Behind the Wheel

The increased pace of merger and acquisition activity late in 2010, including some huge deals, suggests that 2011 will be a busier year. Low interest rates, significant cash on many firms' balance sheets and stock prices that are low enough to attract buyers but high enough to move sellers off the sidelines all reinforce that possibility.

Decisions on acquisitions are always a challenge. There is extensive literature that documents the too-high percentage of failed combinations, ones that failed to reward shareholders with a positive return on their investment. Yet most firms are motivated to consider acquisitions as an element of their growth strategy, citing the potential contributions from acquired firms, including ones targeted to fill gaps in a firm's portfolio and ones seen as having the potential to help create a game-changing position. An acquisition can bring assets and competencies that are otherwise either unavailable or would take years to develop.

The hardest acquisitions to evaluate are those involving a decision to enter a new line of business and new markets. "Bolt-on acquisitions" are much simpler, involving familiar business environments with known characteristics and risks. Often, the acquisition target in such situations is quite familiar to the acquiring firm as one of the well-known players operating in the same market. But when the acquisition option involves a new and unfamiliar situation, the need to ask the right questions becomes paramount.

Most corporations have established solid processes of due diligence to evaluate acquisition candidates, spanning a wide spectrum of economic, legal and other factors. During the implementation of these processes, there is an intense focus on the firm targeted to ensure that its market position is solid, its assets secure and its financial structure sound. Such assessments are critical to decisions likely to yield success in the end.