Back To Basics In Mergers & Acquisitions

  1. For small business owners who want to sell their businesses, finding a buyer is probably the most difficult aspect of any potential merger and acquisition (M&A). Unlike large businesses, small businesses lack a brand, market share and transparency in terms of corporate governance. The probability of an outsider buying up a small business is so low, that, in all my 26 years as a corporate lawyer in Singapore, I have only seen and transacted less than a handful of such cases.
  2.  What is more common, is for owners to sell out their majority and controlling stakes to long time senior staff and employees. Unlike the concept of “vertical” or “horizontal” mergers and acquisitions that one hears about for the bigger companies, I like to call this type of merger and acquisition “succession” acquisition.
  3.  What makes mergers and acquisitions work? I am asked this question many times. In my experience, I think sellers need to communicate better to potential buyers. They need to explain why buying their company is a good investment.
  4. From the buyer’s point of view there are several economic reasons why a company may be considered a good investment. The 4 most common reasons are:
  1. To extend their market
  2. To extend their product or services
  3. To take out competition; and/or
  4. To improve supply chain.
    These are not mutually exclusive, as there can be combination of intent. I shall refer to these as “economic intents”.
  5. Succession acquisitions are not really considered real mergers or acquisitions, because there is usually no economic intent expressed by the potential buyer. There is an imbalance of interests, because for the seller it is a way to retire and get a post retirement pay out, while the interests of the employees who “acquire” the company may just be to perpetuate the existing business; unless the employees can revamp the company towards any of the 4 usual economic intents.
  6. Knowing your buyer’s economic intent will also assist greatly when it comes to negotiations and valuing the company. An example of a successful merger and acquisition involved my clients, who wanted to sell their company. They were in the event organising industry. It was well known within the industry they had a unique event. When they started to put the word out that they were selling their company, the market immediately understood the value of the company was really in that unique event. So naturally, they attracted potential buyers who wanted the unique event to “extend their product/services” range. The merger and acquisition was eventually a success. I attribute their success to clear communication of the economic intent.

7. An example of a failed merger and acquisition also involved another client who was in the precision engineering industry. They wanted to sell the company because all the founders were close to retirement and they could not find a younger generation to succeed them. The business was very healthy and the revenue and profits were good. Yet and despite many months and years of putting the word out, there were no potential buyers. I attribute their failure to not communicating well to potential investors, how buying their healthy business will achieve an economic intent.