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Acquiring Tastes

If you thought M&A wouldn't fit your growth budget, you haven't seen today's prices.

An Association of Corporate Growth International (ACGI) study shows that 54 percent of the group's members believe M&A activity will continue its downward trend through the rest of 2001. Investment banks are citing fewer M&A deals as a reason for lowered earnings. So why are experts like ACGI president-elect John Gullman claiming M&A is alive and well?

Because valuations are so low-especially in the technology sector-that bargains abound. William Weisberg, counsel to growing businesses at the Reston, Virginia, offices of Mintz Levin, says firms worth 20 to 30 percent less than their peak are still robust compared to the rest of the market.

Two thousand potential buyers scour the classified ads at BusinessesForSale.com every day, says COO Leigh Nissim. Currently, the site lists more than 5,000 businesses for sale. Most activity is in the tech sector, but there's also interest in manufacturing. "It's easier to buy an existing manufacturing plant than to build one yourself," he says.

Most of these aren't the Fortune 250 deals of yesteryear, Weisberg notes. The action is under the radar screen as midmarket companies, private transactions and "partial M&A" (acquisitions of a division or product line) dominate the activity.

With less competition, now may be the best time to grow your business through acquisition. Companies without much cash are finding it hard to land necessary loans, and public firms can no longer offer their depressed stock in lieu of money.

Also, says Weisberg, many investors are looking for exit strategies for their beaten-down dotcom and tech investments. They're willing to deal to salvage something for their efforts as long as you have cash on hand and an appetite for risk. You may have to resort to creative financing strategies, such as offering a lower price now with an incentive clause that pays off if the venture exceeds expectations.

Still, warns Steve Spinelli, director of the Arthur M. Blank Center for Entrepreneurship at Babson College, you need to enter deals selectively. "Don't be seduced into an M&A mentality without a plan for meshing the business with yours," he says. "Buying just because it's cheap is not a good strategy."

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This article was originally published in the September 2001 print edition of Entrepreneur with the headline: Acquiring Tastes.

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