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Deal Making In the New Landscape

Since the beginning of the sub-prime crisis in 2007, the focus of the market, the media and our government has increasingly been on businesses and industries with decreasing cash, limited credit access, major retail exposure, and/or shrinking profits.

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We have devoted a majority of our collective resources to cleaning up the damage to our businesses and industries from this perfect storm.

Some companies with well-thought-out plans have maintained “fortress” balance sheets with enough cash and liquidity to withstand the shocks of this perfect storm. These companies continue to have the flexibility to execute all-cash transactions, and some have. Honeywell’s most recent announcement of its acquisition of the healthy and well-positioned RMG Group for approximately $400 million is a prime example.

Define targets

One obvious but important change in today’s market is a lower level of merger and acquisition (M&A) activity in general. However, an even bigger change is the growing share of one-on-one negotiated transactions or highly limited auctions accounting for a larger share of this smaller transaction marketplace. Again, there is a premium on a well-considered strategic plan, as those companies with a clear direction and defined universe of ideal targets are experiencing better levels of success on targeted buyside activity, as long as they are willing to pay truly strategic values that account for a prospect’s mid- and longer-term promise.

Today, buyers are well advised to invest extra time on multiple scenario matrices, interloper analyses and alternative (including organic) path reviews, as acquisitions in this current buyers market—even at a current “premium” price—can still be at a lower cost than organic growth initiatives and drive tremendous long-term value for the company.

In today’s climate, some senior executives have begun to address a resetting of expectations in several ways in the transaction process itself. There is far greater scrutiny throughout the deal process and a call for accountability at all levels. One emerging change is the quality and meticulousness of diligence teams. Today, they are larger and considerably more involved than ever before, with a greater focus on contingent liabilities, quality of earnings and depth of management. It is always best practice to keep the chief executive officer and the board of directors up to date throughout the acquisition process, including this diligence phase.

Perhaps one of the biggest changes is the way transactions are being put together; there is much greater receptivity to creative deal structures. In some very selective transactions, seller paper is being used to get an otherwise unworkable deal done—a prospect that was unheard of more than a year ago. It can be a useful tool, although it’s important to note that this should be very carefully introduced into a buyer’s capital structure. In addition, we are seeing instances in which buyers only acquire a majority share of the business by either bringing in a partner or asking the existing shareholders to retain a portion of their equity.

Overall, the landscape is certainly changing, but as we’ve said in the past, we need to remember that historically speaking, we have a resilient economy. We’ve seen managements excel in difficult times, and this time is no different. Boards today need to focus on doing what they can to gain results. For well-run, forward thinking and liquid companies whose leaders are flexible and can focus on the controllable aspects of their businesses, there is always room for growth and wealth creation.

Jim Lavelle,, is Managing Director of the Industrial Technologies practice of Houlihan Lokey. Eugene Bazemore, is Senior Vice President of the Industrial Technologies practice of Houlihan Lokey. For more about Houlihan Lokey, visit

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