In a popular business broadcast, Fred Marx, a partner with Hemenway & Barnes, recently explained the basics of corporate mergers and acquisitions from a family-business perspective. In the first of a multi-part interview, Mr. Marx was featured in a March 27, 2012, segment on the MYOB (Mind Your Own Business): The Radio Show.
According to Mr. Marx, there has been an uptick in acquisition activity as the nation’s economy has improved. However, unlike many public corporations or private corporations with professional management, which might go through several mergers or acquisitions in their life cycles, a family business typically experiences a purchase or a sale one time in its entire history. This underscores the importance of approaching M&A issues and negotiations deliberately, with outside counsel, and as free of emotion as possible.
Buyers and Sellers profiled
Listeners to the MYOB show will get a brief overview of the mechanics of a typical M&A transaction from the perspective of both the seller and the buyer, starting with when the decision has been made to sell or when an interest in selling first surfaces.
What happens next? Most sellers talk with friends or business colleagues to get an idea of pricing as well as tips, where to find potential buyers and other advice.
Most sellers will learn that there are generally two types of buyers:
- A strategic buyer is someone looking to buy a business because there’s a strategic fit. They might be in the hunt for a company with a new product or territory or it may require a needed element in a particular technology. The financial aspects tend to be less important in a strategic purchase/sale.
What’s important in a strategic purchase/sale is synergy. There’s a huge value added to the price when a purchase target has something to offer that can be added to the buyer’s mix. Under the right circumstances, there might be a three or four-fold increase in strategic value as opposed to a straight, financial valuation.
Strategic sellers and buyers often find one another by networking and by word of mouth.
- A financial buyer looks almost exclusively at profit potential as expressed in the numbers. A private equity firm or other financial buyer might start with your family business’s current or recent profits. From there, they’ll factor in a certain amount or kind of build up and investment and, finally, predict a level of growth and profitability by a given date.
The product and the management of the purchase target are important. But, as Mr. Marx puts it, “it’s really the numbers.”
Is there a way to predict whether a strategic buyer’s price offering will be over or under a financial buyer’s? No, there isn’t, according to Mr. Marx, who cites studies that have tracked strategically-based and financially-based transactions.
Inherent inefficiencies of the marketplace
The reason it’s so hard to predict value, as he describes it, has to do with the concept of Gross Inefficiency. Everyone bids with their own view of the deal and, as a result, the dynamics are unpredictable. Perceptions of a company’s value from a strategic perspective typically vary from time to time and place to place.
Sellers, therefore, often don’t know if a buyer is at the high end or the low end of the strategic buying range. In addition, for the seller to a financial buyer, it’s tough to make predictions because you typically lack comparables.
No such thing as a lost opportunity
Mr. Marx advised getting outside counsel for arm’s length advice. This is particularly important for sellers, who tend to have a harder time separating themselves and their emotions from the deal.
He added that sellers would be well-served to approach any deal slowly and deliberately. A patient negotiator often sees a deal collapse, only to be replaced later by another, better offer. So, resist the urge to quickly take an offer merely as a means to gain “early parole” from your old business, something that often happens with family-owned businesses.
This can be likened to what happens during a courtship that leads – or doesn’t lead – to marriage. Getting to know a potential partner requires spending time together, when preconceptions and biases are either confirmed or reversed.
Frederic J. Marx