BPM Ratchets Up M&A Results

Cash may be king, but it can also be a killer if it sits on the balance sheet too long while investment opportunities pass fleetingly by. Excess liquidity has become a nagging problem for many organizations, and perhaps the most popular solution has been to increase mergers and acquisitions. "There have been record profits reported over the past two years, which have helped give the S&P 500 more cash than it's ever had in its history," says Kevin Prokop, director of Southfield, Mich.-based Questor Management Co., a private equity firm specializing in turnaround situations. "We're seeing a growing number of companies using M&A to put that cash to work.

"Many deals, however, are being done on the basis of just the financials, employing an LBO [leveraged buy-out] model and running cash flows out four or five years to determine the value of the acquisition target," says Prokop. "It's an old approach that doesn't often lend itself to successful results."

The deeper, more operational type of performance analysis is frequently ignored, in part due to time constraints. Acquiring companies figure that the window for any particular deal is only open for so long.

But in M&A activities the stakes are high, and a superficial analysis may be risky. The stock of the buying company often takes a hit following an acquisition. "On average, two-thirds of M&A deals end up eroding shareholder value," says Bruce Myers, managing director of Southfield, Mich.-based AlixPartners, a corporate performance improvement, turnaround and financial advisory firm. A recent Accenture study confirms that M&A outcomes are often disappointing. (See Post-M&A Depression: Symptoms and Remedies below.)