For many companies navigating a down economy, mergers and acquisitions can provide a viable solution to financial woes, a new future, or an exit strategy. For the past year, Hobson Hogan, a principal at consultant, advisory, and publishing firm ZweigWhite, has been guiding firms—from small architecture studios to multinational public entities—through the complex merger process, representing both buy and sell sides. From his Durham, N.C., office, Hogan discusses how to approach each situation.
Toss the keys.
Many firms are selling because they have to. Life doesn’t follow economic cycles, Hogan says. Some firms need to get out. Their owners walk away and toss the keys to maintain the jobs of the staff or to reduce future liabilities, not for a premium or extraction of wealth. Although a few blockbuster M&A deals have grabbed headlines, the overall number of deals has been flat over the recession. There were also a lot of distressed deals.
Stuck in the middle.
Midsized firms are the main M&A drivers today. In this economy, midsized isn’t good. These firms can’t compete with the big boys and are not as nimble as small firms. So either they buy smaller firms or cozy up to a big brother or sister, Hogan says. “M&A has to be the part of the conversation that midsized firms are having about competing in the ‘new normal’ environment.”
Bigger is better.
Large firms, either public or private, can make good deals in today’s market. Large firms are always looking to buy, especially among firms with highly specialized clientele or markets. “In most cases, larger firms buy smaller targets at a lower multiple of earnings than they are valued”—and more earnings per share adds to the firm’s overall valuation.
Make a date.
M&A is not an easy process: A transaction can take up to 15 months to complete. Approach mergers like dating, Hogan says. Look around to see who’s interesting, then go on a few dates. The terms have to be right, of course, but so do the timing and personalities. “If you don’t get along professionally and personally, the deal isn’t likely to work, even if the numbers look good,” Hogan says.
Know yourself …
As a buyer, first think about what direction you want to go. When thinking about mergers, know whether your firm wants to do more of what it is already doing or things it doesn’t presently do. Not in the healthcare sector? Find the firms that are. Then decide what you can afford and what size firm you can buy for the money.
… and market yourself.
At this point be ready to answer questions from the seller. Put together a package of information that “conveys the benefits of being a member of the family,” Hogan says. You won’t get to the numbers unless those questions are answered up front. “There needs to be an element of sweeping them off their feet as opposed to being passive and just saying, ‘We have the money.’ ”
Worth the money.
Firm values are certainly down from where they were before the recession—but value follows from a firm’s specialty. If you offer your firm for sale and buyers won’t expect another firm like it to be on the market for five years, expect a bigger premium. Specialization provides a huge competitive advantage to the seller.
Often a merger can seem like a good fit, but after all is said and done, there are culture clashes. What happens post-deal depends on the buyer. Some big buyers want a quick integration of staff and firm name. Other firms are more flexible, keeping the name and running it as a subsidiary. Buyers should discuss all of these issues beforehand, Hobson says, with an open mind. “The more flexible you are with M&A terms, the more candidates you will have” amenable to a merger, he says. “Architects attach a lot of importance to their brand name.”
If you are considering selling, carefully weigh the risks. Consider your personal balance sheet and where you are in your career to decide whether the time is right. Some owners have expectations that are way beyond what they will ever get. If they believe an offer they got back in 2006 will come around again, Hobson says, that might not happen in their lifetimes. The reality is, he adds, “the market may not return to that level for the time they are still in the firm.”