Deal execution skills are key for trust in M&A strategy

28 April 2016 Consultancy.uk

M&A activity is expected to remain robust into 2016. New research into the investment community's most critical issues finds that transparent communication to a range of stakeholder is key. The research further finds that investors’ confidence in a company’s ability to execute deals is crucial to whether the transactions, explicitly those with unfavourable synergy opportunities, were viewed positively – giving companies latitude to execute wider strategy.

Mergers & Acquisitions (M&A) activity has been running hot globally, topping $4.9 trillion in 2015. This year is expected to be another bumper year of activity in the US. In order to generate long term value from a deal, it is, however, key to ensure M&A fundamentals are in place.

In a new study by FTI Consulting, titled ‘Corporate Issues Study’, the firm considers a range of factors that are of critical issue for the investment community – including the role investor confidence plays when it comes to evaluating a variety of corporate issues including M&A. The study itself involved 300 institutional investors worldwide.

Clear communication
The research found that a key area of interest for investors, in relation to an M&A transaction, is transparent communication with stakeholders. 95% of investors reported that clear communication with them about a deal is important. However, a range of other stakeholders were also seen as important recipients of transaction news. The most important stakeholders are employees (cited by 93%) followed by customers (88%) and regulators (85%). Getting a clear picture out to a range of stakeholders about the deal provides investors, and stakeholders, with a means to make related decisions.

Information sources
The survey also sought to identify where investors sourced their information regarding M&A deals. The top company communication used is the company conference call at 75% of respondents, followed by press releases at 73% and meetings with management at 58%. In terms of third party communications channels, the biggest source is financial data from sources such as Bloomberg, at 76%, followed by sell side analyst reports, at 74%. Trade media coverage and general media coverage both come in at 52%. Social media is the least sought after source of information – at 15%.

The research further considered which factors lead to a successful M&A transaction. The top item, at 65% of respondents, is a well-priced transaction, followed by the ability to realise cost synergies at 63%. Strong financial rationale came in at 61%, followed by sensible strategic rationale. The area of least concern, although still at 42% of respondents, is the ability to realise revenue synergies.

In terms of specific factors that generate concern among investors relating to a deal, unclear strategic rationale comes in at the number one spot (75% of respondents). High valuation comes in second, as cited by 73% of respondent. Unclear financial rationale is cited as the third most concerning move, at 71% of respondents. Also of concern, but significantly less so, is significant regulatory or antitrust risk, at 46% of respondents. The area of least concern is high levels of media scrutiny, at 9%, and high risk of labour issues, at 24%.

Tust in deal outcome
Another area FTI Consulting looked into is M&A trust, with the study highlighting that confidence in the company marks a clear point of departure for them. For instance, 63% of investors are particularly keen that cost synergies are realised as part of the deal. If there is a lack of explicit synergies in the deal rationale – or there is limited rationale – then the investors’ implicit confidence in the company and it direction play a key part in their concern surrounding a deal. The survey finds that 46% are likely to be very concerned if they are not confident about the company’s capacity to successfully complete the deal, while 76% of non-confident investors viewing limited revenue synergies as a high concern. The research further finds that concern may also be generated if the confidence of investors falls partway through the deal – then so does perceived ability to achieve cost synergies.

According to the authors, “In the end, this means that confidence translates into increased breathing room for companies. Our data shows that investors are willing to give companies more latitude regarding the specific financial benefits of the deal (i.e., deal synergies) if they are confident in the company’s ability to execute deals.”

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.