While 1998 may have been considered the year of the Megadeal, merger and acquisition activity is still running high well into 1999. The environmental services industry was not left out of the active merger and acquisition activity.

What's driving the merger/acquisition fever? Many market conditions are helping these financial deals along, including:

• Low interest rates
• A flat interest rate yield curve which benefits longer-term financing
• Exceptional stock market performance
• High Market Liquidity which are attractive terms for acquisitions (lenders have, however, recently tightened lending parameters)
• A stable economy and tame inflation
• Leverage Buy Out (LBO) funds which have significant purchasing power
• Increased interest from foreign investors in U.S. Market because of the uncertainty of foreign markets
• A lower Capital Gains Tax

Companies can participate in a variety of transaction options. Choosing the most appropriate and lucrative deal and carrying the deal to a close can be a difficult and timely process. To assure success and protect a company's interests, many environmental services companies are relying on firms, like KPMG Peat Marwick, to seek interested buyers or sellers and to guide companies through the merger/acquisition process. Today's business purchases are employing a variety of financial strategies. They include:

The Initial Public Offering (IPO): The IPO involves selling a portion of the company's ownership to outside investors. The IPO is usually undertaken as a means to raise capital.

The Roll-Out IPO: This option creates a major player in a given industry by simultaneously going public and acquiring several small to mid-sized firms within the industry. The proceeds from the sale of common stock are then used to pay the cash portion of the purchase price to the founding companies. Any additional funds are used to bolster its balance sheet for working capital and future acquisitions.

A Sale to a Strategic Buyer: The strategic buyer is in the business already and acquires to achieve growth, expand services, gain new markets, or eliminate competition. Since the buyer is "in the business," management and employees of the company being sold risk being eliminated in some cases. In others, however, strategic buyers often offer options and performance bonuses to employees who are retained.

A Sale to a Financial Buyer: The financial buyer, on the other hand, represents someone who is not in the industry and is buying the company hoping for a significant return on their investment. Financial buyers achieve returns on their invested capital through growth.

Management Buyout: In this financial transaction, existing management acquires control of a company using minimal equity and various forms of debt usually secured, to some extent, by the assets of the acquired company.

ESOP Buyout: These plans are qualified retirement benefit plans designed to invest primarily in the securities of its sponsor or other affiliated corporations. ESOPs are defined contribution plans that have a unique ability to borrow funds for the purpose of purchasing employers’ securities.

Leveraged Recapitalization: This method involves a company borrowing against its balance sheet and using the proceeds to make lump sum payments to its shareholders. These payments may be in the form of special dividends and may be structured to include cash, debt and/or equity securities in a newly formed entity. These borrowed funds are not guaranteed by, or the obligation of, the shareholders.

Whatever financial strategy is undertaken, one area that cannot be overlooked is insurance. For clients involved in today's purchasing activities, agents and brokers offer valuable assistance in developing insurance programs that protect companies from the risks that they are acquiring in these transactions. Proper insurance protection will assure that today's merger and acquisition opportunities remain profitable.