We’re taking a close look at FAS 141R as it relates to M&A, especially in light of the traditional year-end wrap-up of deal flow and our upcoming webcast on FAS 141R this week.  CFOs are beefing up due diligence efforts to ensure they are seeing deals in the light of the new accounting rules - a practice that we wondered about when the revised rules were put into play in 2008.

It is no secret that deal flow has seen a dramatic dip since 2008, to the tune of a 50 percent drop in activity.  However, there are signs of life out there and 141R should never be an obstacle to closing a good deal.   Dealing with 141R simply means building in more upfront time to understand the implications of the new accounting, which is dramatically different from the old SFAS 141.

Interesting focus lately on a couple of areas that relate to M&A in this environment; companies are getting more creative about deals and thereby run the risk of triggering tax issues that weren’t as prevalent in the bull market days. We wrote about this last week in TheDeal.com (check out the article called “Dealing with the Code“), and it seems to be top of mind in other areas as well.

Most recognized is the use of net operating losses (NOLs) to offset taxes and make deals more attractive; the inherent value of NOLs is earning some attention as companies take major steps to protect them.  This is outlined in TheDeal.com article but also highlighted in a recent piece from CFO Magazine about GM’s bankruptcy plans.  As the magazine writes,

the IRS substantially curbs the amount of NOLs that can be used when there’s a change of ownership. In that way, the government prevents corporations from buying loss companies just to latch on to NOLs for their accompanying tax benefits…[but] bailout plans can’t limit the taxable income of companies benefiting from them.

The historically difficult environment is giving rise to exceptions like this and to opportunities for acquiring companies to get creative with the way they structure deals.  Dealflow might be slow, but it’s still moving and knowing how tax issues can help or hurt transactions will be key as we close in on the latter half of 2009.

On Tuesday, September 23rd, the Financial Management Association of New Hampshire (”FMA of NH”) hosted its first event entitled “Preparing for a Successful Liquidity Event in Today’s Volatile Markets“.  I am fortunate to be among the founders of FMA of NH and to have had the opportunity to participate in the panel discussion on this very timely topic.  Peter Alternative and Bas van der Brugge of Mirus Capital started the evening’s discussion with a recap of the current market environment for merger and IPO activity, and touched on the availability of funds from the venture and investment community.  Steven Bell, Senior Director of Finance at venture-backed Vertica Systems, Inc., also particpated on the panel and gave his corporate perspective of deal activity and funding availability [in the way of full disclosure, Vertica is also an MFA client].

The evening’s discussion has me thinking more and more about this topic.  Let’s make no bones about it - the IPO market quite clearly is closed for the time being and we don’t expect to see any liquidity from that market in the near term.  Similarly, our guests from Mirus painted a pretty bleak picture on the M&A front.  However, there was a contrast worthy of note, and I continue to see anecdotal evidence in the market that suggests that all is not lost.  For example, one might think that this is not the time to be raising new money from venture or angel investors.  But as Steve fairly pointed out, companies like Vertica that have a solid business strategy, sound leadership team, and a market solution that customers are clamoring for, can still raise equity with relative ease.

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