Take Our Outfit -- Please!
By Gabor Garai
One of the ripple effects of the dot-com boom's collapse is the unraveling of many of the mergers and acquisitions that marked the late '90s. The trend is most visible among public companies, where major media and other conglomerates are aggressively seeking to unload some of the properties they acquired. But it is also happening among private and less-visible midsize outfits. So desperate are the conglomerates to be rid of unprofitable divisions that, in some cases, they are giving up on selling the units, and instead moving to shut them down.
As is often the case in financial markets, though, one outfit's problems are another's opportunities. The eagerness with which yesterday's acquirers are seeking to shed disappointing acquisitions means that bargains abound for today's smart buyers. Increasingly, such buyers -- growing companies, investment groups, managers of the units slated for divestiture -- are stepping up to the plate and completing acquisitions for a tiny percentage of what the seller paid just a few years ago. Some experts have estimated that leveraged-buyout firms have more than $80 billion in funds raised during the 1990s. With leveraging, this could be the equivalent of more than $300 billion available for acquisitions.
Just as the Internet boom pushed acquisition prices into the stratosphere, the current sour economy and bear market on Wall Street are depressing prices way below what some for-sale corporate properties would be worth in a more stable environment. Prospective buyers who understand the dynamics of the divestiture trend can pick up what can only be termed significant bargains -- and do so while locking in long-term growth opportunities.
A BURDEN WORTH SHEDDING.
As just one example, a major American conglomerate recently sold a British-based, 20-employee division with nearly $2 million in annual sales and $500,000 of assets to an investment group. The price: the nominal charge of one pound sterling, about $1.50, for which the acquirer had to assume responsibility for more than $1 million of liabilities and any severance-pay obligations.
For a conglomerate seeking to divest, the pressures are enormous. Often, these companies are losing money, and shareholders are demanding that management cut costs and restore profitability -- sooner rather than later. For example, Interpublic Group (IPG ), the huge advertising conglomerate, made 185 acquisitions between 1999 and 2001. Now, it is reported to be assessing which ones to divest. This follows a stock-price decline of more than 60% this year, and the downgrading of its bonds to near-junk status. Any outfit obliged to sell a property under pressure is at an enormous disadvantage in the marketplace.
When they can't sell quickly, the conglomerates are often tempted to give up and simply shutter the properties. But this option is filled with its own set of potholes. There are usually significant losses to be incurred from canceling leases, backing out on contracts, refunding money to customers, and paying severance to terminated employees. The earnings hit that such charges inflict can make a bad situation much worse for a publicly-held company, especially one whose shares have already been battered by the bear market.
Clearly, such sellers are often much better off simply giving properties, especially if that means getting the buyers to take over the ongoing obligations. In some situations, amazingly, it even makes more sense for the sellers to pay the buyers something, or continue paying for one or another ongoing obligation, since such costs are still less than the cost of shutting a division.
For prospective buyers, the current market requires adjustment in perspective and tactics. The rules about acquisitions have changed in what has become very much a buyer's market:
• Don't automatically assume that the price for acquiring a corporate division or unit is beyond your means. As I have suggested, the sellers are often desperate to unload corporate assets. This doesn't necessarily mean they will give an asset away -- often they are under pressure to realize some certain minimum return -- but the amount of flexibility may be greater than you might assume.
• Be sure to fully understand the state of the division or unit being sold. While such "due diligence" has always been key, it's now essential to look more closely at the financial underpinnings of a corporate property that is up for sale. Invariably, such a property is losing money -- but the reasons why may not be clear. Are the losses due primarily to the down economy of recent years, or has the corporate parent been "milking" the property, perhaps assessing unreasonable overhead charges? To the extent you can identify the problems, you can determine your ability to fix them.
• Think creatively when negotiating terms. Never has it been more important to understand the seller's motivations. If it is most important that the seller be able to announce the sale of a division or operation, then consider how you can help the seller accomplish that -- and how you can do so at the most advantageous financial terms.
The old adage, "buy low, sell high" applies as much to the mergers-and-acquisitions game for small and midsize outfits as it does to investing in the stock market. Rarely have the opportunities for buying low been as abundant as they are now.
Gabor Garai is a partner in the Boston office of national law firm Epstein Becker & Green, specializing in the financing and growth requirements of small and midsize companies.