressure on corporate advisors allows improved flexibility in fee levels, including non-contingent fees.

However, with advisors on both sides running contingently the pressure to complete in the final stages of the transaction intensifies so you should always consider carefully, alongside due diligence, whether the transaction is right for your business.

Appetite for debt to support M&A is slowly increasing.

Of course the multiple levels are substantially below those before the credit crisis. With increased diligence by the banks, borrowers can expect much more aggressive fees. It is important to refer to corporate advisors to ensure that market rates are being charged.

Checking and rechecking the budget cashflow management and bank covenants remains paramount.

Having a 100-day integration plan remains key and is even insisted upon by some finance providers. Culture considerations, in particular changes made by both parties in reaction to the recession, should be examined thoroughly and separately.

Making the right checks
Employee changes have even greater importance than usual. What's more, watch out for any Transfer Undertakings Protection of Employment (TUPE) issues, as they require legal advice.

Take special care with distressed companies as any cost-saving exercise by the vendor is likely to be only partially completed. While providing opportunities for the purchaser, the management time in completing any cost reduction programme should not be underestimated.

Also look into debt management and fraud issues. An acquisition allows for increased cost-effectiveness over the management of debt and fraud. This should be reviewed as part of due diligence.

A pre-pack is where the sale of a business and its assets is agreed prior to the company going into administration. Most pre-packs involve a sale back to the existing management and thus allow a cleansing of debt with the unsecured creditors feeling aggrieved.

A pre-pack may be of value but again this requires specialist advice from an insolvency practitioner.

Further consolidation should be welcomed. For those feeling vulnerable, early advice should be sought to ensure maximising exit opportunities as the marketing of your business when you are under financial pressure may be exploited by an aggressive buyer.

And never forget the golden rule. If, even at the last hurdle, a deal is not right, do not do it.

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