Top 10 Trends in the New M&A Boom

1. Buyers will focus on their core business lines.

Last year, you saw conglomerates Cendant and Viacom move to break up. Verizon dumped its directory business. And Ford unloaded Hertz. "This trend will continue into 2006 and M&A activity will continue to be focused on the 'core' business and consolidation within verticals," according to the authors of the FTI forecast, Anuj Bahal and Patrick Donoghue.

"We believe that strategic corporate acquisitions and divestitures will drive M&A to new records and higher stock prices in 2006 as infation chatter and interest-rate uncertainty subside and give way to a focus on improving corporate fundamentals."

2. Look for a record breaker.

The $31 billion leveraged buyout of RJR Nabisco by KKR in 1989 still stands as the largest single deal of all time. But the second, third and fourth largest deals happened last year - the Danish telecom TDC, at about $15.2 billion, Hertz at $15 billion, and Sunguard at $11.3 billion. Now more cash is flowing into takeover funds than ever before. KKR is eyeing deals in the $20 billion to $30 billion range. "2006 could be the year that we see the largest buyout ever," according to Bahal and Donoghue in their report.

3. Takeover artists get active.

"Large public corporations who once thought their size made them safe from hedge funds may be surprised," according to the FTI analysts. "Activist hedge funds are increasingly emboldened and focusing their sights on well known, large 'corporates'."

Look, for example, at Pershing Square Capital Management and McDonalds, Carl Icahn and Time Warner, Kirk Kerkorian and General Motors, or K Capital Partners and OfficeMax. In each case the suitor is looking for a say in the operation of the company, with the threat of a nasty fight. For sure, talk of dividends, share buybacks and divisional divestitures is rattling boardrooms across Corporate America.

4. Strategic buyers join the game.

But it's not just the takeover artists who are getting busy. Operating businesses are looking for strategic fits. "This likely bodes well for deal prices that should benefit from the larger deal synergies they can deliver," according to the analysts. "'Corporates' will also push back on activist hedge funds and try to shift the debate back to actions that create long term value as opposed to actions that focus primarily on short term returns."

5. Globalization hits hard.

With the increasing economic power of China, India, Brazil and Russia, buyers and sellers could pop up anywhere. And it won't be limited to manufacturing. Today high-end services - including research and development, consulting services, traditional call centers and business process contractors - will be in play.

6. Watch out for the hedge fund shakeout.

It could be bloody. Hedge funds have become a trillion-dollar worldwide industry. And with 6,000 of them, and climbing, we've already begun to see a scandal-ridden shakeout. Expect some bad deals as funds get desperate for new ideas and fat returns. The shakeout should leave the leaders with even greater market share and power.

7. Executive compensation takes the spotlight.

Corporate boards will be spending more time developing fair and clear executive compensation programs to blunt public criticism. The Securities and Exchange Commission has already proposed significant new disclosure rules - the biggest such overhaul in 14 years. And don't forget: 2006 is the first year that stock options will be recorded as an expense on income statements, bringing new focus to the issue.

8. New financial and management talent in demand.

With so many hedge funds chasing so few deals, they will need to beef up their finance and operational teams. Smart due diligence and experienced management could make the difference between a winning deal and a flop. So finance professionals with particular industry expertise are in hot demand.

9. Tick, tick tick.

Hear that sound? It's the defined-benefit pension time bomb. Studies put net defined-benefit obligations at more than $450 billion. Many companies are facing up to a three-fold jump in contribution costs. Think steel, airlines and car makers. That's why IBM and Verizon, for instance, have cut back their plans. It'll take a whole new team of finance professionals to sort out the issues, reforms, and liabilities before any deal gets done. And it could push some companies to market faster.

10. Ready for fair value reporting?

The debate is back, say the analysts. Although I don't think it ever went away. Still, pushed by International Financial Reporting Standards, fair-value accounting is taking hold in the United States and around the world.

"Fair value concepts are today incorporated in the accounting for acquisitions, stock options, derivatives, guarantees, special purpose entities, impairments and certain longer term liabilities, to name a few," note the analysts. "However, there has been some backlash from corporate executives and certain investors in Europe on the implementation of IFRS to the point where the International Accounting Standards Board has agreed to orchestrate a public debate on how assets and liabilities should be valued and reported in accounts."

As analyzing a company's financial performance has become more complicated, buyers are spending more billable hours digging into the financials.

"The days of saying I only understand GAAP or I only understand valuations are over," according to Bahal and Donoghue. "True value-added analysis and advice can only be provided by those who understand both GAAP and valuations - and the intricacies in how they are linked."

Sounds like it's already a busy year.

[First published by the AICPA]