Private equity

DUE to the slump in M&A activity post Lehmans, many Private Equity houses have had to hold onto their investments for longer than anticipated. 2010 was therefore characterised by a number of PE houses looking to realise investments. This will continue into 2011, with a number of businesses already in a sales process.

But PE houses also need to invest. There will be a number of secondary buy-outs, but the ability to create a return from secondary buy-outs can be limited unless there is a new management, a new strategy or step changes in the business.

We have seen some strong competition for good secondary buy-out opportunities, resulting in high prices in 2010 – this will continue in 2011. However, this will not be enough to satisfy the demand for investment. The key challenge will be whether there are enough primary deal opportunities in what is a hugely competitive private equity market.

Corporate transactions

HIGHLY visible in 2010, was the return of the corporate acquirer. Whether they be UK based (e.g. Kromeks' acquisition of Nova R&D or James Fishers' acquisition of GMC Produkt), or more often from overseas due to the weak pound (e.g.Deutsche Bahn's acquisition of Arriva or Li+Fung's acquisition of Visage), larger companies have dealt with their capital structure and leverage challenges in the last eighteen months and are now trying to generate growth through acquisition.

UK companies can be slow and reluctant participants in auctions. Overseas buyers, unless they have in-house M&A teams and have already identified the target, will often struggle to meet deadlines in processes. Overseas buyers are also challenging the rationale for acquisition in the low growth, highly competitive economies of Western Europe.

The key thing which will entice them to the party is presenting the strengths of the UK business, its intellectual property, brand or management, to replicate the model in high growth markets. Attract the overseas investor by convincing them of the opportunity in the UK for them to transfer into high growth economies, takes time and a global network of relationships. PwC is currently working on opportunities with investors from Japan, US and Korea amongst others to effect such transactions in 2011.

Private companies

THE recession impacted very quickly on many private businesses and many entrepreneurs moved quickly to take corrective action. After 18 months of tight control, we are now seeing private companies beginning to make the decision to sell. One of the drivers for sale is the high prices that good assets are attracting. We are also finding that many entrepreneurs have a price in mind and, recognising the requirement for preparation, we are now working with a number of those entrepreneurs who want to ensure the business is ready to sell and realise the price that fits the entrepreneurs' aspirations.

Preparation is key in any process. Ensuring management structures and clear strategic growth plans are in place will be the building blocks to a successful transaction in 2011. In addition, and to secure premium prices, early consideration and communication with buyers around the world will see international investors at the table.

Conclusion

2011 will be a stronger year for M&A than 2010; private equity and local buyer demand will keep prices high, but look to international investors to maximise prices for world-class businesses.

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