With companies continuing to explore acquisitions, divestitures and other transactions, deal activity in the second half of 2021 is expected to remain strong, building on the resurgence that began after the first wave of the COVID-19 pandemic and has continued at a steady clip this year.
Even as company valuations remain high and a seller’s market endures, demand for high-quality assets and the increasing willingness of some owners to sell them are accelerating deals that were thought to be two or three years away. Many buyers are reassessing where they are in the value chain and how acquisitions can improve their positions. But elevated transaction prices also raise the pressure to capture value in deals.
With so much cash looking for a good home, multiples are likely to remain high. This means increased focus on value creation from each transaction.
Ensuring the valuation model includes a robust assessment of underlying earnings. Sellers and buyers need to be comfortable that reported profits are not distorted by one-time or non-recurring income or costs. Other considerations will include the impact of changes in accounting policies and any other scale changes including recent acquisitions.
Value creation diagnostics and workshops, combined with financial and commercial due diligence on top line revenue, the market and competitors should include the right industry experts with deep knowledge of the sector. This knowledge will inform the assessment of the expected outlook for the business and demonstrate valuation upside that can be realised. It is important to also consider what management has been able to deliver against historical targets set.
Resilience of business models has been highlighted by recent events This has increased the focus of Buyers and sellers on assessing impact of business disruption and changes in trading including Covid-19. Buyers and sellers are looking to demonstrate resilience of the business against changes in trading by highlighting recurring levels of annual revenue or ‘stickiness’ of the customer base.
Every deal comes with a promise. And whether it’s about saving money, making money or both, that promise often includes delivery of synergies. Capturing synergies from consolidation of efforts, duplication of functions or greater purchasing power is often the reason why shareholders and stakeholders get behind the deal. Management is also on the hook to realise and deliver against these benefits. Value creation supported by financial and operational due diligence can assist in the review and assessment of synergies identified. It is critical that post transaction reporting and monitoring of the target synergies against benefits delivered is in place to track delivery of value.
Upsides from change in ownership: New owners will be interested in EBITDA enhancing initiatives which may be already identified by the target but not yet developed. Value creation data analytics and initial due diligence can assess the potential EBITDA impacts and time and cost to achieve. In addition to earnings, what improvements can be made to working capital management post transaction.
Tech enabled businesses are attracting more investment. CEOs are aware of the impact of technology and the need for workforces to be adept with it — both of which can have a significant impact on company valuations in deals. Evolving business models require combining people with the right technologies — such as artificial intelligence, automation and cloud — to drive the right business outcomes. Doing so efficiently and effectively only elevates your appeal as an acquirer or a target. Value creation diagnostics and due diligence should include an assessment of the current IT landscape and capacity of the business and levels of capital expenditure historically and required going forward.
Environmental, social and governance (ESG) issues are becoming more important, with more investors assessing how those issues affect asset values. ESG concerns are even more pronounced among public company executives and private equity firms also are sharpening their ESG focus. Whether you’re a buyer or a seller, the decisions you make need to be good not only for the bottom line but also contribute to society, which creates sustainable advantage and value.
Companies can improve deal success by putting in place a robust repeatable, scalable M&A process involving a team of internal and external advisors. Consider if there are changes that need to be looked at in this process and how it has evolved within the organisation.
Use data analytics and subject matter experts to consider how you can create value through strategic repositioning, improving business performance and optimizing your balance sheet and tax structure pre-deal. Invest sufficient time and resources in review of available key data and identify areas where there are data gaps that bidders will require. Do an initial assessment of underlying earnings, debt like areas and be clear on the value messages.
Companies consistently experience challenges with accurate identification and validation of synergies during the early stages of an acquisition. Information and access to the target can also present challenges with synergy validation. Acquiring companies can improve their chances of capturing synergies if they bring in a broader team during due diligence, including individuals with in-depth understanding of the target organisation’s markets, products, channels and functional units. This kind of team can better validate synergy potential and build more accurate forecasts and earnings-per-share calculations.
The nuts and bolts of integration often dominate the early days following a transaction. Thereafter it is key to select integration initiatives based on value potential. Look to prioritise initiatives based on their ability to drive the most shareholder value. These high-value activities should be further prioritised based on probability of success. Activities that meet these two criteria – high value generation and high probability of success – are likely the ones that should be implemented as soon as possible.
Keeping track on what has been achieved, translating this into value delivered and communicating progress formally. Companies that do this well have tracking processes and tools that define synergy targets and monitor them individually. They also comprehensively measure the economic value added by each acquisition.
Review compensation and reward structures and linking compensation to post acquisition EBITDA performance and delivery of synergies.
Our approach to value creation considers all strategic, financial and operating factors that affect value. We use data analytics to unearth hidden value creation opportunities. The output from this collaborative exercise is an implementation roadmap to increase revenue and margin, which can also be used to show investors valuation upside through your information memorandum with risk adjusted strategic initiatives supported by proven data points.
Today the well-structured M&A processes we see are not only focused on ensuring the right checkpoints and discipline are in place from deal sourcing through to due diligence and integration, but are supported by data driven, value creation plans.
We are ready to help you as you prepare for a sale or purchase of a business.
Contact us today.