Corporate merger boom ongoing in middle market

by John Qua

for the Business Journal

The corporate merger boom of the 1990s continues unabated. In 1997, mergers and acquisitions in the U.S. totaled just over $654 billion, more than 40 percent higher than the previous year. That figure represents 7,798 individual transactions.

It's not just the global giants that are cutting deals. The middle market companies in the $10 million to $200 million range Ð is also participating in the merger boom. Middle-market companies have been attractive acquisition targets for businesses in the same or a closely related industry and for financial buyers seeking attractive investment returns.

The middle market. In previous merger booms, such as that of the 1960s, companies bought up disparate businesses to diversify themselves as a protection from exposure to market cycles. In the 1980s, companies were bought and sold by third parties as investments.

This time around, however, the boom is about efficiency and market clout. Today's frenzy of M&A activity is being driven by a desire to concentrate on core businesses in an effort to strengthen a company's competitive position by dominating an industry.

Middle-market deals are motivated by the same factors as those driving the megadeals: economies of scale; market-share expansion; product line or service capability expansion; and acceleration of strategic growth. Financial buyers bring the capital needed to effect growth and perhaps position a company for a future initial public offering.

In many cases, buyers are looking for opportunities to grow and increase profits swiftly. In recent years, economic factors primarily low inflation have made it hard for companies to increase profits by raising prices. Instead, strategic buyers are seeking to broaden their product lines or increase their services through mergers.

At the same time, rising stock prices and easy credit have greased the wheels for attractive deals. And, companies acquiring others in their own industry have been prepared to pay more, because they believe they will be able to extract more value from their targets.

A seller's market. A 1997 DAK study found that 44 percent of small business sellers were age 45 to 65 and were selling for strategic reasons, rather than lifestyle factors such as age, health or the desire to cut back on work.

A successful sale begins with an accurate assessment of your business's worth your financial advisor can help you arrive at an accurate value that will put you in a position to negotiate a sale on the most advantageous terms.

To add value to your company, address any outstanding issues that may give a prospective buyer second thoughts. You may want to spruce up your facilities, for example, expand your business base or sell off non-operating assets.

Once your business is ready for sale, your financial advisor will start an aggressive marketing program. With your help, he or she will prepare an in-depth profile of your business to show to qualified prospective buyers. A financial adviser will also help you identify the most viable buyers for your business.

The future of the business will be of equal, if not greater, interest to potential buyers.

Be sure to anticipate questions that you believe potential buyers may ask. And be ready to quiz potential buyers yourself. As the seller, you will want to know what the buyer can and will do for your business, your managers and employees, your customers and, most importantly, your own long-term plans.

(John Qua is senior vice president and director, business financial services for Merrill Lynch).

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