Mergers and acquisitions activity in the United States are approaching another record high this year, and that means new challenges for some small and growing businesses.
Mergerstat Review, which tracks publicly announced U.S. M&A transactions, counted 3,013 deals totaling more than $657 billion in 1997, up from 2,658 deals worth $494 billion in 1996. This year’s figures are expected to exceed last year’s.
For customers, suppliers and vendors of those merged companies, that means a new and sometimes uncertain working environment. “Most small and growing businesses can’t change this environment they’re in,” says R. Jerry Grossman, director at Houlihan Lokey Howard & Zukin, which owns Mergerstat. “But they can at least think about it and consider how they can grow their own business to keep in step with the consolidators.”
Most at risk in a merger or acquisition are the vendors, according to James R. Gollihugh, managing director at Management Resource Center, Inc., a Los Angeles M&A consultant. “I’d be more concerned as a supplier than as a customer, because a customer can always go somewhere else,” Gollihugh says.
Grossman notes that many newly merged entities apply “supply-chain management” techniques to reduce their number of suppliers, while imposing price reductions and inventory management technologies to ensure that the supplier follows the buyer’s needs. Vendors working in industries with a lot of M&A activity should scrutinize their customer bases and diversify if possible, according to Grossman and Gollihugh.
Customers are protected more effectively from the turbulence that usually accompanies a merger, says Nicholas B. Merkel, president of Merkel & Associates, a Cleveland firm. That’s because “most buyers would not go through with an acquisition if they felt there was a big threat of losing customers.”
But size matters. Smaller customers of a newly merged bank may find themselves hit with new or increased fees, which larger customers can get waived. Smaller customers are also at a disadvantage because merger candidates rarely announce the fact to any but their largest customers until the deal is complete or nearly so.
Many buyers use an “earn-out” provision in the seller’s contract to ensure that the business continues flourishing after the sale, Merkel says. This percentage of gross or adjusted pretax profits to the seller in years after the sale can be cut or eliminated if business begins to decline, thus coincidentally protecting the company’s customers as well.
Still, Merkel says, “A buyer should be prepared for a major problem within the first few years after the purchase, which can either be the loss of a major customer, or the loss of an important employee, or some other major business reversal.” The cause is usually insufficient or inadequate transition planning by the buyer or seller.
Banking and financial services, communications and health-care industries have seen the heaviest merger activity of late, according to Grossman and Mergerstat. “As the regulatory environment has moved from tighter to more of a laissez-faire view over the years, all of these industries have begun to change and consolidate,” Grossman says. “Change in general, absent government interference, drives consolidation.”
Looking ahead, Grossman expects intensified M&A activity in the information technology, hotel and motel industries, business services and retail, and electric and gas utilities. Office suppliers, auto dealerships and even golf courses have been hit with recent waves of mergers, driven by cheap capital, government deregulation and new technology enabled economies of scale.
