The new model for mergers and acquisitions

New World of M&A

The context for traditional M&A we’re using is the US business environment from 1982 (the end of the stagnant stock market and the Nifty 50, and the advent of the emerging tech powerhouses like Intel, Microsoft and Apple). Prior to that time, traditional M&A primarily involved one public company acquiring a smaller company or two public companies.

ELEMENTS OF CHANGE IN BUSINESS ACQUISITION

The transformation within the M&A world taking place over the past generation is significant on many levels and there are many factors reflecting the change.

  1. Many more private companies are acquired and making acquisitions today than 30 years ago.
  2. The financing scheme for acquisitions is very different today than it was then. This includes SBA financing on smaller deals, angel, private equity and venture capital equity deals. Even crowdfunding presents a new means of raising capital for a deal.
  3. IT and some non-IT companies grow and are sold rapidly.
  4. Mergers are not the norm today, acquisition and divestitures are.
  5. The concept of money has changed. The advent of online transactions and the numerous portals for investment, even without considering the universe of cryptocurrencies, brings new great opportunities for completing financial exchanges without the burden of many closing formalities that were necessary in the past.

The above list is by no means complete. In fact, the business environment has changed so much since 1982, it might be impossible to compile a complete set of factors reflecting all of the change.

THE NEW MODEL OF MANAGEMENT

One change I omitted from the list intentionally that warrants a discussion on its own is the difference in relationships between owners and management today. In 2018, managers are much more likely to be owners than they were in the 1980’s. This transformation has come in waves that have each set the path for the one to follow.

f you were part of the world of business back then, you could recall that the business books of the day focused on management philosophy. Today, the focus is on entrepreneurship and investment – ownership philosophy. The books written by Peter Drucker and other authors of that era, focused on what owners should do to select, train and mentor managers, and they seemed to be written with the expectation that the structures of corporate America at the time would remain the same structures that would dominate the business landscape forever.

But the business world was transforming even as these books were coming to press. By the late 1980’s the first generation of the new hires and business managers who would be treated like valuable assets to the company rather than materials to be shaped by an employer was emerging.

I remember a conversation I was a third party to that took place in about 1990. I was newly acquainted with Windows, thought of Microsoft as a tangential service provider (even though their operating systems already dominated the PC world) rather than a large cap powerhouse, and the corporate world on the whole as pretty much exactly what I had been taught in business school at the time, i.e. changing at a glacial pace, rather than evolving into something highly dynamic, which is exactly what was happening.

The young man and woman I listened to were seeing a very different world in front of them. He, working for a large, national consulting firm, and she having worked for three years at Microsoft. They saw the world quite differently than did at the time. What they witnessed was rapid change, owners valuing human capital in ways they never had before, commitment to innovation and zeal for competition that just hadn’t existed in the business marketplace 10-15 years before.

That discussion made me change how I thought about the future of American business. I had to begin seeing it happen in front of me.

What came next is even more amazing to me. The go-go 80’s preceded and begat the super-go-go 90’s.  As large companies acquired their competitors, they laid off tens of thousands of mid-level executives in efforts to cut payroll expenses and become more profitable even while consolidating the top layer of many industries. As competition in old economy industries declined, the dominant players in those industries became more clear.

There were fewer competitors and more companies behaving like virtual monopolies, or oligopolies. But there more experienced, talented, business people looking for work at the same time. And along with looking for work, this crop of business execs came with a new perspective – a perspective they would pass on to the next generation of business talent – there is no security in the cushy, corporate job anymore. Rather, all of the security you can muster is founded in your own ability to innovate and sell ideas to others in business.

THE ERA OF SELF-RELIANCE

And so came the 21st Century. Yes, it came along with the bursting Wall Street bubble, the Iraq War, the foreclosure crisis and the Great Recession, but it also came with the Millennials’ technology savvy and keen recognition that no one would take care of them in their adult lives except themselves. These two factors aren’t just new and different, they are utterly transformational to the business climate.

The business culture is now populated with a generation that has zero loyalty to a company, and zero reason to have loyalty to a company.  That’s not all good by the way, but it is real. It does mean that companies have to be keenly aware of the value of the human capital they work with. So employees get equity in companies much faster than in times past. And people start businesses and seek innovation much more consistently and much more often.

Arguably, the culture is becoming a culture of a wide series of individual monopolists – you have a good idea, and you own it. You have a good enough idea and you can sell it. Even better idea? You can sell the concept as intellectual property and it becomes its own entity, and an investment.

So now, the simple “good” or service that historically could be sold as a product of the company, becomes the company itself. Instead of acquiring a transactional product, you make the acquisition of a business.

The velocity of a business acquisition is actually in the early stages of accelerating at a hyperbolic pace unseen in history. But it’s not there yet. Actually, the current environment of business acquisitions is incredibly fast-paced and hot. But it’s nothing like it will be 10-20 years from now.

DEMOGRAPHICS AND FINANCING ACQUISITIONS

As for today, the market is exceptional for other reasons as well as those cited above. For one, the age demographic of the baby boomers, and all of their privately held businesses is ripe for current owners to sell. Second, the wave of manufacturing competitiveness that exists presently makes the small manufacturer the ideal target for vertical integration. In truth, today’s marketplace looks more like a divestitures and acquisitions market than mergers and acquisitions. There are many other reasons too.

The bottom line is M&A related services today are far, far different than those of the past. The marketplace is much more wide open. At the same time, the complexity of identifying, pricing and going through the due diligence process for an acquisition target remains very high for the typical business investor. To make the accessibility of the marketplace work best to your advantage, utilize the talent and skill of experienced professionals who work in the acquisitions field every day.

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Landmark Advisors

Landmark Advisors