Keynote: thoughts on M&A in the current environment: to increase the likelihood that a deal can be completed, a company needs to differentiate itself from the pack.

• Author: Silverman, Stanley W.

Recessions slow the pace of M&A activity due to a divergence of seller and buyer valuation expectations and a difficult financing environment. Recessions are a natural part of economic cycles. They have occurred in the past, and will occur again in the future. Whether the divergence in valuation expectations during recessions can be sufficiently narrowed to close a deal depends on the motivations of both the buyer and seller.

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How can a board and management team increase the likelihood that their company will successfully complete a transaction? For a buyer, this means having the confidence of investors and lenders that the company is well run, can successfully execute stated business strategies with the acquired company, and can deliver promised returns. For a seller, absent nonmonetary considerations, it means obtaining the minimum acceptable price. A potential acquirer will pay more for a company if it feels the potential acquisition is well run and views it as a growth opportunity. The acquirer will pay less if it needs to fix the potential acquisition to significantly improve profitability.

Whether a deal can be financed during this or any other recession depends on whether the required amount of equity and debt financing can be raised in an environment where both are in shorter supply than in times of economic expansion. During this recession, less debt financing is available, requiring that more equity be invested in deals, lowering leverage and potential returns for acquirers, which will drive lower valuations. This widens the gap between buyer and seller expectations. Sellers may choose to wait until valuations recover, and use this time to improve its operation so it can command a higher price when the M&A environment improves.

What the board can do

The role of the board in this process is to ensure the right CEO is in place, and develop with the CEO the right long-term strategies to differentiate the company from its competitors. The board also sets growth and profitability goals and expectations for the CEO, and monitors progress on the execution of the strategies and progress towards achieving the goals.

The board needs to establish a compensation program that rewards the CEO and senior management for achieving results with an acceptable level of risk to the company, and to ensure that an appropriate portion of bonuses are paid out over an appropriate time horizon. The board needs to avoid the situation...