Doing deals in the new world
AFTER one of the toughest periods for mergers and acquisitions (M&A) in decades, high-profile announcements such as Kraft's bid for Cadbury, have got everyone talking.
We are entering a test period but one thing is certain – the rules of M&A have changed and in order to stay ahead, buyers and sellers need to adjust to doing deals in the new world.
So given the current economic climate and the turmoil of the past 18 months, what issues should be considered by businesses thinking about making divestments? And in a continuing uncertain market, how can sellers of businesses ensure that they maximise returns?
The key to maximising value is preparation; considering both internal and external factors affecting the business for sale and the buyers’ perspective. Sellers should consider the best time to start a divestment process. It can take a long time to sell a business, so anyone wanting to take advantage of the return to more open M&A markets should start planning now.
It takes time to run a thorough sales process, including putting together a detailed information memorandum, and to proactively market a business. There may be outstanding issues to consider, such as property leases and onerous contracts, that can complicate and prolong a sale.
At the same time, more complex issues that could delay or put the brakes on a sale should not be overlooked. Any pensions, tax and legal issues should be discussed early and mitigated.
What is the growth story and who are the likely buyers? Sellers need to illustrate the growth story not just generically, but on a bespoke basis for individual buyers. Different buyers will value the target business differently, dependent upon the synergies they can bring, the new markets the target may open up, the new products that the target brings to the acquirer, or simply bringing greater strength in a pre-existing market. Sellers can really enhance returns by understanding these dynamics and using these to negotiate the optimal deal.
Looking forward, private equity is likely to be a smaller player in M&A transactions than it has been in recent times, although it nevertheless remains an important source of support for growing entrepreneurial businesses.
Some private equity investments are being sold now to realise cash returns in advance of new fundraising, as a number of private equity houses are looking to raise new funds in the early part of 2010 in anticipation of a recovery. As pricing expectations of vendors and purchasers converge and a workable deal can be structured now, why would vendors wait?
Given lower levels of debt available to support leveraged transactions, financial investors need to invest much higher levels of equity into transactions, generally around 50% of total funding for the deal.
This lower level of gearing will have a significant impact on the ability of investments to provide an acceptable return. Value creation, and hence returns, will have to come through a much higher degree of operational improvement and corporate bolt-ons, with much less dependency on financial engineering.
The absence of cheap and plentiful debt for financial investors means the door is widely open to trade buyers. However, debt is available for quality businesses underpinned by contracted revenues. The difference now is that it is more expensive and more conservatively structured.
When looking to divest of a business, sellers need to put a realistic value on the business being sold, being sure to consider current market conditions as well as future potential. The valuation of intellectual property and intangible assets, such as brands, is perhaps more important than ever.
It has been said that valuing businesses in recent months has been a bit like catching a falling knife.
This is becoming much less the case and we are entering a period for M&A where a small number of quality assets are coming to the market and are likely to sell for respectable prices to both financial and corporate buyers.
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