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M & A Mania All Over Again by David H. Peirez

November 20, 2014 Posted in: Our Blog

As Yogi Berra so aptly said: ‘It’s déjà vu all over again.’ Yes, Wall Street is going wild with overpriced and overhyped M&A deals. But for the privately owned company, take a deep breath and understand there is no marketplace or public arena for you to be bailed out if you make a poor deal. A good merger requires real synergy, not make believe.

Here is what I know after 40-plus years of representing private companies in merger and acquisition transactions: in addition to rigorous due diligence of the target company, it is imperative that there be a symmetry of interest so the net result is a stronger and growing entity. What does that mean? The two companies are in the same marketplace and thus can cut overhead and increase sales volume; or, one of the companies has a product compatible to the other’s product line so you expand what you can offer your market; or, one company has younger management with greater depth and can take on more managerial responsibility to grow the resulting entity; or, one company has the sales and marketing savvy while the other has the better product line and R&D.

Be it a private company or a publicly traded giant, a deal must make sense to be a good deal.  M&A folklore dwells on giant catastrophes, such as the combinations of Time Warner and AOL in 2000 just as the dotcom bubble burst, or Royal Bank of Scotland and ABN AMRO in 2007, as the subprime crisis struck. Yet some of the world’s most successful firms are the result of giant deals. Exxon became the energy industry’s top dog thanks to its purchase in 1999 of Mobil, which had an under-appreciated collection of global assets.

The key is not to combine just to have a larger company, but to combine for a valid and achievable business purpose.  We cannot tolerate deals that are done merely to satisfy executives’ vanity and enrich their bankers. I firmly believe that private companies should ignore the merger mania in the public sector and focus on compatibility and value when considering an M&A transaction.