Recent KPMG report indicates that many companies are funding M&A activity with cash. KPMG expects that healthcare, pharmaceutical and life science industry will lead in M&A activities, followed by technology, media, and telecom industry. In reality, M&A is more often about acquisition than merger. Whether a merger or an acquisition, the companies involved often seek to improve their standing with economies of scale, efficiencies, or enhanced market visibility.
Study says companies that fail to achieve goals of the merger are at nearly 83 percent. The reasons varies from valuation being too high, the culture shift between the two companies was too large or the value was misunderstood. Companies are getting more cautious on the quality of deals; quality trumps quantity as investors also get more critical and request more strong growth strategies.
According to the study, respondents intend to pursue additional strategies to increase revenues and 38 percent plan to increase revenues through new product development. Most respondents believe that the M&A environment will be dominated by smaller and middle-market deals. 50 percent of all respondents said that the average enterprise value per acquisition would be less than $250 million.
According to respondents, the most important separation issue that arises during a divesture is clarifying the operational links or entanglements. Other key separation issue understands the deal parameters. Buyers should be aware that data driven due diligence can mitigate many challenges, including execution issues. 54 percent of respondents expect interest rates to increase in the second half of next year; 23 percent expect rates to increase in the first half of 2015 or in 2016.
When a change in control of a company happens, survey indicates that there is usually a different compensation plan for executives than there is for other employees. Retention incentives are customarily based on a percentage of the base salary and in accordance with the level and responsibility of the employee.
U.S based companies pay a higher retention bonus to executives who are considered critical for the long-term success of the company-the median bonus is 95 percent of the base salary. In Canada, that median bonus drops to 75 percent. In Asia, the median drops further to 45 percent, and Europe has the lowest median retention bonuses at 25 percent of the base salary. Understanding the timing of the retention bonus will help the researcher to understand the timing of a request for a philanthropic gift.
It is most common for retention bonuses to be paid out in a lump sum at a pre-determined time period after the deal has closed. Transaction bonuses are paid out when there is a successful transaction. KPMG have structured their approach through an investor’s lens to ensure they are focused on some characteristics to help their clients identify, evaluate, and successfully implement growth strategies.