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Mergers & Asset Acquisition in a Crisis Economy
During times of economic uncertainty, assets often change hands as companies acquire other businesses or often just their assets. During the acquisition process, the assets are then subject to significant scrutiny. During such economic crisis, the time available to evaluate the assets that may be acquired is often limited. In a more stable economic environment, the acquiring company may have three to six or months to understand and to value the assets being acquired. In crisis mode this may be only weeks or less. Along with any 'crisis acquisition', there might be assets which are non-productive.
Examples of the incomplete and non-productive assets might include a newly started business unit with potential and little else
or a venture involving capital construction in which the construction is currently underway but not finished. This situation occurs often in a 'crisis acquisition' when the incomplete asset is bundled with a larger producing or partially producing asset or group of assets.
Two things must be indentified before the incomplete asset can be understood and valued. The first: what will it cost to bring a new business unit to a productive state or in the case of capital construction, what will it cost to finish the work? (Often we find that a new business unit involves capital construction.) Whatever the circumstances, if the business unit is still in the development stage at the time of purchase or transfer, it is important that the acquiring company understand the additional investment in dollars and management oversight that will be required for the asset to be fully productive. The second is that the acquiring organization must update the proforma under which the still incomplete asset was assembled. This is particularly important if capital construction is a part of the incomplete asset.
Design and construction generally are lengthy processes so years may have passed since the initial proforma was developed. In such a case it is important to have a good grip on the cost of construction, remembering that most contractor claims are filed after the substantial completion of the project. It is equally important that the acquiring entity develop an independent proforma of such a venture and not rely on updated proformas undertaken as time (and construction) progressed. The new proforma must also consider the market conditions that exist during the current period of economic uncertainty.
Even if the asset is transferred under 'fire sale' conditions, it is important that it be evaluated for its potential using sound cost, schedule and management methodologies. Such assets may have hidden potential, which together with the lowered cost of acquisition, and may prove to be very profitable. Only a sound analysis can make that determination.
Legis Consultancy can assist you in your evaluation of potential assets whether under crisis or normal acquisition conditions.