| Could be time for M&A bargain hunting |
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| After a shaky first quarter on the international M&A front John Kehoe, partner at Mason Hayes & Curran, looks at the prospects for M&A activity and opportunities in the Irish market for the remainder of 2001. |
How busy can M&A advisers expect to be over the coming year? Mergerstat’s first-quarter figures for 2001, just released, are not particularly encouraging (at least for those of us not planning on extended summer leave): more US deals (108 with a total value of about $20 billion) fell apart in the period than in any quarter since 1997. Another interesting perspective on the question of whether the US economy has moved into a ‘recession’.
But the statistics are more reassuring on any sort of long-term view. In volume and value terms more US deals closed in Q1 2001 than in the whole of 1990. If the Q1 rate of deal-failure remains constant throughout the year, over 25 per cent more US deals will be done in 2001 than in 1997; and five times as many US deals will be done in 2001 as were closed in 1980.
The most obvious reasons for this year’s decline in M&A activity are economic uncertainty and volatility in the capital markets. Depressed stock markets, in particular, present a double-edged sword to buyers: although there are bargains to be found, their listed shares are weaker acquisition currency. An overall market downturn will be less of an issue on transactions involving exchange of listed shares, where it is relative value that counts. But even the mere fact of volatility - with the capitalisation of bidders and targets (such as Eircom and Vodafone) fluctuating materially throughout the merger discussions - makes it harder for merging managements to hold the deal together.
These volatilities and uncertainties give rise to particular issues when preparing the acquisition documents. Take the example of a conditional deal, such as a transaction involving antitrust clearances, involving a target whose share price or business is bouncing around wildly during negotiations. Holding a deal like this together until completion will require careful preparation of the legal agreements. Circumstances are almost certain materially to change between first signing of binding documents and completion. What is the fairest allocation between buyer and seller of the risk of material adverse change in the target’s business occurring during this interregnum? What management oversight and veto rights should the buyer be permitted before completion? These issues will be particularly relevant to M&A transactions proposed to close during the rest of this year.
Successful acquisitions of ‘moving targets’ such as businesses in the course of restructuring themselves to deal with harder times (or likely to face into a downturn) will depend enormously on careful due diligence. In this sense, takeovers and especially hostile takeovers (where almost no due diligence is possible) are risky when compared to deals that are not regulated by takeover codes. A major advantage of takeovers is that they generally complete (or fail) quickly, to a pre-determined timetable that all involved can work to. These are some of the factors that will need to be weighed by a buyer and seller deciding whether to transact all or part of a business whose acquisition is regulated by takeover rules (e.g. an Irish company with a London or NASDAQ listing).
The advantages of speedily ‘getting the deal done’ can be overstated relative to the merits of taking the time properly to understand the target. When attempting to strike the right balance between caution and the deal-doing imperative, managers must consider the time and money that it takes to clean up undiscovered liabilities of a target. I often think of Peter Drucker’s words here: ‘I will tell you a secret: Dealmaking beats working. Dealmaking is exciting and fun, and working is grubby. Running anything is primarily an enormous amount of grubby detail work-dealmaking is romantic, sexy. That’s why you have deals that make no sense.’
Drucker’s thoughts illustrate the role of human nature in mergers and acquisitions. Likewise, confidence at the level of individual management is certainly the key determinant of the level of deals initiated and then held together until completion. However, it is when times are hardest and business confidence at its lowest that the best value is to be had. If the M&A market collapses completely in six months time, that will be precisely the time to go shopping.
There is concrete evidence in recent weeks of such contrarian activity in the technology sector. Phillips & Drew, reportedly the best-performing UK fund manager last year, estimated in its year-end announcement (13 April) that its value‚ strategy of avoiding TMT stocks during 1999 contributed about a quarter of its outperformance. The announcement went on to state that it had used the more recent fall in those stocks as an opportunity to buy into them.
So, players in the Irish market (and especially those with cash rich war-chests) should treat 2001 as an opportunity to move into or out of economically weak or unfashionable sectors. Harder times can be seen as an opportunity to execute or at least begin the search for a suitable acquisition or disposal. |
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| Article appeared in the April 2001 issue.
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