M&A: A new and promising economic development tool

Our economic development agencies spend millions of dollars wooing out-of-state companies to move here and then give these companies tens of millions of dollars more in incentives. At the same time, these agencies are spending virtually nothing to help existing Nevada businesses grow. This doesn't make sense.

There is a strong business case for Nevada companies to acquire companies in high-cost, high-tax states like California and move their operations to Nevada. Consider an existing Nevada company with $20 million in sales that acquires a California S Corporation in a similar business that has $10 million in sales and $1.5 million in EBITDA (earnings before interest, tax, depreciation and amortization). According to a study by Pepperdine University, the cost of acquiring this company (on average) is four times EBITDA or $6 million. The Pepperdine study also reports that acquisition-related loan rates are at record lows, averaging about 5 percent resulting in an annual debt service of about $1 million for a seven-year term loan.

Moving the acquired company to Nevada results in a tax savings up to $137,000 a year simply by eliminating the California income tax, plus there is no federal tax on the loan's interest. These tax savings combined with operational savings such as merged overhead functions, higher capacity utilization and lower labor and facility costs indicate that the acquisition could completely pay for itself in three to five years.

The bottom line: For many Nevada companies, an appropriate acquisition can help fill underutilized capacity, acquire new products and markets and position themselves for more rapid growth in the economic upswing. With the economy currently at a low point in its cycle, costs are cheap and opportunities plentiful.

The economic impact resulting from the acquisition related above is the same as a $10 million sales company moving here but without the costs of wooing them or the incentives necessary to close the deal.

What can we do differently?

* Our economic development agencies can promote the advantages of growing through mergers and acquisitions (M&A).

* They can organize conferences and seminars with experts explaining the methods and techniques required to successfully execute transactions.

* UNR's school of business can include courses on M&A as part of their advanced business programs.

* A list of service providers that specialize in M&A transactions can be compiled and made available to business owners and executives.

* A portion of the funds allocated to the Nevada Capital Investment Corporation can be made available to assist companies with M&A transactions.

Implementing these changes can make M&A a key component of our economic development agenda, reducing economic development costs and enabling existing companies to become major contributors to our state's economic growth.

Bobby L. Watson is president of H. Roark & Company, an investment banking firm that specializes in the middle market. Contact him at 775-527-1456 or through www.hroark.com.