Catalyst - Winter 2011 - Ingredients of a Successful M&A Deal
Catalyst Interviews Steve Kreit, Partner, EisnerAmper Commercial Practice
Steve Kreit is a partner in EisnerAmper LLP’s commercial practice. He specializes in, among other areas, life sciences, pharma and technology. Kreit believes that going into a deal with “eyes wide open” and a reasonable attitude when in comes to negotiations will help all parties in a merger or acquisition deal come out feeling like winners.
What’s your advice for negotiating and closing successful deals?
First things first: identify what you want out of the deal. Is it just the product? Or is it the supply chain? Is it the successful management? Or, maybe it’s a particular relationship with another company. Once you know what you want, you know exactly what to look for, which questions to ask and how to lead the negotiation to a successful conclusion.
Second, be realistic – especially about price. Expect negotiation, but be aware of realistic values. If you enter a discussion with an unrealistic expectation about what you are willing to pay, or what you expect to get paid, especially in the life science industry, you will likely be disappointed.
Think about it this way: if you are the seller, you have likely invested a lifetime of research in the venture. This is your “baby.” However, you have to separate the value proposition from the emotional proposition. On the other hand if you are the buyer, realize the other guy has been there from the start. Realize that it’s understandable that he doesn't have a realistic perspective on what the product or company might be worth. You have to find a reasonable compromise. Look everyone wants a bargain. But someone once said to me, in any negotiation, if both sides walk away not completely happy and not completely unhappy, the deal was likely fair.
Third, make sure you are seeing beyond today or even tomorrow. If you are acquiring an operating business, you want to have agreements in place with the current management so that the future management of the company works. For example, if you have a product that is being sold to doctors offices, and the selling company has 65 sales reps with relationships with doctors’ offices, you better make sure your deal includes preserving those relationships or you will lose sales.
What should companies consider from the accounting and tax due diligence perspective?
Information, basic information, is very important. Whether you are buying or selling, you have to consider both the tax side and the operations side.
On the tax side, make sure you obtain prior tax returns, the results of any IRS or state government audits and analyses of any tax estimates. At the end of the day, these pieces of information have to be easily obtainable and provided by the seller.
On the financial statement/operations side, make sure you are able to see supporting information for all books and records, view agreements around patents and technology licensing, leases, and any manufacturing agreements.
When you go in to acquire a company, it’s similar to buying a house. If you are looking around the house and everything looks great, but you open a closet and piles of things fall out on your head, you should probably be concerned about what else is going on behind the scenes in the house. It’s similar when you are looking to buy a company. If you open a desk drawer and see piles of invoices that haven’t been paid or if they can't find certain pieces of info such as a building lease, you should probably be questioning how they have been running the company.
If you are selling, have everything in order. Expect that a real prospect will want to see everything and know what’s going on behind the scenes – financially speaking. Make things easy to review and information easy to gather. And, if you are buying, be prepared to walk away if the prospective company doesn’t have good documentation.
What challenges can arise when integrating new operations?
If two companies can do things differently, count on the fact that they will be doing it differently. When it comes to accounting systems and policies, internal controls, financial statement processes – there are so many things that can be different. It’s not just about changing the name on the top of the invoice; there are so many things to consider.
Revenue recognition can be a major issue. Each company will do it differently. For example, let’s say your company records revenue as soon as a product ships. The other may record revenue when it gets into the customers hands. All parties should be clear on how that will be done going forward.
Different companies use different accounting systems. I had a client who uses SAP. When they made some acquisitions, my client found that those companies used other systems. Timing comes into play as well. One company may send monthly reports to a client while another sends them more or less frequently.
It’s important to integrate the systems as soon as possible to increase oversight and make it easier to do business going forward.
What are key reminders for management to think of when analyzing the book and tax impact of an M&A transaction?
As far as book impact goes, everything has to be fair value. So think of it as “fair” value and not even book value. If you are buying inventory that you feel is worth $1 million but by “fair value standards” it’s worth $800 million, you must record $800 million in inventory.
As far as tax impact goes, you need to be thinking about how this transaction will affect the ability to use net operating losses (NOLs), assuming they exist. Good advice about this is critical.
Lastly, from both an accounting and tax side, the nuances of the rules and regulations surrounding M&A and general accounting are very complicated. It's very easy to miss things. I advise that you hire an advisory company with the resources and expertise to help you. In fact, I don’t know how you could go with a merger or acquisition without that kind of expert support.
EisnerAmper's Catalyst: January 2011
- A Combination of Equals’ Eisner and Amper, Politziner & Mattia Combine to Form EisnerAmper LLP
- One for All…Managing the Other Capital – the Human Kind
- All the Right Pieces: Answering the Call from Big Pharma
- Legally Speaking, M&A Due Diligence is Worth its Weight in Gold
- Ingredients of a Successful M&A Deal