Around 50% of acquisitions don’t work because people don’t plan integration projects, says Bruce Milne, CEO at M&A advisor the Corum Group, but companies have no option, the market is moving too fast to foster organic growth. M&As are the only way to stay ahead. However, the chance of an acquisition succeeding increases dramatically after the acquirer has cut some teeth on a first transaction, so the high failure rate would suggest that there are as many new companies making first deals as there are veterans.
If Milne is to believed, failure rates will only increase as vendors’ Y2K projects enter their final stages. Y2K is particularly acute in Europe right now. In our experience, there are a lot of companies there that still have a great deal of work to do. They won’t make any more purchases because they’ll be reluctant to buy more problems, says Milne. Even though US companies tend to be further down the line in Y2K compliance procedures, he argues, the market will not necessarily be any kinder. A company will be expected to assume 100% of the liability for its software running efficiently in 2001. If it doesn’t, there’ll be an awful lot of lawsuits flying and customers not paying bills. All acquirers need to make sure they are buying Y2K-compliant products before they progress with any deal, he says.
Milne does not expect Y2K issues to act as that much of an inhibitor to transatlantic deal-making activity. He expects a growing trend towards international transactions as US companies look to expand into global markets and take advantage of overseas talent and technology, often at a lower cost than would be the case if making a US acquisition. The cost to the buyer can be anything from 30% to 80% lower if a company chooses to make an international acquisition, says Milne. It is also easier and less expensive to buy a European operation than build one organically due to European labor laws, he adds.
The continuing attraction of international purchases could mean that there will be quite a few casualties by the close of the year when vendors realize they have unwittingly stumbled into Y2K compliance issues resulting from a purchase earlier in the year. By the beginning of 2001, it will become more of a buyers’ market, confirms Milne.
But the shift in the market from seller to buyer is not likely to have much of an effect on company valuations. The average overall multiples in deal valuations will remain steady at 2.5 to 3 times trailing revenues for the next couple of years, although multiples will be higher for hot internet and related issues, according to Milne.
