M&A deal activity likely to remain robust on corporate growth demand

12 July 2017 Consultancy.uk

M&A activity is expected to remain robust throughout the remainder of 2017, a new study has found. Geopolitical concerns are meanwhile taking a back seat to demand from investors, keen to continue growth trajectories in line with an uptick in the global economic outlook. While organic growth represents one way forward, the continuation of inorganic expansion, as well as strategic moves, is highlighted as a key driver for deals throughout 2017.

A report from EY, the Big Four accounting and consulting firm explores current trends within the M&A space. The report, titled ‘Global Capital Confidence Barometer', is the firm’s 16th edition, and among others, looks at market fundamentals as well as the reasons companies are leveraging M&A in their wider business strategies. The report involved a survey of 2,300 executives, 58% of whom were in C-suite level roles.

Perspective and expectation for the M&A market

The participants of the survey were generally upbeat about the prospects of the global economy. 64% believed the economy is improving, and 32% said that it is stable, while just 4% said that they saw it as declining. In April and October 2016, just 21% and 36% said conditions were improving, while 55% and 49% respectively said conditions were stable.

The firm attributes the improved sentiment to key business indicators, including a very strong Purchase Managers’ index. However, the conditions are also raising the expectations of investors – which, are increasingly being met by companies leveraging organic growth opportunities as well as expansion through inorganic means.

Do you expect your company to actively pursue M&A in the next 12 months

M&A activity last year slowed on 2015's figures, although still operating at levels well above that of the years following the financial crisis. The majority of companies are expecting to continue leveraging acquisitions in 2017. The number is down slightly on October 2016, when it stood at 57%, although up from April last year when geopolitical uncertainties saw expectations fall to 50%. The current results continue to reflect above average acquisition activity is expected throughout 2017.

Researchers also noted that some of the key concerns that created concern among respondents during 2016, have begun to dissipate. In particular, European activity has picked up as more certainty about Brexit, as well as time to digest the result, have come to pass. Companies are also finding themselves in a situation in which acquisitions are becoming increasingly necessary to stay relevant, overturning political considerations. In particular, companies continue to be face with digital disruption, sector blurring, and changing consumer and customer behaviour.

What will be the main themes of M&A in the next 12 months

One of the top themes for firms entering into M&A deals over the remainder of 2017 was ‘an increase in cross-border dealmaking as companies seek to secure supply chains and market access’, cited by 23% of respondents as their main reason. The second most cited reason is an ‘increase in activist investor intervention in M&A, putting pressure on boards to negotiate deals’, cited by 17% of respondents.

Another area cited, this time by 15% of respondents, is ‘a return of private equity as a major acquirer of assets’. The area least noted by respondents as a main theme is ‘an increase in investment in infrastructure projects and privatisation of government assets and operations’.

Effects of political concerns on M&A

While inorganic expansion, and low cost money, continues to provide key drivers for M&A activity, the firm also considered how geopolitics and resulting policy agreements are expected to affect M&A activity in the near term.

The volatile new US administration appears to be creating more M&A opportunities than it is taking away, with 41% of respondents saying they were more inclined to invest in such activity, 24% saying they were less so, and 35% saying it will have no impact. The survey also found that round 46% of respondents are factoring the possibility of trapped cash repatriation and the potential revising of the US corporate tax code into their M&A strategy.

Respondents were also asked about the effect of Brexit on investment activity in the country, with 29% saying it will reduce investing in the UK, 23% expecting investment to increase while 48% expected no change. In terms of the wider EU, the number of respondents planning to increase or reduce their investment into the region is relatively evenly split, 24% saying that they will increase activity, 24% saying it will decrease and 52% say that it will have no impact.

Have you failed to complete or cancelled a planned acquisition in past 12 months?

2016 and its variety of political and economic instabilities, with changes in commodity pricing as well as the Brexit and US administration results, may have affected M&A deals across the sector. While this was indeed the case among those surveyed, 32% of respondents said that economic and political instability led to their cancelling planned acquisitions in 2016, it was only the 5th most popular reason stated.

The most cited reason for failing to complete an acquisition last year was ‘issues uncovered during due diligence’, cited by 43% of respondents, followed by ‘concerns about cyber security’, cited by 39%. ‘Concerns about regulatory or antitrust reviews’ and ‘unforeseen tax implications’ followed at 36% and 33% respectively.

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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.