Manufacturers & Distributors ARTICLE -

A risky proposition

Building a solid integration plan for a merger or acquisition

Target Audience: Manufacturing and Distributing Companies, M&D Industry, M&A Accountants

Merger and acquisition (M&A) activity fell sharply last year, but many experts believe it’s poised for a comeback. Still, entering the M&A arena can be a risky proposition — particularly for buyers — because of a weak economy, limited financing options and Financial Accounting Standards Board (FASB) guidelines that affected the M&A accounting process.

Although the prospect of acquiring a company in this environment may seem intimidating, several companies have found success by negotiating too-good-to-pass-up deals in which they acquire weaker competitors that have fallen behind during the recession. Before jumping into any acquisition, however, it’s important to build a solid integration plan.

M&A and FASB

The M&A landscape changed dramatically with FASB’s Statement of Financial Accounting Standards (SFAS) Nos. 141(R) and 160 in 2008.

Elements of SFAS 141(R) — which affect how items such as M&A-related attorneys’ and accounting fees, contingencies, and goodwill are accounted for — require a more critical eye toward any merger or acquisition. This makes it important to include tax, accounting and other finance advisors (both in-house and external) in the early phases of acquisition planning.

SFAS 141(R), specifically, changes the accounting process for U.S. companies in a major way. It mandates the use of SFAS 157 — Fair Value Measurements. In addition, 141(R) changes several accounting practices related to M&A, including requiring ongoing fair value testing of acquired assets and liabilities, heightened disclosure requirements, and less leeway in terms of write-offs and other loopholes. As a result of this added emphasis on transparency and loophole tightening, manufacturers must be more diligent in the early phases of an acquisition.

SFAS 160 is another relatively new standard that may affect M&A accounting. It sets new rules for reporting noncontrolling interests and requires companies to report minority interests in subsidiaries as equity. Businesses also must identify the amount of consolidated net income attributable to the controlling and noncontrolling interests.

SFAS 160 also requires that companies report the sale or acquisition of subsidiaries they control as equity transactions. The gain or loss that results from the deconsolidation of a subsidiary must be measured based on the fair market value of the minority equity investment. Overall, this standard aims to ensure that controlling and noncontrolling interests are reported as part of consolidated entities and to encourage transparency and detail in the reporting of these interests during mergers and acquisitions.

Integration plan

During the due diligence phase, pay close attention to the assets and liabilities of the company you plan to acquire and how those fit into your M&A and overall business strategies. Because of the current credit crunch, also determine whether a deal puts your company in a less-than-favorable cash flow position.

If, after completing your due diligence, you decide to go ahead with the merger or acquisition, ensure you have a solid integration plan. Even deals that look perfect on paper can go sour because of culture clashes, losses of talent or management disagreements. Your plan should include tight timelines that involve designated “integration teams” to make the process as seamless and nondisruptive as possible.

Employee issues can be the biggest hurdle in any acquisition, so involve your human resource (HR) department early and encourage interactions — particularly face-to-face — between employees at both companies. It’s also smart to create plans with HR teams that involve employee communication and retention strategies after any merger or acquisition. This may also include workshops with key executives from both companies to prevent clashes in management styles.

Crucial elements for success

Ultimately, the environment for M&A activity isn’t as favorable as it may have been in previous years. A merger or acquisition, however, can be a part of appropriate growth strategies for some manufacturers — when done correctly.

Performing due diligence, bringing in all involved parties early on — specifically, your accounting, operations management and HR departments — and creating comprehensive integration strategies and timelines are crucial elements to the success of your merger or acquisition.

The state of M&A

Last year wasn’t a good one for mergers and acquisitions (M&A). Because of a shaky economy, lack of credit and financing, uncertainty about prices in M&A negotiations, and recent accounting requirements, global M&A volume was down almost 50% in the first half of 2009, compared with the same period in 2008, according to Mergermarket. When the dust settled, 2009 had the lowest volume of M&A since 2004.

Additionally, the deals that solidified were smaller, and the growing trend of global mergers and acquisitions was stunted. Toward the end of 2009, however, M&A activity increased by about 40% compared to the average of the first three quarters of the year — a trend that appears to be continuing into this year. Experts predict that, if the same trends that fueled an increase in M&A activity in fourth-quarter 2009 continue — namely increased financing availability and decreased economic volatility — 2010 may shape up to be a good year for M&A activity.

Find out how our M&D accountants can add value to your business. Email us or call us at 1 (888) 875-9770.

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