Read Mergers and Acquisitions For Dummies Online
Authors: Bill Snow
Mergers and Acquisitions For Dummies (12 page)
I've got troubles, troubles, troubles
In the “How did I get here?” file, you find the troubled children of the M&A world, often known as
troubled companies, special situations,
challenged companies,
and
turnaround opportunities
.
Troubled companies run the gamut from handyman's specials that just need a little TLC to those that should be in bankruptcy. A company that is suffering from poor management decisions but remains a
going concern
(liquidation is not on the horizon) may make a suitable acquisition for an acquirer well versed in turnaround work. On the other end of the spectrum, a company that is no longer a viable going concern should probably be liquidated by an orderly bankruptcy.
Although the reasons a company becomes troubled are virtually limitless, you can pool them into three distinct buckets:
Changes in the macro-economy:
A general downturn in the economy, much like the one experienced in the latter years of the first decade of the new millennium, often has a chilling effect on many companies, including those that are fundamentally sound. An otherwise healthy company that has been beaten up by the market (suffered declining revenues and profits) is often a great acquisition for a savvy acquirer.
Managerial mistakes:
Companies can suffer a downturn at the hands of poor management. Bad managerial decisions may or may not be tied to the general economy, and include overextending the company's operations by opening too many new locations (often, the second location constitutes “too many”), making bad hires, neglecting to reinvest in the company, throwing company resources after a bad idea, and failing to participate in a new trend in the industry.
Is this company worth the trouble?
In addition to considering the nature of the target's downturn (macro-economic, managerial, or changes in customer preferences â see the nearby section), a wise Buyer also looks at a few other key considerations when determining the value, if any, of a troubled company:
Is the target still profitable?
If profits are down (perhaps even greatly down) but the target is still break-even or better, a Buyer will be able to ride out the storm (because the acquisition is not burning cash) and wait for the economy to pick up. After the economy turns around, the acquired company's bottom line will be in position to snap back to its previous higher levels.
What are the target's trends?
Is the target continuing on a downward slope, or does it appear to be on the rebound? If the worst is behind the company, a Buyer will be in good position to pick up a bargain.
What's the target's top line revenue?
Even if a target is suffering losses, that company may still have a great deal of value if revenues are large enough. What's “large enough” depends, of course, but in a general sense, a $40 million revenue company has far greater residual value than a $3 million revenue company. A Buyer may be able to move the target's operations to a new facility and/or eliminate duplicate positions, thus rapidly improving the bottom line of the acquired company.
Does the company have a recognizable brand name or other intangible qualities?
These factors are notoriously difficult assets to value, but if a company has a recognizable name within in an industry or has done a good job of differentiating itself from the pack, that intangible may have value for the right Buyer. On the flip side, a company that's essentially a faceless name in a sea of interchangeable companies probably doesn't have much intangible value.
The good news is a company that has made managerial errors similar to those listed here may make a great pickup for the smart acquirer. The bad news is a company suffering through a series of near-fatal managerial mistakes may have burned bridges with its customers or suppliers. Consider yourself warned!
Changes in customer preferences:
In the world of troubled companies, those affected by this situation are the most troubled of them all. Think of the proverbial story about buggy whip manufacturers in the wake of the advent of the automobile. Sometimes, technology passes by a product; regardless of the product's quality, companies can't do much to regain market share when customers move on to new and better products. The word for this phenomenon is
disintermediation.
If you own a troubled company, speak to your attorney and an M&A advisor about how to proceed with a potential M&A transaction. You may need to consider accepting a deal below your dream price because holding out for a better, future deal is risky. That better deal may never materialize, and the clock is ticking on the longevity of a troubled company.
Selling a piece of the company
Business owners don't need to sell the business and then retire or move on to other pursuits. The following sections explore some of the common reasons a business owner may want to sell a piece of the company.
Needing capital for growth
A growing company often needs more cash than it can generate from operations. If the owner doesn't want to put her own money into the company or sign a personal guarantee for a bank loan, she can raise money from an outside investor. Outside investors come in two basic flavors, control and non-control:
