NEW YORK, May 21, 2003 Large U.S. multinational companies plan to increase M&A activity over the next two years, with nearly 70 percent expecting to complete deals during the period—and more activity expected among non-tech than technology businesses—according to a PricewaterhouseCoopers Management Barometer survey. With the stakes high and the economy uncertain, senior executives said they would devote extra time to navigating potential roadblocks that could keep them from realizing the full expected value of their transactions. At the top of their list: the impact of new regulations, including the Sarbanes-Oxley Act of 2002, and corporate governance practices.

Overall, 69 percent of executives interviewed said their company expects to complete one or more new deals over the next two years. Of these, 87 percent will be acquisitions and 13 percent sales. On balance, executives anticipate transactions will be larger than in past years: 22 percent expect to make larger deals, while 13 percent expect smaller deals. The rest expect deals to be the same size, or are uncertain.

Nearly two-thirds (63 percent) said that M&A activity will be important to the growth of their company over this time period—29 percent said it will be very or critically important and 34 percent, somewhat important. Only 22 percent see M&A activity as not particularly, or not at all important to their growth. The remaining 15 percent were neutral or not sure.

Slightly more non-tech than tech companies view M&A activity as important to their corporate growth—65 percent versus 60 percent, respectively. Smaller companies in slower growing sectors are a bit more likely to consider M&A an important growth engine. These companies had half the revenue of the others and are in sectors that executives expect to grow 3.0 percent versus 4.5 percent.

“The anticipated jump in deals may be seen by non-tech executives as a way to help their company achieve new traction in an uncertain economy,” said Brian Levy, technology partner with PricewaterhouseCoopers’ Transaction Services practice. “In today’s highly competitive environment, many businesses are seeking an immediate edge, and simply can’t afford to wait for their home-grown initiatives to mature.”

Roadblocks to Achieving Full Value

Citing their own experience, senior executives identified several problems that may prevent dealmakers from realizing the expected value of their transactions.
Potential barriers include:

	All Companies	Companies With Recent M&A
Overly aggressive revenue, earnings or cash flow projections	71%	84%
Difficulty aligning corporate cultures, operating philosophies and management practices	69%	79%
Ambitious cost reduction and revenue targets	55%	62%
Inadequate or hard to integrate IT and financial reporting systems	55%	61%
M&A process not standardized or well understood throughout the company	49%	56%

Other problems mentioned were: inadequate techniques for measuring business performance (45 percent); substandard internal controls or governance practices (43 percent); financial reporting and accounting (41 percent); and tax exposure or unrealized tax savings opportunities (32 percent). A limited number also mentioned under-funded retirement and benefits programs, or other employee-related issues (18 percent).

“When planning a deal, capturing greater transaction value often hinges upon an early understanding of what it will take to run a merged operation effectively,” said Levy. “Those involved in recent transactions appear to be more alert to potential value inhibitors, and will bring a more comprehensive approach to due diligence and integration planning for this next time around.”

Coming: A Closer Screening

Seventy-eight percent of senior executives say they will be spending more time on several aspects of future deals than they previously did, including nearly half (49 percent) who expect to devote much more time.
Primary areas of focus are:

Expect to Spend More Time Than Previously	All Companies	Companies With Recent M&A
New corporate requirements such as Sarbanes-Oxley	54%	63%
Internal controls and corporate governance practices	53%	60%
Revenue, earnings and cash flow projections	51%	58%
Financial reporting and accounting practices	46%	52%
M&A process improvements	43%	49%
Business performance metrics	41%	49%

Other areas mentioned as requiring more time included: corporate culture, operating philosophies and management practices (37 percent); operations (35 percent); IT and financial reporting systems (31 percent); tax exposure and tax savings opportunities (26 percent); and retirement, benefits programs and compensation practices (25 percent).

“In today’s uncertain business climate, the need to thoroughly explore a potential merger or acquisition becomes strikingly more clear and compelling. There is simply less revenue to disguise any failure to achieve value,” said Levy. “When planning a deal, understanding what it will take to run a merged operation effectively is a critical, early step toward capturing greater transaction value.”

Previous M&A Activity

Over the past two years, 58 percent of Management Barometer companies completed an average of 3.9 mergers and acquisitions each. Of these, 91 percent were acquisitions, while nine percent were divestitures. Most transactions (71 percent) were less than $100 million; 21 percent were between $100 million and $499 million; five percent, $500 to $999 million; and only three percent, $1 billion or more.

Overall, executives were pleased with the outcome of their transactions. Seventy percent claimed they exceeded prior expectations—17 percent performed substantially better than anticipated, 33 percent somewhat better and 20 percent slightly better.

• Non-tech companies completed 55 percent more transactions than their tech counterparts: 61 percent of non-tech companies completed an average of 4.4 deals each, while 54 percent of technology companies completed an average of 3.2 deals each. In both cases, 91 percent of deals were acquisitions.

• Transactions were also larger among non-techs: 33 percent were of $100 million or more, versus only 22 percent for tech companies. And more deals by non-techs exceeded expectations—74 percent, versus 66 percent.

• Companies active in M&A over the past two years also expect higher revenue growth this year--6.9 percent versus only 5.8 percent for non-participants.

“Most of those involved in deals these days are looking for revenue and cost synergies,” said Levy. “New intellectual property and human resources may also be attractive to a buyer, if they are a good complement to what’s already in place.”

PricewaterhouseCoopers’ “Management Barometer” is an established quarterly survey in the U.S. These surveys are developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.

PricewaterhouseCoopers (www.pwcglobal.com) is the world's largest professional services organization. Drawing on the knowledge and skills of more than 125,000 people in 142 countries, we build relationships by providing services based on quality and integrity. “PricewaterhouseCoopers” refers to the member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Direct questions about Management Barometer to Pete Collins, survey director and publisher, at 646-394-4496 or e-mail to: pete.collins@us.pwcglobal.com. For more information about Barometer surveys, including recent economic trend data and topical issues, visit www.barometersurveys.com.