As experts in getting great deals done for our clients whatever the market conditions, we were asked to contribute to a recent online round table hosted by Corporate Live Wire.
We discuss topics including:
- How valuations have held up well, and how to benefit from this;
- The role of joint ventures;
- Financing options in the current market;
- The importance of IP;
- The benefits of using advisers; and
- The hottest developing countries for M&A activity.
What advantages does a corporation gain by using M&A advisers?
The most important advantage M&A advisers bring to corporates – whether they’re advising on an acquisition or a sale – is market insight. This includes advice on valuation (if acquiring, not too high; if selling, not too low) based on experience of and insight into other recent deals in the sector.
It also includes market norms – because they do lots of deals, they can advise a corporation on what’s ‘on market:’ what’s normal in the current M&A climate, what you might be able to get away with and what the other side might perceive to be unreasonable. And because a good M&A adviser is experienced on both sides of the table, they can help ensure you’re presenting things in a way that is most likely to be accepted.
In the first three quarters of 2012, global M&A activity dipped 19.4% compared to the same period last year. Should we be concerned by this slowdown?
Deal volume was down in 2012 compared to 2011, but valuations have held up well, for two key reasons.
Firstly, there is a shortage of high-quality businesses for corporations to acquire and for private equity houses to invest in. This means that a high-quality business can generate real competitive pressure amongst acquirers and investors, and this supports attractively high valuations.
Secondly, there are far fewer ‘distressed’ transactions than were completed in 2008-9-10 in many sectors (retail is an obvious exception); these deals dragged down average valuations and as they have become less frequent the stats are capturing more ‘strategic’ M&A at higher valuations.
Are strategic alliances and joint ventures ‘the new M&A?’
These definitely have their place in a toolbox, but they’ll never completely replace M&A. They offer good ways to share risk and manage exposure, particularly for companies moving in to new activities or territories, or exploiting new technologies in unproven ways. But they don’t provide the complete ownership, and hence control, that an outright acquisition does, and there is often a need to unwind the alliance or buy out the JV in order to achieve this.
This year has seen patent acquisition and licensing intensify, with battles between Apple and Google in mobile devices and digital content. With intellectual property becoming increasingly important, how would you help identify and strategise the best opportunities to pursue?
The key is proximity to your strategic goals. Unless you’re a patent troll, there’s no point acquiring patents or other IP merely for its own sake, and in some contexts you might not need to own the technology – a license might be enough.
Decisions on prioritisation need to bring together your operators and your strategic decision-makers: it has to start at the operating level, not in the M&A team, because it’s the guys running the business day to day who are best-placed to identify what IP they need to achieve their objectives.
It’s then up to the M&A or Strategy team to work out if this is something you genuinely need to control, and to prevent others using, or whether you merely need access to it.
Developing countries are gaining strength and influence as big corporations are looking to expand in these promising territories. What regions are worth noting for M&A potential? What does an organisation need to be wary of when dealing with cross-border transactions?
We’ll continue to see very strong interest in and from China, which we tap in to through our team in Beijing. India is also very important, particularly in sectors such as Industrials, Manufacturing, Energy and Technology. The USA-UK and USA-Europe axes remain some of the most active for M&A, and we don’t expect that to decline.
Around half our deals are cross-border, and these deals come with many pitfalls. You really need an experienced adviser who can guide you through them – from the trivial (time differences) to the surprisingly fundamental – the capacity for causing offence by suggesting a working sandwich lunch in the office, instead of a sit-down meal in a restaurant, should not be understated!
What is the best way to finance an acquisition if a business does not have enough capital?
The honest answer is that it depends, as different forms of finance have different characteristics and will be more or less appropriate for specific deals, companies, and/or sectors.
For example, bank debt is relatively cheap, particularly if it can be secured on assets (property, debtors, stocks etc.). But it needs to be serviced in cash each quarter, both interest and principal.
Equity, in contrast, is much more expensive, but you don’t have to pay cash out of the business each quarter to service it – it only gets paid out at exit.
This means there’s a trade-off between cost of finance and cash flow impact; there are lots of hybrids or variants between these two which can help find the optimal combination for a specific situation.
When you are representing an organisation that is selling a business, how do you ensure they get the best deal?
The key is to know the acquirers intimately, and to know the specific reasons each one has for making this acquisition. You have to present the specific benefits each purchaser stands to gain. Real sector insight and purchaser knowledge is key here. It sounds trite, but beauty really is in the eye of the beholder, and it’s not uncommon to have a highest offer which is three or four times the lowest offer. With such a potential distribution of valuations, you have to be sure you’re reaching out to the most likely and credible purchasers, who have the most to gain from an acquisition.
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