While mergers among giant public corporations capture headlines, small to medium-sized private companies are not immune to this phenomenon. It is easier to sell and finance mega-mergers like Chrysler Daimler-Benz and Amoco and British Petroleum, but what about selling mid-market companies? How do you sell your private business? How do you finance an acquisition? There are a number of issues that must be carefully examined by potential buyers and sellers before they even enter the market. Peter A. Ulin and Timothy W. Tully, partners at Boston-based mergers and acquisitions and private placement firm Tully & Holland, Inc. discuss some of these issues from their point of view.

Q: With merger mania sweeping corporate America, what is happening with mergers and acquisitions among private companies of, say, between $10 million and $100 million in revenue?

A: Activity among middle-market companies has been very brisk, particularly among consumer product companies. There are a number of factors driving this activity.

First, the market is at all-time high levels, and interest rates are at the lowest levels over a generation. There is no shortage of money looking to be invested in high-growth companies.

The private equity funds or venture capitalists with whom we do business, as custodians of the institutional money that has been temporarily placed under their management, are under tremendous pressure to put this money to work behind good management with a solid plan for growth.

Second, we have seen a lot of consumer companies under enormous pressure to become even more competitive. In an economy devoid of inflation, one cannot generate corporate growth by increasing prices alone.

In addition, many companies today want to do business with just two or three suppliers for a particular product, suppliers who will provide them with acceptable quality at the lowest possible prices.

This usually results in suppliers looking for ways to reduce their cost of production, distribution, and overhead. Companies that can do this, and continue to innovate, succeed; those that cannot get squeezed financially and ultimately may seek a merger partner.

The third factor driving today's middle-market M&A activity involves companies looking for growth. Growth can typically occur through growth of existing products or through acquisitions. Many middle-market companies have learned that it is faster, simpler, and safer to grow via acquisition of a strategically complementary business.


Q: What are some key issues buyers of a business should be aware of?

A: There is literally an endless number of factors that could go wrong for a buyer after he or she has completed an acquisition. For this reason, one should always be surrounded by an experienced team of professionals - an accountant, a lawyer and an investment banker. These professionals can help with the negotiation and structuring of the deal, legal protection and financial due diligence.

Beyond the legal and financial due diligence required to complete any transactions, some of the more important elements that buyers should focus on are the management and cultural aspects of the deal.

Specifically, buyers should be sure they have clearly articulated their goals to the management of the company being acquired. They should be sure that management is capable of delivering the often-rosy projections that justify the acquisition, and that management is properly incentivized to achieve those goals. A "meeting of the minds" on these matters, in addition to establishing how these goals will be achieved, is critical.

Q: How much time may a typical transaction take, and what factors can delay or expedite the process?

A: The process takes, on average, nine months to complete. It can take as few as six months, as many as 12 months, or may never happen at all if agreement to price and terms cannot be reached.

The factors that typically affect the timing of a transaction include the very best buyers being distracted by other events, which could delay the process. Financing contingencies can also delay a closing after both parties have signed a letter of intent.

Often, there is a layer of senior or sub-ordinated debt involved in financing the acquisition.

Should this take longer than anticipated to obtain, the closing could be delayed. The amount of due diligence and what is learned during the due diligence period can also, of course, affect how quickly things proceed.

The single biggest thing that can expedite the process is the level of awareness between two parties. If the two businesses know and trust each other, the entire process will go much faster and be much easier.

Q: What are some of the do's and don'ts of the M&A industry?

A: Two important factors: preparation for the eventual transaction and a reasonable expectation about the ultimate outcome. The process is very time consuming.

The due diligence and full disclosure required by buyers after a deal has been struck create the potential to distract one's attention from running the business at a critical time. If one is unprepared to provide standard information, then the seller begins to convey an unprofessional manner, which can later result in a suspicious buyer.

Time spent in advance with a corporate attorney, accountant, and investment banker, anticipating these needs and getting out in front of the process, can be extremely helpful.

Beyond adequate preparation, seller or merger candidates need to have a clear idea of what they want the ultimate outcome of the transaction to be. Not only must they clearly understand what the after-tax proceeds will be, but they also need to clearly understand and come to terms with how the deal will ultimately be structured.

© Boston Business Journal. May 21, 1999. Reprinted with permission. All Rights reserved.