Merger Failure Signals

Not all mergers are intended to deliver financially accretive results to the acquiring company. There are legitimate reasons to embark on mergers besides immediately enhancing shareholder value, as evidenced by greater earnings per share. For instance, companies can more quickly enter new markets via acquisitions than they can by organic growth. Companies can quickly snag valued intellectual property through acquisitions. Finally, firms can block competitors from obtaining valuable trade secrets, know-how and talented employees by making strategic acquisitions.

However, here are few signs that mergers--embarked upon for reasons of boosting shareholder value--may not come to fruition:

• The deals are large in terms of the market capitalization of the acquiring company. When the target's market capitalization exceeds 30% of the acquiring company's market capitalization, indigestion is likely to arise.
• Similarly, when the premium paid for the target company exceeds 40% of target's current market value, it becomes extraordinarily difficult to produce accretive shareholder value.
• Deals financed with stock are not as successful as those financed with cash.
• Deals that lack a strategic fit are less successful than those that are more closely tied to the acquirer's strategy.
• A substantial fall in the price of the acquirer's stock upon the announcement of it making an acquisition is an ominous foreboding of the success of the combined entity.
• When the companies internal projections do not reflect the benefits of the combination as heralded by upper management in the press, the promise of the announcements are unlikely to be met.
• When the management teams fail to set aggressive targets for financial performance (e.g. cost reductions via synergy or revenues ramping up as a result of cross-selling opportunities) that are to ensue after the merger is consummated, the employees are likely to be more focused on the uncertainty of the merger rather than trying to achieve operational results.

To find out more on IncreMental Advantage's Mergers & Acquisitions Due Diligence Conference on April 17-18, 2007 in San Francisco, visit www.incrementaladvantage.com/conferences or contact Neomi at neomi@incrementaladvantage.com or 609.919.1895 x100.