Buying And Selling Companies In The New Millennium

The growth in corporate mergers and acquisitions in the 1990s has been nothing short of spectacular. Among the most important contributors to the growth of M&A are globalization and technological change, which are working together to create excess capacity in virtually all global industries. When industries are experiencing overcapacity, some degree of consolidation becomes inevitable, and M&A is a primary means for accomplishing consolidation. Although much of the dollar volume of M&A comes from the highly publicized mergers of large companies, by far the greatest number of transactions is taking place in the middle market—that is, companies with revenues less than $500 million or a market cap under $1 billion. Along with the sharp increase in middle‐market M&A, the author notes a relatively new financing practice in which private equity groups take large minority stakes in middle market companies. One factor contributing to this development, which the author calls “the small‐cap trap,” is that the stocks of small and mid‐sized public companies now appear to be trading “at large discounts to the values of their large‐cap peer group, even in cases where the operating performance of the smaller firms is better.” According to the author, the most plausible explanation for such discounts is the limited “float” of such companies; most receive little research coverage by Wall Street analysts and have limited institutional followings. After reviewing broad trends in M&A, the author offers some tips on designing a broad M&A strategy and conducting a selling process. One of the keys to the selling process is to create a sense of “exclusivity” among interested buyers without removing the pressure of competition. Consistent with the message of other articles in this issue, the author argues that one of the most reliable ways to create a sense of exclusivity is by providing good information, relatively full disclosure. Indeed, the disclosure should be sufficiently revealing that the initial bids are based on all relevant information.