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This Is Best Time For M&A, If You Can Realize The Synergy

This article is more than 3 years old.

Chemical company Albemarle announced last week its intention to acquire all or part of Tianqi Lithium Corp, which has a controlling interest in the world’s largest lithium mine. For Albemarle, which is the world’s largest producer of lithium for electric vehicle batteries, this would be a well-timed strategic move. For CFOs looking to do a strategic acquisition, this may be the best time to buy. The sharp drop in public equity markets is triggering a buying opportunity. Valuations have dropped for private companies as well.  The question of whether to pull the trigger on a transaction depends on whether the buyer can add value to the acquired target and quickly integrate that company into its operations to realize synergies.

There’s no doubt that market prices have dropped with S&P 500 down 15% from its peak in Feb 2020. The valuation for any acquisition is lower. 

Despite the buyer’s market, there will be many companies up for sale. In 2008, as the subprime mortgage crisis began to unfold, 6% of the private equity-owned companies filed for bankruptcy. The rate may be higher in the current economic climate. For some private equity owners, the choices are to put in additional capital to bolster the business, file for bankruptcy or sell.

There will be many arbitrage opportunities. High-quality brands and assets of Covid-vulnerable companies can realize more value with a Covid-resilient buyer. Companies that were hard-hit are shedding assets to generate cash, improve liquidity and make debt payments. This will force assets onto the market. The right buyer can realize significantly more value from these assets than the low sales price under forced liquidation.   

Competition is distracted. Many CFOs are focused on keeping the ships steady through the choppy waters. Many companies don’t have the balance sheet to consider acquisitions. In this uncertain market, many companies will not have the clarity of vision to evaluate the long-term value of a strategic acquisition.

The acquirer will have to pay 25% to 50% premium to market share price to buy a company. The $26 billion acquisition of Sprint by T-Mobile, which concluded in April 2020, offered a 50% premium to Sprint shareholders to agree to the sale. The only way acquisitions at these mark-ups can add to earnings is if the acquirer can quickly integrate the acquired company. The synergies can be over 50% of the purchase price and can come from increased revenues with the stronger market position or operational efficiencies due to economies of scale or both.

The key determinant of the success of an acquisition is not the purchase price; it is what value is realized after the close. Most acquisitions fail not at the negotiation table but at the integration team meetings. Can the acquirer retain the talented experienced management team and fill in missing gaps with strong performers who can push for results? Can the acquirer keep the key strengths of the culture while making the changes needed to lift performance? Can the acquirer put in place incentive structures that motivate management to drive for results, even as they lose some independence and autonomy? Is the acquirer successful putting in place tools, processes, metrics to measure and improve performance? Can the acquirer realize synergy with other portfolio companies or with other subsidiaries by breaking silos?

For a CFO doing a strategic acquisition today, it may be relatively easy to negotiate a low-price purchase agreement over a few weeks. It can be much more difficult to integrate and improve and grow a company over the next months. It’s a great time to buy a cheap company today. The question is whether there is the experience and ability to make it into a valuable company in a couple of years. Or if the acquirer will end up with what they bought. A cheap company.

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