Earlier this year, we reviewed Deloitte and Touche LLP’s (Deloitte) 2016 survey of M&A trends (the Survey), which predicted that the year would match or exceed deal volume as compared to 2015. Deloitte recently published an article (the Article) which delves deeper into its Survey results from mid-sized companies, concluding that this demographic of the corporate world should be looking to implement more disciplined measures in deal-making.
The Survey polled approximately 1,800 companies, of which half comprised of mid-sized companies. These companies’ responses indicate that they are more concerned than their large-cap counterparts with “obtaining bargain-priced assets”. Mid-sized companies’ responses also highlight a higher rate of disappointment post-consummation of transactions.
The Article notes that while deal activity has remained relatively flat thus far in 2016, valuations for mid-market transactions have remained high. In this context of lofty valuations and scarce targets, the Article focuses on discipline in deals as a factor of critical importance. Of approximately 78% of the total companies canvassed in the Survey, it was noted that insufficient due diligence with respect to targets was a key barrier to success in M&A transactions.
Deloitte suggests practical steps that should be taken by mid-market companies in order to improve diligence and efficiencies on both the buy-side and sell-side. For acquisitive companies, the maintenance of a list which points out potential targets and bottom line strategies to adopt once the said targets become available would be a good start. Such a list would improve reaction times and post-deal integration.
In addition, the Article suggests that one of the main reasons why mid-market companies facing either side of the buy-sell coin consider that they are not ready to complete M&A transactions is because they may not be equipped to maintain a permanent, internal deal team. Companies should proactively build a team of trusted legal and financial advisors to engage in a variety of tasks from monitoring deal valuations in the industry to evaluating potential targets. A continuous flow of information about M&A activity, valuation trends and financing options in a company’s sector is key.
While pricing and valuation are typically the most significant factors in any M&A transaction, companies should ensure that a comprehensive process is implemented in the deal-making process in order to enhance deal results: Does the transaction meet strategic goals? Can the parties easily integrate culturally? Does it make sense financially?
The author would like to thank Vincent Belley, articling student, for his assistance in preparing this legal update.
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