The Transition Companies Beating Stocks

M&A Break Up

Increasing my profits

Increasing the value of my company

Exit Planning

One size doesn’t fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power. By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies. M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.
A merger can happen when two companies decide to combine into one entity or when one company buys another. An acquisition always involves the purchase of one company by another.

Recap:

The functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones – synergy is the logic behind mergers and acquisitions.

Acquiring companies use various methods to value their targets. Some of these methods are based on comparative ratios – such as the price earnings and price to price ratios – replacement cost or discounted cash flow analysis.

An M&A deal can be executed by means of a cash transaction, stock for stock transaction or a combination of both. A transaction struck with stock is not taxable.

Break up or de-merger strategies can provide companies with opportunities to raise additional equity funds unlock hidden shareholder value and sharpen management focus. De-mergers can occur by means of divestitures, carve-outs spinoffs or tracking stocks.

Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations.

The Transition Companies Selling a Business

M&A firm or M&A Firm

Selling a private company

Selling a private business

If you are waiting for that next big deal before you sell your company, you may want to re think your approach. An intelligent structure may be the way to help you capture the most value.

You have made the decision to sell your company. Maybe it was because A major company in a related industry just acquired a direct competitor. It could be that one of the industry giants recently acquired one of your small but worthy competitors and has removed the risk component of a buyer’s decision. Your fire to compete at your top level is not burning as brightly as it once did.

These are all good reasons to set your business sale process in motion. A critical element here is time. Given this scenario, the more rapidly you can get your acquisition opportunity in front of the viable buyers, the better your chance for more favorable sale terms and conditions.

All systems go, right? But wait. We have a major proposal out to that Blue Chip account and when we get that deal our sale price will sky rocket. So we are just going to wait for that deal to close and then put our company up for sale.

Let me give you a gem here. We will call it the Moving Sales Pipeline Theorem. It states the sales pipeline always moves to the right. This is based on over 20 years in sales and sales management experience and many years of selling companies with sales pipelines. The sales either take much longer than projected or do not materialize at all.

Given this, the time critical nature of your pending business sale, and your desire to ring the bell from your Blue Chip account deal, what do you do?

You engage a great M&A firm that specializes in selling similar companies (I know of one if you are interested) to sell your business. Let them focus on selling your business and you focus on running your business and closing that big sale. Get several buyers interested and negotiate for your best deal. There will be a lot of give and take here. At the right moment, as a counter to one of the buyer’s points, you ask for a 6-month window post acquisition to close that deal. You then ask, for example, for an earn out incentive of 30% of the contracted first year revenues of the Blue Chip account deal as “additional transaction value” payable 30 days after the one year purchase anniversary date.

There are lots of moving parts here so let me elaborate. The first element is you do not delay your business sale process. We already established that it was time critical. Secondly, I very carefully chose the language “additional transaction value”. We want to make sure that this payment is not confused with ordinary income at double the long term capital gains tax rate. Third, you have a way better chance of closing the big Blue Chip account as a division of G. E., for example, than as XYZ Manufacturing, Inc. Finally, what a great way to kick off a relationship than a big collaborative sales win that makes the buyer look really smart. Your earn out check will be the most enjoyable payment they can make.

The Transition Companies Business Offer

An offer on my business

Consulting

Start with an Offer
When the CEO and top managers of a company decide that they want to do a merger or acquisition, they start with a tender offer. The process typically begins with the acquiring company carefully and discreetly buying up shares in the target company, or building a position. Once the acquiring company starts to purchase shares in the open market, it is restricted to buying 5% of the total outstanding shares before it must file with the SEC. In the filing, the company must formally declare how many shares it owns and whether it intends to buy the company or keep the shares purely as an investment.

Working with financial advisors and investment bankers, the acquiring company will arrive at an overall price that it’s willing to pay for its target in cash, shares or both. The tender offer is then frequently advertised in the business press, stating the offer price and the deadline by which the shareholders in the target company must accept (or reject) it.The Target’s Response
Once the tender offer has been made, the target company can do one of several things:

• Accept the Terms of the Offer – If the target firm’s top managers and shareholders are happy with the terms of the transaction, they will go ahead with the deal.
• Attempt to Negotiate – The tender offer price may not be high enough for the target company’s shareholders to accept, or the specific terms of the deal may not be attractive. In a merger, there may be much at stake for the management of the target – their jobs, in particular. If they’re not satisfied with the terms laid out in the tender offer, the target’s management may try to work out more agreeable terms that let them keep their jobs or, even better, send them off with a nice, big compensation program. Not surprisingly, highly sought-after target companies that are the object of several bidders will have greater latitude for negotiation. Furthermore, managers have more negotiating power if they can show that they are crucial to the merger’s future success.

• Execute a Poison Pill or Some Other Hostile Takeover Defense – A poison pill scheme can be triggered by a target company when a hostile suitor acquires a predetermined percentage of company stock. To execute its defense, the target company grants all shareholders – except the acquiring company – options to buy additional stock at a dramatic discount. This dilutes the acquiring company’s share and intercepts its control of the company.
• Find a White Knight – As an alternative, the target company’s management may seek out a friendlier potential acquiring company, or white knight. If a white knight is found, it will offer an equal or higher price for the shares than the hostile bidder.

Mergers and acquisitions can face scrutiny from regulatory bodies. For example, if the two biggest long-distance companies in the U.S., AT&T and Sprint, wanted to merge, the deal would require approval from the Federal Communications Commission (FCC). The FCC would probably regard a merger of the two giants as the creation of a monopoly or, at the very least, a threat to competition in the industry.