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David Braun

David Braun founded and is President of Virtual Strategies Inc., a consultancy which advises clients on proactive acquisition or divestiture programs.

The firm has acted for small and family-owned businesses, as well as Fortune 500 and multi-national companies, in a wide range of manufacturing and service industries.

Over the past 10 years, Mr Braun has lectured to over 10,000 top-level business executives, through the American Management Association and various industry organizations.

How to make gains from M&A activity

1. Invest in experienced buyers.

If you’re investing in a company that is entering acquisition mode, make sure the people running it are experienced in M&A. A company that has executed a few successful deals recently is a better bet than one which has just started to think about making acquisitions.

2. Back an acquiror with a comprehensive strategy.

To maximize the chances of making successful acquisitions, an acquirer needs to have a compelling external growth strategy, with associated milestones and timeline. Avoid investing in ‘one-trick ponies’ – those companies looking for the one silver bullet acquisition that will propel them to where they want to be.

3. The acquisition of a great company is only as good as its integration plan.

The acquiring company needs to have a solid integration plan that solicits involvement from key management in every major functional area. Look for evidence of a ‘100-Day Plan’ which illustrates in detail exactly how the two companies will be fully integrated 100 days after ‘go live’ day (the close).

4. Ignore the financials.

Well, not entirely. But avoid investing in a company that is making acquisition decisions based on its CFO saying “we can get a great price on this company.” Remember, a balance sheet doesn’t generate profits - people do. Accretion/dilution should not be the number one acquisition criterion. Simply stated, you can overpay for a good company and recover your earnings with time, but you can underpay for the wrong company and never recover.

5. The customer is always right.

When deciding whether consolidation makes sense for a company whose stock you own, consider its customers. The mere fact that a sector is fragmented does not make it ready for consolidation, and conversely, there are plenty of fairly concentrated industries that are still managing to consolidate with impressive multiples (e.g. banking). A good rule of thumb is to look at the industry’s customer base and determine if there is demand for consolidation. Good industries to watch are those that have major, multinational customers that will demand a wider-spreading presence.

6. When investing in potential takeover targets, do your homework.

Don’t rely on hunches, gut instinct, or market rumors. Identify companies that are likely sellers due to below average stock performance (and restless shareholders), older senior management, ownership base, etc. The market may unfairly undervalue some companies by painting them with the same brush as an entire underperforming industry group.

7. Don’t be duped by a target’s stock that is ‘on sale’.

Avoid arbitrarily investing in a stock that seems to be underpriced in the hope that it will later be sold for a premium. Many stocks, while appearing to be bargains, are simply ‘broken’ or long-term underperforming stocks. Just because the stock was once trading at a much higher level it is by no means certain that the stock will ever return to its previous high.

8. An acquisition premium may already be built in to a stock price.

Do not necessarily vote against the sale of control in a stock you own because the offer price is not at a significant premium to the current market price. The market may already have incorporated an acquisition premium into the stock, therefore minimizing the potential for an additional premium offered by a buyer.

9. A receding economy creates novel M&A opportunities.

Many people assume that a downturn in the economy will drag M&A volume down with it. In fact, shifting market dynamics of any kind will change the complexion of deals, but not necessarily the volume. For instance, a company that has been on a buying spree to diversify its business may decide, in a tightening market, to return to its fundamental competencies and sell off a non-core business line, thus creating an acquisition opportunity for a buyer.

10. Question the Board of Directors before voting to accept an offer.

When confronted with an attractive offer, the Board of a target company may need to be reminded of its fiduciary responsibility to shop the deal around for the highest sale price possible. Many buyers will finagle their way into an exclusive offer, which may appear attractive enough to woo a Board that is eager to complete the sale.

‘Stock prices are anchored to ‘fundamentals’ but the anchor is easily pulled up and then dropped in another place. Given that expected growth rates and the price the market is willing to pay for growth can change rapidly on the basis of market psychology, the concept of a firm intrinsic value for shares must be an elusive will-o-the-wisp.’

Burton Malkiel