Corporates continue to explore M&A as part of growth strategy

11 June 2018 Consultancy.uk

Geopolitical uncertainty, and recent market stutters, have done little to dent corporate optimism in earnings, credit availability, short-term market stability and equity valuations. Their optimism is reflected in continued divestment and acquisition interest, even while competition with private equity for targets heats up.

The equity markets started 2017 at a high, before falling sharply on the back of uncertainties, from bond levels reaching 3% in the US to the possibility of a trade war between the US and China. Meanwhile, geopolitical concerns have continued, with airstrikes in Syria and in the US, continued uncertainties around the incumbent Whitehouse administration remain, amid the threat of a trade war with China and the EU.

The markets have continued to post strong results however, while fundraising in the PE segment continued unabated. To understand the conditions affecting the market for companies and business units, EY has released its latest ‘Is your portfolio fit for the future or fashioned on the past?’ report into the industry. The report is based on figures from a survey of more than 2,500 executives in 43 countries.

Confidence level in key indicators

Overall respondents remain positive about the direction of the market, with 77% citing confidence that corporate earnings are improving, a 20% increase on the same period last year – none of the respondents expect decline. Credit availability is cited by 51% of respondents as likely to increase, while short-term market stability is cited by 50% of respondents to improve and 48% of respondents as stable.

A small decline was noted on the previous survey in October 2017 when it comes to equity valuations / stock market outlook, at 45% expecting an increase and 53% stability, vs. 51% an increase and 43% stability. According to the firm, the figures reflect the relative confidence of the market that the relatively good times are likely to continue for the near-term at least.

Greatest risks to near-term core business growth

The study found that political and geopolitical uncertainties continue to dominate the near-term risk to their business’ growth, at 48% and 43% of respondents respectively. The rise of protectionist rhetoric and populism noted as areas of particular concern to business outcomes. Although any concrete consequence is still to be seen, with Brexit talks still on going, Europe as a whole is facing a populist backlash as Austria, Italy and Hungary have all delivered anti-migrant, Eurosceptic governments in recent months.

There are other concerns on the horizon too, including changes in trade policies, and the impact of technologies, such as digital transformation, sector blurring and customer behaviour changes, on business outcomes (cited by 36% of respondents). Finally, currency movements – as rates change – are noted by 35% of respondents as an area of concern.

Portfolio review and objectives timeframes

According to the study, the majority of respondents said that they would engage in M&A activity in the coming 12 months, with firms continuing to streamline their portfolios in line with changing market conditions. The main action taken by respondents is an identification of asset at risk of disruption to divest, cited by 39%, while 32% said that they identified underperforming assets to divest. Most of the respondents said that they would move within a year on their discoveries.

The majority of companies (52%) also say that they will engage in M&A activity in the coming 12 months, down slightly on the same time last year (56%). A large cohort of respondents is expecting the market to improve over the coming 12 months (86%), up significantly from the same question posed last year, when 39% of respondents said that there would be a pickup over a 12 month period.

M&A themes next 12 months and major risks

While geopolitics dominates global headlines, the survey respondents note that in the M&A sphere, cross-border deal making and a return of PE as a major acquirer of assets – are highlighted by 30% of respondents apiece. With a smaller 10% noting cross-sector M&A in technology and digital as the main theme.

The major risks face by players seeking to acquire companies and bolt-ons, is a lack of quality targets as the number of players fishing in the same pond increases. High valuations are less of a concern, while access to funding is likely to remain sufficiently robust – cited by 10% as a concern.

Related: Management consulting drives M&A activity in professional services industry.

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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.