The economic environment is rarely static, but certain periods feature greater change than others. Growth-minded business leaders or those considering a sale should continually consider whether current conditions present an opportune time to seize a competitive advantage and pursue a merger and acquisition (M&A) transaction.
Mergers and acquisitions refer to transactions in which companies combine (merge) or one company purchases another (acquisition) to achieve growth, expand capabilities or gain competitive advantages.
Whether companies are looking to buy or sell, valuations are pivotal to the process. Interest rates, the amount of capital and debt in the market and recent transactions will influence valuations and decision-making surrounding M&A.
Beyond outside factors, companies should look internally to ensure a successfully completed M&A.
There are essential steps all companies should take when conducting M&A in a changing environment.
Answer 'why'
Most deals start with an understanding of a company’s M&A strategy and how a merger or acquisition fits in that corporate direction. Is a merger intended to fill gaps in capabilities and market desires, or is it to grow in an area aligned with changing economic circumstances? Is it more cost-effective to evolve through a deal than to do so organically?
Clarity of purpose will assist all upcoming actions and decisions. Establishing a clear “why” is a critical first step in any successful M&A strategy.
Consider outside M&A expertise
Ensure the business’s management team has a highly skilled set of advisors to guide owners and leaders through the merger and acquisition process. Lawyers, bankers, communications firms, government relations specialists, HR consultants and others are critical to the process.
FNB, for example, has experience in investment banking with a focus on providing M&A guidance to ensure a successful process and outcome.
Anticipate evolving M&A regulations
The regulatory steps associated with M&A vary from jurisdiction to jurisdiction and can frequently change. Organizations need to keep an eye on these developments – especially when diversifying their capabilities, adapting to new governmental priorities or if they plan to expand into a new market or industry.
Create, build or maintain a strong culture
If a business has a strong company culture, acquiring a new entity runs the risk of upsetting the delicate mix that goes into a successful workplace. It is important to understand the company being acquired and what people enjoy about being there; then take steps to ensure the positive aspects of both company cultures remain. Additionally, evaluate the leaders at an acquisition target, find the exceptional talent and try to retain them.
Flexibility to pursue M&A growth
Companies may find themselves in growth mode when the broader environment is ripe with acquisition targets, but they may not fit a traditional lending profile. They may have concerns about a deal’s impact on their liquidity, or their performance may not align with their bank’s capital requirements. For those companies, flexible financing options are available.
Mezzanine financing “sits” between debt and equity on the balance sheet and has characteristics of both. For companies that have exceeded senior debt borrowing capacity – or want to preserve it – while seeking growth capital and do not want to raise outside equity, mezzanine financing can be an ideal solution.
Benefits of mezzanine financing include:
Another alternative to traditional financing is asset-based lending (ABL), which is primarily secured by accounts receivable and inventory, but may also include equipment and/or other property. ABL typically offers fewer covenants and greater flexibility than is typically available in a commercial structure.
ABL can expand borrowing capacity for an asset-rich business with cash flow limitations, empower growth or free up liquidity to accommodate working capital needs.
Learn more about the range of financing options available that can unlock M&A in the “Expand Your Business” section of the Business Knowledge Center.
