Strategic acquisitions: prepare to buy: a key component of an effective corporate development strategy is strategic acquisitions.

• Author: Lunkes, Joseph C.

Corporate boards must not lose sight of one of their primary responsibilities--to focus management on strategy development and long-term business performance. This is especially true in today's market when the prevailing focus of management may be to impose constraints in response to recessionary conditions. A key component of an effective corporate development strategy is strategic acquisitions.

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Like the economy, merger and acquisition markets move in cyclical patterns. Beyond the obvious cycles of reduced deal activity and valuations, some cyclical trends are now favoring strategic acquirers. Boards of directors would be wise to encourage their management teams to prepare for and exploit these opportunities.

The M&A cycle

Private equity groups' prominence in the acquisition market has faded and this trend will continue for several years. Syndicated credit markets tapped to fund these acquisitions have dried up and will remain so for the next few years. The stock market decline has forced institutional purveyors of private equity capital to reassess their assets allocations and portfolio liquidity, resulting in diminished capital allocations. Fund performances will catch up with public market trends and the results will not be attractive, resulting in the contraction of private equity firms.

The M&A market cycle will also swing to smaller deals. With both stock and M&A market valuations down, deals involving larger corporations are more likely driven by restructuring sellers versus acquirers pursuing corporate development. In addition to restructuring, activity in the middle market will also be driven by the life cycle needs of aging entrepreneurs and private equity limited partnerships, both of whom will face increasing pressure to create a more liquid equity investment.

In recent years, speed to close and value dominated the decision-making criteria for evaluating potential suitors. These were the hallmarks of private equity. Today, strength of financing and strategic fit are key criteria sellers and their advisors use to assess suitors and assign a probability to close. With strong balance sheets and firm banking relationships, focused corporate acquirers should exploit this advantage.

Conventional wisdom suggests that valuations are down and sellers will not be motivated until there is an alignment of market values with their intrinsic value. This is typically true at the onset of a cyclical downturn but as noted...