Strong Economy Feeds Mergers and Acquisitions

UNITED STATES merger and acquisition activity is booming so far this year, thanks in part to folks such as broker and consultant R. Paul Sprague.

Mr. Sprague is chairman and chief operating officer of Warwick & Company, a private investment banking firm based in New Canaan, Conn.

Warwick & Company finds buyers for small businesses. Sprague, who has helped arrange takeovers for more than 60 companies over the past 10 years, says the current economic climate is the best he can recall for the merger and acquisition market.

Reasons, he says, include a growing US economy and the strong financial position of commercial banks and investment banking houses, which not only have money to lend businesses to finance acquisitions, but also are willing to do so. Recent interest-rate hikes have not curbed merger and acquisition activity, he says.

Companies that track merger and acquisition transactions corroborate Sprague's conclusion about the current market. ``[Merger and acquisition] activity is definitely booming right now,'' says Robert Liu, a financial analyst with Securities Data Company, a financial research organization based in Newark, N.J.

``If present trends continue, 1994 will be a better year for mergers and acquisitions than 1993,'' Mr. Liu says.

So far this year, merger and acquisition transactions are valued at $124 billion. That compares with $246 billion for all of 1993, the third highest year recorded for such transactions. Second highest was 1989 at $293 million. The best year was 1988, with transactions valued at $336 billion.

Sprague's deals are relatively modest compared with many of the multimillion-dollar corporate transactions that Securities Data tracks. Most of the smaller businesses that Sprague advises have a book value of between $10 million and $100 million; the average firm is privately held and valued at around $40 million.

A tall, affable person, Sprague says he ``loves the negotiations'' involved in the sale of a company. Sometimes, he is surprised by the results. For example, the owner of a small firm recently wanted to sell out to an overseas manufacturing company for $24 million. ``But the owner said he would take $20 million,'' Sprague says.

Sprague carefully studied the balance sheets and operating processes of the small firm, determined how well the company would mesh into the operations of the larger European firm, and promptly sold the company for $39 million.

``But we didn't tell the owner'' of the small firm the amount until the very last minute, Sprague says. Needless to say, the owner was flabbergasted, he adds.The 1980s - and to a lesser extent, the early 1990s - have been strong years for start-up companies. But the flip side of the equation is also true, Sprague says. More owners of small and medium-sized businesses seem to want to sell their companies than ever before.

Sprague says he is not totally certain why there is this desire to sell. Tax considerations may play a part, but there also seems to be less of a willingness to turn companies over to heirs. Now, instead of turning a family business over to a son (or, less often, a daughter), most owners give cash to their heirs and sell the business outright, Sprague says.

IN addition, small-business owners are usually concerned about the future security and well-being of their employees, he adds.

Sprague says the worst words the owner of a small business can hear - when contemplating selling off to a competing firm - are: ``Let's have lunch.'' The reason? ``Most owners do not adequately prepare themselves for a sale.'' Thus, they are sometimes inclined to take the first good offer they hear - often over lunch.

The entire sales process for a small firm can take between one and six months, Sprague says. He maintains a data base of about 12,000 firms in the US and abroad that are eager to acquire businesses. Sprague will contact about 150 firms on a typical sale and then gradually winnow the roster of potential buyers down to a few firms.

Usually, Sprague prefers obtaining cash for the owner of a small business, rather than stock. In a takeover transaction, registered stock typically has to be held for a set period of time, such as a fiscal-year quarter, before the acquirer of the stock can sell it. That is because the small company's operations have to be merged into the operations of the large firm for accounting purposes.