Global M&A market grows to 5 trillion in deal value

11 January 2016 Consultancy.uk

M&A activity reached record numbers in 2015, totalling almost $4.9 trillion in more than 7,500 deals, research by McKinsey & Company shows. Deal volume increased 8% on 2014 and deal value 37%. The reason for deal activity is no longer focused primarily on cost reduction and industry consolidation – cross-selling, access to new customers and transformation now also sound new tones.

In a recently released McKinsey & Company article, titled ‘M&A 2015: New highs, and a new tone’, the consulting firm explores the M&A environment in 2015 with respect to the past decade. The article finds that “deal activity surged again this year— especially big deals and those in the United States.”

McKinsey’s research shows that M&A activity has hit record numbers in 2015, following a number of relatively lacklustre years following the 2008 financial crisis. Since 2012, M&A increased with an average of 25% per annum, up from $2,504 billion in 2012 to $4,894 billion in 2015 – and almost $400 billion more than in the previous record year of 2007. These numbers reconfirm previous researches from EY and from Mergermarket, which found M&A activity reached its highest level in 2014 in five years, and was forecasted to reach $4 trillion in 2015.

In terms of deal value, the Americas continue to lead the pack, booking $2,617 billion worth of deals in 2015 – well above the $1,885 billion worth of deals booked in 2007. The area that lost the most ground is Europe, the Middle East and Africa, where deal value has fallen from $1,943 billion to $1,147 billion. The Asia-Pacific area has seen deal value almost double, up from $670 billion in 2007 to $1,130 billion in 2015. The number of mega deals, those above $10 billion, has seen a steep increase on last year – up 130% year on year in the first 11 months. Medium deals, those worth between $5 billion and $10 billion too saw a relatively strong increase, up 24%. Small deals, those below $5 billion, were up 10% on the year previous.

The announcement effects for acquirers in large deals, deal value added (DVA), has in recent years been relatively negative – hitting positive territory for the first time in McKinsey’s records in 2013. Since then, DVA for the acquirer has again dipped only slightly below the line. Target DVA remains strongly above the line, while the combined effect comes in at around 10% in 2015. The consultancy notes however that there is no link to be found between perceived DVA, and its real world effects, and the deal’s eventual value: “Our analysis of past deals has found no correlation between share price movement in the days after a deal is announced and a company’s excess total return to share-holders two years after a deal, when most synergies are captured.”

The research also highlights that the reason for deals has changed somewhat in recent years. Big deals were historically seen as a means of cost reduction and industry consolidation—and many still are. McKinsey notes however that diversification and revenue growth have also become reasons to enter into deals, as well as cross-selling, creating new customer opportunities, and transformation.

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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.