Mergers and Acquisitions For Dummies by Bill Snow Read Free Book Online Page A

people wanted to forecast the future in days of old, they would observe the flight patterns of birds . . . and then make up something. Today, folks read newspapers and the Internet, follow their gut instincts, and try to guess what’s going to happen next.
    Timing the market can be a dangerous pursuit, but if a business owner believes the future involves technology developments that will render his company a has-been, or worse, obsolete, he may be ready to exit the industry by selling the business.
    For Buyers, changes in the industry are always a risk. Just ask any newspaper about how the Internet changed the way news is disseminated.
    I’ve got troubles, troubles, troubles
    In the “How did I get here?” file, you find the troubled children of the M&A world, often known as troubled companies, special situations, challenged companies, and turnaround opportunities .
    Troubled companies run the gamut from handyman’s specials that just need a little TLC to those that should be in bankruptcy. A company that is suffering from poor management decisions but remains a going concern (liquidation is not on the horizon) may make a suitable acquisition for an acquirer well versed in turnaround work. On the other end of the spectrum, a company that is no longer a viable going concern should probably be liquidated by an orderly bankruptcy.
    Although the reasons a company becomes troubled are virtually limitless, you can pool them into three distinct buckets:
    Changes in the macro-economy: A general downturn in the economy, much like the one experienced in the latter years of the first decade of the new millennium, often has a chilling effect on many companies, including those that are fundamentally sound. An otherwise healthy company that has been beaten up by the market (suffered declining revenues and profits) is often a great acquisition for a savvy acquirer.
    Managerial mistakes: Companies can suffer a downturn at the hands of poor management. Bad managerial decisions may or may not be tied to the general economy, and include overextending the company’s operations by opening too many new locations (often, the second location constitutes “too many”), making bad hires, neglecting to reinvest in the company, throwing company resources after a bad idea, and failing to participate in a new trend in the industry.
    Is this company worth the trouble?
    In addition to considering the nature of the target’s downturn (macro-economic, managerial, or changes in customer preferences — see the nearby section), a wise Buyer also looks at a few other key considerations when determining the value, if any, of a troubled company:
    Is the target still profitable? If profits are down (perhaps even greatly down) but the target is still break-even or better, a Buyer will be able to ride out the storm (because the acquisition is not burning cash) and wait for the economy to pick up. After the economy turns around, the acquired company’s bottom line will be in position to snap back to its previous higher levels.
    What are the target’s trends? Is the target continuing on a downward slope, or does it appear to be on the rebound? If the worst is behind the company, a Buyer will be in good position to pick up a bargain.
    What’s the target’s top line revenue? Even if a target is suffering losses, that company may still have a great deal of value if revenues are large enough. What’s “large enough” depends, of course, but in a general sense, a $40 million revenue company has far greater residual value than a $3 million revenue company. A Buyer may be able to move the target’s operations to a new facility and/or eliminate duplicate positions, thus rapidly improving the bottom line of the acquired company.
    Does the company have a recognizable brand name or other intangible qualities? These factors are notoriously difficult assets to value, but if a company has a recognizable name