When an economy is growing and strong, the prices of companies for sale tend to rise.
Sometimes a company is priced in a high range even if the overall economy is weak.
Higher prices mean higher risk for everyone but especially for financial acquirers. Sky-high prices decrease the chances that the deal will close.
What can a buyer do in these circumstances especially when only limited capital is available?
Add some sort of unique value?
Only invest in a minority stake?
Buyer smaller companies?
Joint Ventures?
Maybe some sort of creative structuring?
Here are some more ideas:
- First, buyers should be in no hurry. Be willing to wait it out. Wait for the right timing and pricing.
- Look at more deals. Look at as many as possible. It is possible the buyer can find one in the “rough” or that is overlooked that fits what they are looking for. It’s not likely, but possible.
- Buyers should stay only with those businesses that they know best. Strategic buyers have less risk of being hurt by overpaying than financial buyers. Strategic buyers know the industry and competition.
- Have well thought-out exit and financing strategies. Be ready to re-finance if necessary.
- If the buyer is a publicly traded company, its own shares might be trading at elevated levels. Use this high P/E equity to finance the acquisition. This is advantageous in that it avoids the long-term write-off of goodwill. These goodwill write-offs reduce reported earnings – never a good thing for a publicly traded company.
- When acquisition prices are higher more due diligence is needed. This is because the higher the price, the more risk there is. Good due diligence reduces risk.
- Buyers should consider unpopular industries, companies, and geographic regions. Pricing will be lower and if the buyer can hold on longer, it will be to their advantage.
- Have a great strategy and know how the acquired company will fit in with yours. Synergy is an overused word, but it is hard to find. Financial buyers have often used “financial engineering” in the past – where leverage, divestitures, cost cost-cutting is critical to the success of the deal. This has been done so much that there are few companies that have not been subjected to that discipline. So basic ‘blocking and tackling” may be less risky.
Of all the items above, the best advice to give a buyer in a time of high and increasing multiples may be to bide time. Item One above. As a well-known financial manager once said, buying companies is not like baseball where there are only three strikes. There will always be another bus if you miss the first one. Just be patient.
