M&A market buoyed by expansion strategies and innovation

21 November 2016 Consultancy.uk

Last year M&A activity hit almost $5 trillion in total deal value. This year so far, has been considerably more subdued, on the back of geopolitical and market uncertainties, among others. A new report finds that executives are again eyeing deals, with almost 50% of respondents citing more than 5 potential deals in their pipeline. M&A activity continues to be driven by the need to expand operations, pick up innovation and enter new business areas and geographies.

M&A activity globally has been glowing in recent years, favoured by strong market fundamentals, such as access to low cost capital, low organic growth opportunities, and access to new markets, among others. 2016 has so far been relatively slow, with analysts suggesting that key political uncertainties, including Brexit and the US Presidential election, as well as market uncertainties, including China’s slowdown, are affecting sentiment. 

In a new report from EY, titled ‘Global Capital Confidence Barometer’, the accounting and consultancy firm considers how the current market sentiment, among others, impacts M&A activity. The study involved 1,700 CEOs, CFOs and other C-level executives from 18 sectors. 

Level of confidence

In terms of a number of key market metrics, a mixed bag of sentiments are revealed by the study. Sentiment around corporate earnings is improving, up from 41% saying that the figures are improving in April to 54% in the latest report. Respondents are still less enthusiastic than last year, when 70% said that they were confident earnings would improve. Respondents are also more upbeat about short-term market stability than in April, with 51% saying conditions are improving on 47% in April. Again, last year, respondents were considerably more positive, at 71%. 

Respondents are a little less positive about debt markets, with fewer respondents saying that equity valuations are improving, at 31% vs 39% in April, while credit availability remains relatively stagnant, although the market is seeing considerably less improvement than the same period last year.

Disrupting core business in the next 12 months

Respondents were also asked how they expect their businesses to be affected by current market trends. The biggest concern cited is ‘sector convergence/increased competition from companies in other sectors’, cited by 23% of respondents. 20% respondents cited ‘product innovation’ as likely to disrupt their businesses, while ‘increasing regulations’ are expected to disrupt around 18% of respondents’ operations. ‘Increasing globalisation’ and ‘changing consumer behaviour and expectations’ both come in as sources of potential disruption at 15% of respondents each. 

Actively pursuing M&A

The respondents suggest that they expect M&A activity to pick up, with 57% saying that they are expecting to pursue an M&A deal in the next 12 months. This is up from 50% in April’s report, and in line with last year’s results of 59% and 56% in October and April respectively. The results remain above the long-term average of 42%. 

Deals in pipeline

While 2016 has been slow, 2017 looks to see considerable improvement, with 49% of respondents saying that they have five of more deals currently in their pipeline, up from 20% in April and 12% last year. The survey further found that there is little change in the expectation from respondents about change to deals in their pipeline – 65% cited no change, while 26% say that their pipeline is set to decrease by 9%. 

Drivers for M&A

When asked about the strategic drivers affecting respondents’ decision to pursue an acquisition within their current sector, ‘growing market share’ came out on top with 23% of respondents, followed by ‘acquiring technology or new product capabilities’, at 20%. Around 17% of respondents used M&A to pick up innovative startups, while a 17% use it as part of their strategy to expand into new geographies. Acquiring talent was cited by 15% of respondents.

Respondents are also leveraging M&A to access companies, and capabilities, outside their own sector. The biggest reasons, cited by respondents as strategic drivers for acquisitions outside their own sector, are ‘reacting to competition’, cited by 19%, access to ‘differentiated customers, details or databases’, cited by 19%, and ‘new product or service innovation’, also cited by 19% of respondents. 

The firm notes that it is not merely M&A, but a wider range of alliances, partnerships and collaborations, which are opening up cross-border and industry specific engagement, as incumbents find new ways to compete in a change markets. Steve Krouskos, EY Global Vice Chair of Transaction Advisory Services, explains, “Industrial mash-ups – through acquisitions and alliances – are being driven by new market entrants upsetting the status quo. These disruptors are changing the competitive landscape with new operating models and new ways of creating demand.”

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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.