The much heralded M&A meltdown, which is predicted to occur when pooling of interest transactions are outlawed sometime next year, will not be the show stopping event envisioned by many analysts, according to accounting, tax and consulting giant, KPMG.
One train of thought among investors runs along the following lines: the inability to ‘pool’, and therefore write-off a high proportion of a deal’s value in a one hit purchased R&D charge, will curtail deal making activity. There are all sorts of likely consequence. Wall Street will no longer see the immediate boost to earnings per share afforded by a pooling of interests purchase. Acquirers will therefore have an increasingly hard time justifying an acquisition beyond a short-term growth metric. And, most significantly, companies with high market valuations and small cash reserves will no longer be able to leverage the purchasing power of a high-flying stock.
Research carried out by KPMG suggests quite the contrary. A change in the accounting landscape will not initiate a slow-down in mergers and acquisitions if companies train analysts and investors to ignore the goodwill charges that erode EPS each quarter, argues Brian Curran at KPMG’s corporate finance practice. Good deals will still be done, but they will be in a different currency. Stock transactions will not disappear. It will just mean companies will trade one highly valued stock for another of equally high value and cash will part a more crucial role as currency within the transaction, he says.
In support of this theory KPMG has released a report outlining the shape of M&A activity in the hi-tech industry over the next five years. ‘Mergers & Acquisitions grow the High Tech Industry,’ contends that M&As will continue to be the preferred growth strategy for hi-tech companies. Of the 100 medium-sized hi-tech companies interviewed in the study with revenues between $75m and $200m, 84% said that merger and acquisition activity ranked highly on the corporate agenda through 2004. Furthermore, just under three-quarters of the sample said they are likely to merge or acquire within the year, making the average transaction just over $525m in 1999, KPMG calculated.
Globalization, increased competition and the enormous pressure to improve top-line growth make mergers and acquisitions the only means to improve shareholder value as fast as today’s investors expect. The most important goal is to be number one or number two in the market place and internal growth won’t get you there, says Curran.
Executives in the hi-tech segment believe an M&A strategy can quickly and effectively increase a company’s growth and customer base, help increase sales, revenues and profits and reduce competition, according to the study.
Post merger integration emerged as the most critical factor in making any deal a success. While the vast majority of executives, around 78%, had previous M&A experience, four in 10 executives said their priorities would be different the next time around. Executives said they would devote more attention to corporate integration and synergies, increase the pace at which acquired companies were assimilated and retain a sharper focus on the management team. Integration is the weakest element of any merger or acquisition. But it is critical because it’s where the rubber meets the road, says Curran, who argues that 80% of the value of a deal comes from integration based around such elements as sharing services and eliminating redundant functions.
The establishment of an effective management team plays a key role in smoothing away the post-merger integration process, according to KPMG. It’s very important to clearly articulate who’s in charge. There’s no such thing as a merger of equals. That’s why Cisco is so good at making acquisitions because it always says ‘we are acquiring you and your name ceases to exist, he adds.
The report also found that future transactions are expected to target core lines of business. The trend is based in part on the concept of not straying too far from the products and services that helped established the organization in the first place. Such familiarity facilitates growth and maintains shareholder value better than if the company enters some non-traditional business arena.
