Ensuring success in mergers and acquisitions.

AuthorCingoranelli, Dominic A.
PositionCertified public accountants

Closely held company owners expect consolidations to increase in the coming three years. Here's some guidance on ensuring a successful union.

Almost 70% of owners of small and midsized closely held businesses expect that companies in their industries will consolidate during the next three years. This finding of a survey conducted by the DAK Group and Rutgers University's Whitcomb Center for Research and Financial Services was reported recently in The Wall Street Journal. In addition, 62% of the owners expect to sell or merge their companies during this time, and slightly more, 64%, expect to make an acquisition. The high percentages for both sales and acquisitions can be explained by the tendency of owners to make acquisitions to strengthen their positions, in anticipation of selling.

CPA firm consolidations are also expected to continue. Consider, for example, the prediction emerging from the vision discussions of the AICPA Forensic and Litigation Services (FLS) Committee that "a steady and growing demand for CPAs with forensic accounting skills" will result in the "continuation of the trend toward the consolidation of smaller niche firms into larger firms."

Statistics have shown, however, that many past mergers and acquisitions (M&As) fell apart within five years, were later sold at a loss, or failed to meet management's expectations. CPAs can help to minimize such risk by expanding their role in these initiatives beyond providing their traditional financial and tax advisory services.

Let's dance

The M&A process has three distinct stages, focusing on organizational behavior and development. The first is the "Let's dance" stage. In Strategic Finance ("What makes a successful merger?" April 1999), David Hanna and Paul Walker noted the similarities between courtship and marriage, and an M&A. At the "Let's dance" stage, two parties consider a business union based on underlying strategic factors. Historically, CPAs involved in an M&A, whether as part of an accounting firm, a controllers' group of a corporation, or a regulatory team of a government agency, have focused on quantitative due diligence areas.

Although consistent with the educational and professional backgrounds of most CPAs, the traditional due diligence steps provided by CPAs do not address organizational behavior and development issues. Moreover, it's likely that the legal professionals involved in an M&A will concentrate on the appropriate entity formation, not on intangible issues such as culture. The CPA can add value to the M&A process by ensuring that the union is between two compatible parties: Not only should they offer each other complementary services and market, operational, and financial strengths, but also they should have compatible traits that...

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