Corporations Returning to Investment Strategies

Article excerpt

The U.S. economy in 2012 is proving to be a favorable climate for the purchase and sale of businesses. Many companies are spending cash reserves on strategic and value acquisitions designed to improve their business, rather than continuing to preserve cash to protect against a difficult economy. Private equity funds are seeking to maximize their long-held portfolio investments and to seize new opportunities. Banks have stabilized their capital positions and are lending again.

In this climate, small and middle-market companies may want to sell their businesses for a variety of reasons, including diversification into other investment opportunities; the opportunity to realize a profit for the first time in the last several years; the owners' desire to move on or retire; conflict between the owners; business adversity such as capital shortage, aging management or the loss of key personnel; the opportunity to strategically exit a market or to exit from a declining market suffering from overseas competition.

Buyers may seek to invest their long held resources in successful small and middle-market firms; enter into a new line of products or geographic markets that will function synergistically with the buyer's existing operations; obtain particular strategic assets such as real estate, intellectual property or equipment; obtain new sources of supply or channels for distribution; obtain working capital or key personnel; or realize tax advantages from acquiring a target business.

The parties must determine the optimal transaction structure to achieve their objectives. The form of transaction is influenced by federal tax laws, the nature of the acquiring company, and the specific characteristics of the target business. In a basic sense, the purchase and sale of businesses occurs in one of three ways:

1. Merger/Consolidation. A merger occurs when one company absorbs another and acquires all of the property, rights and obligations of the absorbed company. …