Upfront: Cashing In on the M&A Recovery

Merger and acquisition (M&A) activity surged last year and looks set to do so again in 2005.

Merger and acquisition (M&A) activity surged last year and looks set to do so again in 2005, according to the latest ACG/Thomson DealMaker's Survey of more than 1,800 professionals. Thomson Financial and the Association for Corporate Growth (ACG) conducted the survey in late 2004.

"Everyone involved in putting deals together [has] witnessed a major turnaround in the deal environment," says Peter Coffey, president of Glenview, Ill.-based ACG. M&A domestic deal volume was $834 billion last year, 46 percent more than in 2003. "What's of particular note is that not only did deals return in 2004, but those closest to them anticipate this will continue unabated in 2005," explains Coffey.

The percentage of respondents who described the M&A environment as good or excellent leaped to 72 percent from 45 percent in a comparable survey conducted by Thomson Financial and ACG in 2003. Only 2 percent of respondents characterized the current M&A environment as poor, compared with 8 percent in 2003.

At the same time, New York City-based professional services firm BDO Seidman LLP is sounding a note of caution for organizations that want to attract buyers. Despite companies' increased scrutiny of their financial reporting processes because of the Sarbanes-Oxley Act, a rising number of M&A deals are foundering on financial statement fraud, misappropriation of assets, and employee violations of ethical and legal guidelines, according to the firm. "We're seeing more companies losing control of the transaction or facing significant post-acquisition claims due to revelations of fraud," says Carl W. Pergola, national director of BDO Seidman's litigation and fraud investigation practice.

Pergola recommends that companies hoping to find buyers should conduct comprehensive due diligence on themselves before putting out feelers in the market. "Virtually every company is exposed to fraud, from padded employee expense reimbursements to major misstatements of financial information," he notes. "If a company conducts comprehensive self-due diligence in advance of a transaction, its value increases both directly by the elimination of fraud as well as indirectly by deterring other frauds which could negatively impact earnings. Companies may even be able to recover from insurers under policies covering employee dishonesty."