M&Amp;A Mania: Boom or Bust? Part I


I am by training a mergers and acquisition (M & A) lawyer. I love what I do. I enjoy the clients I work with and the challenge of the deals. That is my bias up front. Hopefully, it is also a valid basis for my perspective from the inside, so to speak.

Since there has been so much discussion of late about the relative wonders and evils of the M & A activity of the '90's, I thought it would be appropriate to weigh-in briefly as well.

M & A transactions, particularly with the continuing trends of increasing globalization of business markets and unbelievable strides in technology, will likely continue at an unprecedented pace - even if the economy slows. In a world driven by technological change and market economies of the scale, if not global, certainly international and national for even the smallest businesses, M & A deals and various other types of business combinations are inevitable. The question is, "Is this good?"

Many believe that it is not - that M & A activity leads to bigger, more monopolistic industries and industry leaders that are ultimately detrimental for consumers. I believe that certainly there are instances where some of the evils described by these naysayers may have occurred. However, from my own experiences, I believe these concerns to be vastly overblown.

In most situations, I believe that consumers and the businesses' employees have ultimately been better off than had the business combination not taken place. In many instances, at least one of the business parties was doomed to a continuing shrinking market segment, or other significant competitive disadvantage, or perhaps to failure entirely. Even in situations where some jobs are lost or other unfortunate consequences occur, generally these situations have been, by far, the lesser of evils. In most cases, the merger or acquisition has resulted in a much stronger business capable of continued growth, providing increased profits to shareholders, additional and better jobs to employees and superior services to customers.

If we believe in market economies, and the success of this country leads one to give that notion a nod, the overall successes of most mergers and acquisitions can be gleaned from the fact that such transactions continue to take place at unprecedented levels. However, as might be expected, neither the purported evils nor the supposed benefits of M & A transactions are true of every situation in their purest forms. Most deals, like most things in life, are some mix of both.

Most mergers, acquisitions, dispositions, joint ventures and other types of business combinations are not without accounting, tax and legal expenses, as well as substantial investments in time for management, marketing and other corporate resources once the deal has closed. To break even on such transactions means that overall market economies have developed such that the benefits of these transactions generally outweigh the risks and costs involved in undertaking them.
This country is currently in the fourth consecutive year of record-breaking merger activity. In the U.S., well over 10,000 mergers were announced last year with an aggregate value of over $900 billion dollars. While certainly the mega-mergers dominate the airwaves in terms of publicity, both good and bad, such M & A activity has, in fact, been fueled by the backbone of the American economy - middle market companies. These middle market companies, some of which are in our very backyard, have dramatically altered the business landscape from New York to London to the Piedmont Triad.

While many mergers and acquisitions of the 1980's resulted in extremely poor results and were found to have been motivated by unsound economic and market strategies, most of the mergers of the 1990's are proving to be relatively soundly financed, with motivations deeply rooted in strategic incentive.

With all of the mergers of the 1990's, one might expect to find incredible unemployment due to dislocation of employees and various redundancies resulting from business combinations. But, in fact, we find ourselves in history's longest economic period of growth, with extremely low unemployment and low inflation. Certainly this cycle will not continue forever. It appears to be equally true, judging from history, that such a cycle should not continue indefinitely, as periods of retrenchment and integration of such transactions are critical for the growth of the economy to prepare effectively for the next cycle of significant merger activity.

A number of factors, many of which have become ever more critical in today's business markets, are fueling mergers and acquisitions as a means of accepted corporate strategy. Next month I will consider many of these factors, in part for the benefit of those entrepreneurs, business owners and business managers who are considering such a transaction.

To foreshadow that discussion, however, most business owners, managers and their advisors consider factors such as the ability to provide more comprehensive and competitive product lines, the additional means of entering new markets, the ability to attract top management, the ability to better share the costs of production and the elimination of unproductive overcapacity, and better economies of scale in terms of technology and other capital expenditures to lower costs and improve ultimate shareholder value. Appropriately considered transactions, despite their up-front costs, can result in win-win situations for a number of constituencies of each party to the transaction and to each party as a whole. As mentioned, these constituencies include not only management and shareholders, but also consumers, employees and the local economies of the businesses.

To be fair, however, that is not to say that transactions cannot go awry and that anticipated synergies and other benefits may not be realized. As part of considering the possible benefits of M & A transactions, I will also try to note where these benefits can take unanticipated turns. In some cases, proper planning - both business and legal - can assist the parties in increasing the likelihood of the anticipated benefits and decreasing the possibility of unexpected downsides.

Mergers and acquisitions are likely to continue to be a significant and important part of the business world. How to enhance the value of such transactions and avoid the potential pitfalls are important considerations - perhaps for everyone.

Rich Drake is a Member of Womble Carlyle Sandridge & Rice, PLLC, practicing in the Corporate and Securities Group in Winton-Salem. Mr. Drake advises clients on practical approaches to achieve desired business outcomes in a variety of corporate, securities, financing and business technology matters.