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Mergers and Acquisitions Best Practice

Mergers and Acquisitions: Today’s Catalyst Is Working Capital

by James S. Sagner

Executive Summary

  • In developed economies M&As are now used to acquire balance sheet assets, particularly cash hoards and other working capital; previously, M&A was oriented to strategic diversification or integration.

  • Although the volume of deals is down due to global economic conditions, the premiums paid for companies remain robust.

  • Acquirers appear to understand the risk inherent in these transactions, including the threat of investigation by US, EU, and Japanese regulators.

  • Until the recent problems with lines of credit provided by banks, many companies held excessive amounts of liquidity, making them vulnerable to unfriendly takeovers.

  • Various consulting companies have international practices in working capital management, including advising on mergers and assisting management to achieve efficiencies after the deal is completed.

  • Global M&A looks for the following characteristics: a high current assets-to-revenue relationship; a holding of cash that is not likely to be applied to business operations; and a proven income stream that should provide adequate cash flow to pay down borrowings used to provide financing for an acquisition.


Merger and acquisition (M&A) activities in developed countries once focused on strategic transactions for diversification or for vertical or horizontal integration. While that continues to be the situation in the developing economies, the M&A game in the United States, Western Europe, and Japan is often either to gain balance sheet assets, particularly hoards of underperforming cash, or to improve the acquired company’s working capital management. It’s a complete revolution in the way companies and investment bankers look at candidates for M&A. What’s going on?

Changes in the M&A Landscape

M&A transactions for all of 2012 declined about 10% from 2011 to US$2.2 trillion, the same level as 2010. CFOs have been holding more than US$3.5 trillion in cash while delaying deals for most of 2012, as EU countries slid into recession and developing economies such as China and India experienced lower growth.1 However, improving economic prospects and the need to manage costs and reduce competition led to several recently announced deals, including the merger of AMR (parent of American Airlines) and US Airways, and the acquisition of HJ Heinz by Berkshire Hathaway and the Brazilian firm 3G Capital Management (for US$28 billion).

Prior to the recession that began in 2008, the global annual appetite for M&A was nearly US$4 trillion. The premiums being paid for companies continues to remain strong, with the Heinz deal at 19% above the publicly traded stock price as compared to pre-recession deals averaging about 25% above the share price.2 The weak US dollar has brought several foreign buyers to the United States in the search for access to attractive markets and technologies.

Some of the past M&A hype has been tempered by a better understanding of the risk of these transactions, as documented by such publications as BusinessWeek3 and as experienced in the loss of value to investors.4 The lure of expanding markets, product lines, technologies, and customer bases drove much of M&A through the last three decades of the 20th century. Many of these hopes turned out to be illusory as mergers underperformed or failed due to incompatibilities between the marketing, production, engineering, financial, and systems functions of the participants.

Some mergers came under investigation by one or more US regulatory agencies, and were delayed, rejected, or abandoned. For example, the Federal Trade Commission has acted against “threats” of raised concentration in markets for frozen pizza, carburetor kits, urological catheters, and casket parts. The Justice Department hit mergers threatening to raise concentration in markets for frozen dessert pies, artificial Christmas trees, vandal-resistant plumbing fixtures used in prisons, local towel rental services, drapery hardware, and commercial trash hauling in Dallas.5 The European Commission has been even more rigorous in its merger reviews than the two US agencies.

Research by Towers Perrin and the Cass Business School finds that the most recent era of M&A deals has created value, rather than led to its destruction as in earlier periods.6 The emphasis has switched to the execution of the deal and a focus on improved financial performance.

Although strategic expansion will continue to be of interest despite the threat of antitrust review, future M&A practice will likely focus on two completely different attractions that avoid the regulators’ microscope:

  • underused liquidity on balance sheets, offering opportunities for the acquirer to redeploy cash in productive activities;

  • inefficient working capital management, leading to opportunities to improve the utilization of current assets and liabilities.

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