M&A and Value Creation Strategies in 2015

This follows a pattern that saw 2014 M&A deals at their highest level in six years. Rob Schipper is head of investment banking at Fifth Third Bank, and he and his team regularly advise companies and owners on strategic alternatives including M&A. Here, he shares his essential M&A tips to drive value and mitigate risk in transactions.

Consider people.

Having proper executives and managers in place before a merger or acquisition is crucial. “You want people who understand your industry and — ideally — people who’ve gone through acquisitions before. They need to be able to integrate the businesses and the cultures,” Schipper says. Many times, buyers create financial incentives for their key employees to share in the upside of a deal, giving them extra motivation to stay on board after closing. “The risk is that you bring two organizations together, but you end up losing your best talent in the process if you don’t have a plan in place to keep them on,” he notes.

Consider Process.

Whether your company is a buyer or a seller, M&A is a transformative event. “You can’t do this opportunistically; you’ve got to spend time making sure you have the right infrastructure, that you’ve analyzed the strengths of your business, and that you understand whether you have the right financial and management structure to achieve your goals,” Schipper says. In a typical six-month M&A process, you’ll spend the first two months preparing: determining what you want from the deal, getting advice from an investment banker or advisor on the risks and opportunities in the market, completing due diligence on your financials and positioning your company for growth.

Consider culture.

While the initial focus tends to be on valuations and prices, successful deals revolve around merging compatible companies that boost value. “We get business owners together early on to share their visions and talk about what they want out of the deals,” Schipper says. “It can get very emotional, which is another reason to have a good intermediary. We’ve had situations where the parties are negotiating very hard for what they want, but after the deal closes, the entrepreneur will be working for the new owner. It’s hard, when you’ve created that conflict, to somehow turn the switch off.”

Be flexible.

Many times, deals that look great at the outset don’t wind up closing or require far more work than anticipated. Meanwhile, transactions that look difficult sometimes come together more seamlessly than expected. Either way, you need to roll with the punches, even if that means no deal at all. “Sometimes we think we’re going to sell a company and when we get halfway into the process, we realize it’s better to recapitalize or bring in a minority partner and invest in growth first and evaluate a liquidity event down the road,” Schipper says.

Consider capital.

Putting in place the right capital structure to fund a transaction is a critical success factor. “While borrowing costs are near historical lows, the cheapest form of capital is not always the best,” Schipper comments. Maintaining financial flexibility to fund investment and growth, while managing unforeseen risks, is key. The good news for buyers is that there are various financing options for well-run companies. Banks are eager to make new loans, and private equity groups are eager to deploy new capital. The regulatory environment has impacted financing for higher leveraged transactions, which could impact financing costs for certain deals.

Be shrewd.

“If you don’t pick the right partner who understands your business, you’ve got a much lower possibility of completing your deal,” Schipper says. That’s why you’ll need professional advisors during any sale or purchase process: investment bankers, CPAs and attorneys. They’ll help you navigate due diligence, scope out targets and investors, assess valuations, negotiate prices and vet contracts, among other considerations. Fifth Third Bank has experienced bankers to help evaluate and execute strategic transactions including financing, risk management and advisory.

The environment is set for middle market companies to ramp up their buying and selling activity in 2015. Companies that execute with a well- thought-out strategy, planning and advice will drive the highest value creation.

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