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Avoiding a Middle Market M&A Train Wreck: A Real World Example

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Avoiding a Middle Market M&A Train Wreck: A Real World Example

In the first part of this article, I discussed the importance of due diligence to determine whether a prospective acquiree’s technology will be as valuable going forward as it has been in the past. I would like to present a real world example.

To read the first part of the article click here

A niche technology manufacturing company in the electronics industry was acquired by a larger firm. The acquired company had a long, successful track record as a market leader in the niches it served. Due diligence did not uncover any issues regarding threats from new technology to its core, cash-producing products.

M&A Failed To Deliver

Shortly after the company was bought, two issues arose, threatening the future of the business, neither of which was uncovered in due diligence.

Issue 1

The core electronics/intellectual property supplied by outside vendor partners was becoming obsolete and would not be available for future product designs.

Issue 2

Competitors were making advances in the area of the company’s core electronics technology, lowering barriers to entry and producing new market entrants whose lower cost alternatives threatened the company’s leadership position.  The experience of the R&D personnel of the acquired company was with the older technology. They were struggling to keep up. The company was all of a sudden thrown into turnaround mode. Its response was:

  1. Cost cutting – because expected revenues and growth were delayed.

  2. Launching an aggressive search for an outside development team to deliver a “crash” project to develop electronics compatible with the new technology.

  3. Asking customers to wait and not place orders with competitors until the new products were ready.

Read more...

To read the first part of the article click here

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