Acquisition Marketplace Review - The Journal of Applied M & A Theory

M & A Viewpoint: The Cost of an Acquisition

This is the final installment of a three-part series. In the previous installments, we defined market value as the theoretical amount a buyer might pay for a given company and price as the actual amount that buyer and seller agree upon through negotiations (or a tender offer). This segment will address the costs of a negotiated acquisition.

The price of an acquisition is generally the amount paid for the asset(s) acquired. The purchase price package is allocated to stock or assets (tangible and intangible). Some items can be depreciated or amortized more quickly than others. A portion of the purchase price can also be allocated to executory agreements such as covenant-not-to- compete, employment contracts or consulting agreements that may be paid over the term of the agreement and usually expensed as paid. (If actual services of value are to be rendered and the income is subject to forfeit by the seller if such services are not provided as agreed, it can be argued that the fees paid under the agreement do not constitute an acquisition cost.)

Identifying and managing the costs of an acquisition is important for a number of reasons. First of all, acquisition-related costs can consume cash. Although unavoidable, they reduce the amount of cash available from acquisition financing activities and the future earnings of the company or business purchased. Costs also result in changes to financial statements. They can be expensed on the Income Statement or can be realized as changes in the Balance Sheet that reduce Equity or dilute shareholders value. In addition, acquisition-related costs impact after-tax profits and the actual Internal Rate of Return to investors. Finally, the identification of all costs is a prerequisite to their control and management.

All quantifiable acquisition costs should be part of any return on investment calculation as well as the financial decisions such calculations support. Depending upon the size and complexity of a transaction, acquisition-related costs can add another 10% to 15% or more to the actual dollar cost of the transaction. That is not a trivial number!

The purchase price paid is not the cost of an acquisition. The price is the portion of the cost that is paid to the seller(s). However, there are other costs beside the price package:

1. Outside Service Provider Fees
2. Capital Costs
3. Internal Costs
4. Assimilation and Operating Costs
5. Intangible Costs

Outside Service Provider Fees

There are a number of different professionals that may assist throughout the process of planning, negotiating, performing due diligence, and closing the transaction. Examples include: intermediaries (investment bankers or business brokers), legal and accounting professionals and consultants. These costs are specific and directly related to the transaction and are usually paid at or around the closing; although some service providers may require retainers to start working.

Intermediary fees are usually negotiated. There can be a retainer as well as a success fee or commission. These fees are frequently based upon a sliding scale and can add up. If the seller employs the intermediary, these fees are usually paid by the seller out of the proceeds of the sale. If the buyer engages an intermediary, it is possible that a fee (as negotiated) will be due at closing. The buyer can either dig into his pocket or pay the fee from the proceeds of acquisition funding.

Professional fees accompany every transaction. The two most important professionals are the attorneys and accountants. The size, complexity and timeframe of the deal will impact these costs which are usually billed on a per-hour basis.

Attorneys are needed for contract negotiation, regulatory review and approval, legal due diligence, preparation of documents for approval and closing documents. There will also be attorney fees for negotiating, reviewing and preparing the documents necessary for funding the transaction. This can include private placement memoranda for debt and/or equity.

Accountants are needed to perform a due diligence review or audit of the target’s books and advise on structuring the transaction to obtain the maximum tax benefit.

Consultants can be retained to perform a variety of highly specialized services such as risk management review, post-acquisition integration, marketing due-diligence, review of benefit plans and shareholder and media communications. Most consultants are paid on an hourly basis.

In addition to the outside professional fees, there may be outside fees paid to government and quasi-government agencies for necessary approvals, permits and consents. The fees are usually set by statute or rules and are paid to the appropriate administrative bodies. See page 2

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