Important Considerations in an M&A

Four Issues to Consider Before Buying

By Skyler Handl, Corporate Counsel, Public Sector

If you are looking to divest your public sector-focused business or complete an acquisition this year, there is one statistic that should provide pause. According to a recent Harvard Business Review article, 70 to 90 percent of all mergers and acquisitions (M&As) fail. Overpayment and underperforming M&A are common results. Here are some key factors that may impact your decision, valuation, and success.

Commerciality and pricing

As described in Commerciality: Establishing pricing to the federal government,  success in securing commerciality for a company directly impacts margin and growth potential. Often in M&As, the valuation is based on several market assumptions validated through due diligence and cost or price transparency from the target company being acquired. Assuming that product pricing will be based on market trends — without conducting sufficient diligence to assess commerciality if not yet determined — can be detrimental to your financial model. Such an assumption may result in overpayment for, and under performance of, the acquisition. A look into the target’s historical actuals against awarded contracts will provide insight as to whether products have been sold as “price-based” commercial products or “cost-disclosed” non-commercial products. This can make all the difference in your financial accuracy when pursuing a public sector M&A.

Pedigree of intellectual property

Understanding what you are acquiring and who owns it is another essential element of an M&A. The why behind the motive to acquire must be sufficiently vetted, as it is another important assumption to the deal. Many new technologies are rooted in government funding. Whether funded in partnership with a university or through special small business funding programs, the strength of a company’s intellectual property requires a thorough review. Additionally, sources of funding may impact the government’s data rights to the technologies. Certain data rights allow the government to take and use the technology as they see fit. Digging into the proprietary aspect of a company’s success can validate assumptions about the market share it holds and impact the validity of the evaluation model.

Conflicts of interest

Certain public sector requirements restrict conflicts of interest. When contemplating an M&A it is important to independently assess the business’ current offerings and overlay a target offering to ensure that no conflict of interest exists. For example, a company specializing in third-party cyber security auditing and monitoring software has a limited market when merging with a company that provides cyber security software. The use of the audit software to monitor that security software would create a conflict of interest within the checks and balances process of the customer’s IT security framework.

Performance history

In the public sector market, a company’s reputation follows it. Under FAR Part 9, the government conducts responsibility assessments to determine a company’s capabilities to meet requirements. This review process includes several factors, including historical performance. This critical factor allows the government to gain confidence in the company’s ability to deliver quality products or services, on-time and in line with contract requirements. Market research and diligence can reveal a company’s historical performance. A request for details on a company’s responsibility assessment will support rebranding decisions and save the acquiring company potential headaches associated with repairing a poor reputation.

In summary, if contemplating an M&A in the public sector space, be sure to pay attention to the unique requirements and operational rules that can support or negate your deal assumptions.

Skyler Handl is legal counsel for immixGroup, the public sector business of Arrow Electronics. Delivering mission driven results through innovative technology solutions for public sector IT. Visit http://www.immixgroup.com/ for more information.

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