M&A Pitfalls

What will trigger the next round of M&A activity in the Greentech space??It may have already begun with EcoVapor Recovery Systems - A DNOW Company becoming a DistributionNOW company.?Congratulations, Jason Roe and team, for putting together a solid solution!?Once government regulations are determined, the “correct” solution will come to light, and companies that provide the best solution will be ripe for acquisition.?As an investor/trader, I am always looking for that edge. ?What are some things to look out for?

First is developing a sense of where government regulations are heading.?This can seem impossible as this changes faster than the wind during a tornado!?However, you must have enough knowledge to make an educated guess.?Yep, a guess.?Why not just wait until everything is “settled” and then make a move??Suppose you find a company you think is the silver bullet to solve a critical problem in the industry.?Your valuations have them at X, but after the new regulations come out, everyone knows they are the silver bullet.?Now their values are several multiples of what you valued them at.?Plus, with the human nature of the fear of missing out, you can add more multiples to that as companies fight for control of that technology and bid the price up even further.?This is one of the classic pitfalls of acquisitions that can lead to poor returns or massive write-offs if the technology does not pan out.?Anytime someone gets in a bidding war, the “winner” always overpays.

Second, why is the acquiring company considering buying this technology??The answer better be that the acquisition works towards completing a well-thought-out strategy that increases the company's value.?Of course, you could buy revenue or headcount, but those acquisitions are not game changers.?Finding the hidden gems with a value that you can unlock by bringing them into your organization is where next-level value is found.?After determining your organization can not build this capability on your own due to patent issues or it will take too long to develop, then considering an acquisition makes sense. With this technology, you have determined that your next critical strategy will succeed.?If not, then this significant hole will jeopardize the whole strategy.?More than likely, a strategy that relies on acquiring and implementing new technology will be a complex one that needs to fit in with many other growth initiatives or acquisitions.

Third, having an acquisition complementary to your existing organization is critical.?A couple of pitfalls come into play here.?Forcing an acquisition valuation by juicing up the synergies is a common trap.?Remember the fear of missing out situation??Justifying buying a company due to the fantastic cost savings and synergies is a poor justification for entering into a bidding war.?Careful thought-out synergies that make it into the financial valuation should only be considered if all stakeholders agree that the synergies exist and how big of an impact they will have on both organizations. ??The other issue is that cultural integration should be considered early during due diligence.?Smashing two companies together with very different business cultures and telling them to play nice is a tough battle ahead.?At least it will be without spending time on these issues during the integration process.?So often, the financial valuation focuses on the value created (2+2=6 (or more) and how it benefits external stakeholders.?However, don’t forget to include the benefits to the employees on both sides of the acquisition.?One side feels they are being taken advantage of or doesn’t understand the rationale for the merger; you could have a mutiny on your hands!?

If you are reading this, thank you for reading my musings on mergers and acquisitions.?Overpaying for an acquisition that does not have a clear strategic goal can lead to disaster.?I would love to hear your thoughts!

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