Successful M&A evaluation includes PE and emerging global markets

Thinking of growing your company via a merger or an acquisition? It’s important for strategic buyers to understand what’s shaping the market and the competitive environment when making such decisions. And it’s just as critical, says Wharton finance professor Robert Holthausen, to consider two external forces at work in today’s M&A market: cross-border activity, and the role of private equity.

“A lot of companies are buying and selling across borders,” says Holthausen, meaning that the target and the acquirer are in different countries. “In fact, these deals are about 30 percent of the total M&A market. Clients expect companies to be able to offer services and supply products globally, which is an important reason for the number of deals.” He says if you’re eyeing a company, you should expect that bidders from around the world might be interested in your target, too.

Another important consideration: private equity firms, whose deals now represent some 20 to 25 percent of the total M&A market. “PE firms are sitting on a lot of money,” notes Holthausen. “But even though they play a large role, they’re not on everyone’s radar. A company looking to acquire may think of itself as the strategic buyer who can use the asset best and thus as the strongest contender.”

He says companies can get caught off guard in the bidding process when they fail to consider the importance of private equity firms in the M&A market: “The strategic buyer sees all of the synergies it can create with the target company and is confident that it has correctly valued that company. But many times, even though PE firms plan to operate the business on a stand-alone basis, they can outbid a strategic buyer because they’ll finance the transaction with lots of cheap debt.”

Holthausen says if you’re looking to buy a company for under $5 billion, in many cases you’ll be bidding against PE firms, so understanding their motivations and considerations and how they value companies can keep you from getting blindsided.

“Be aware from the outset of the importance of PE players and foreign buyers who are affecting the M&A landscape and the competitive bidding process,” he notes. “You may have a great process and have identified an acquisition target that you have great synergies with. But you might not get it — at least, not at the price you want to pay — because a PE firm or a consortium of PE firms could outbid you. A foreign buyer who can create more synergies with the target could also swoop in and outbid you. When you understand the dynamics of the marketplace, you have a much better sense of what to go after and how to bid.”

Holthausen’s caveats exemplify the approach of Alternative Investments at Wharton, which advances knowledge through research on market forces, regulatory changes, private equity, and the globalization of financial institutions and services. By including this sort of crucial, timely information in Wharton’s curriculum, the School empowers students and executives to analyze the global M&A market wisely.