Maximize Your Deal

Many industry watchers see middle-market M&A deals increasingly attractive for large private equity firms seeking alternatives to large, highly leveraged M&A deals.  Financial buyers are looking for attractively priced assets to grow their portfolios and strategic buyers are seeking to gain market share through strategic acquisitions.

According to the full-year 2010 edition of the mergermarket Deal Drivers North America report, the M&A market made up a lot of ground lost over the past couple years. In 2010, the North American market saw a 28.8% increase in the total volume of deals to 3,978. The financial buyers helped considerably by engaging in heavy buyout and exit activity.  After a relatively quiet 2009, buyouts and exits started to come back in 2010 when total value doubled in buyouts and tripled in exits. The return to aggressive M&A tactics by private equity firms has shown a drastic turnaround from the depressed post-crisis credit market.¹

Other industry watchers share this view. While the past year presented private equity firms with a number of challenges, the industry still managed to bounce back surprisingly fast from last year’s lows. Having now turned the corner, look for the positive trends around deals and exits that developed in 2010 to continue in 2011. While a number of challenges do remain such as fundraising and availability of financing, the outlook for 2011 appears to be bright.²

In another recent mergermarket report, "The Future of M&A", deal-makers operating in North America, Europe and the Asia-Pacific regions commented on the nature of deal-making over the next 12-24 months. As economies and markets continue to recover, respondents involved in the major areas of M&A say signs of economic improvement have slowly surfaced, but many companies are hesitant to try their hands in the market due to debates over post-crisis regulations. Uncertainty surrounding changes to legislative talks regarding tax rates, foreign investment, antitrust and banking regulation, has led respondents, especially in Asia and Europe, to expect further changes.

The valuation climate remains a significant concern for buyers and sellers according to respondents from the same mergermarket survey. But they are somewhat optimistic that the two sides will converge on price, particularly in North America where 75% expect the gap to narrow; 38% of European and 30% of Asian respondents agreed as well.  Indeed, all respondents are relatively split over whether we are in a buyers’ or sellers’ market.  Linked to valuations is the availability of finance. After years of lapsed deals due often to the inability to secure funding, respondents don’t expect financing obstacles to be a major concern going forward. While they don’t expect it to go back to pre-credit crisis levels, they believe it will be easier to obtain, notwithstanding the addition of covenants. ³

Prepare for thorough due diligence  

Many M&A professionals agree that strategic buyers, as opposed to financial buyers, are emerging as the strongest party in deals at the moment. The advantage has shifted somewhat from the private equity groups to the strategic buyers. This group is seeing prices come down, and is able to compete better than they have in years.

Experts advise sellers to expect to spend more time on thorough due diligence preparations in this environment. Investing time in this area can help prevent issues that may cause a buyer to reconsider the investment or cause a lender to withdraw support, or even change the level and cost of financing in light of late-stage information becoming available.

The due diligence process is best managed by providing full disclosure in as transparent and efficient a manner as possible. Letting buyers “discover” issues on their own is invariably a bad approach; this may cause them to wonder what else they may have missed in their due diligence. Unexpected turns can result in renegotiation, lower valuation or complete withdrawal from the deal.

For certain companies in the mid-market, particularly those involved in M&A deals ranging up to $25 million, it is recommended to seek professional advice.  It is not unusual for company executives or owners to want to manage the process themselves. However, a “go-it-alone” strategy may turn out to be very risky. With a false sense of security in their own deal-making capabilities, company executives are often blindsided by the nuances and specialisation required in an M&A deal or capital-raising transaction.

Plan for a successful deal 

Mid-sized companies looking to raise capital or sell their business can succeed by paying close attention to the specific way in which these buyers view their investments. Before proceeding, sellers should consider the following four critical success factors:

1. Conduct a “readiness” assessment
2. Assemble the right team to manage the M&A process to a timely, successful conclusion
3. Leverage technology to facilitate thorough due diligence and accelerate time-to-market
4. Start planning early for successful post-merger integration

Conduct a “readiness” assessment 

Does your management team have M&A experience? What preparation work must be completed and what resources will be required? For many mid-sized companies, preparing for an M&A transaction places a significant burden on staff and resources. The management team, largely focused on the day-to-day operations of the company, must now find time to lead the company through the preparation process and be available to respond to arising issues and unexpected challenges as a potential deal unfolds.

The best practice is to conduct a “readiness” assessment to determine the steps necessary to bring your company to market and then complete those items. Some of the key issues include:

• Assessing the right time to go to market, given the company’s sales and profitability trends, combined with market developments
• Preparation and validation of financial records
• Preparation of customer and market analysis
• 3- to 5-year strategic plan and financial forecast
• Review and resolution of legal, operational, managerial and environmental issues
• Development and summary of marketing and sales plans, including new business pipeline
• Leveraging technology to create a seamless due diligence process

Sellers should objectively analyse their capabilities and their resources in light of the following areas of risk:

Positioning the company correctly - there is a tendency for sellers who are presenting their own company to package it according to their own perspective, rather than through the eyes of the buyer. This may result in focusing on the seller’s, rather than on the buyer’s interests. Objectivity is lost, and so is the opportunity to maximise value from the interested buyers.

• Identifying the right buyers – sellers have a tendency to hone in on a certain potential buyer or group of buyers and miss good opportunities by overlooking other buyers who can potentially deliver a better deal. An objective third party, such as an investment banker, will have knowledge of, and access to, a broader range of buyers. Equally important, they will also better understand how to customise the approach to each party to ensure the maximum chance of success.

• Designing and sustaining a competitive process - M&A deals are highly specialised transactions, characterised by distinctive nomenclature and negotiating behaviors. Recognising negotiating ploys that can lower a valuation can be challenging for sellers who are new to the process and often lead to unsuccessful transactions. M&A experts have the necessary experience to read the situation and keep the deal on track. Keeping multiple interested parties involved to create and leverage the inherent competitiveness between the parties is an important tool.

• Constructing a seamless due diligence process -  today, technology has changed the game of M&A by allowing due diligence to be conducted online through “virtual data rooms” (“VDRs” or “datasite’s”) where multiple viewers may have concurrent access worldwide to read, print and even download all of the documents made available by the company.  Datasites give companies the opportunity to effectively warehouse the company’s most important due diligence documents in a secure, yet readily accessible location. As opportunities and needs present themselves, the company simply decides on the level of access it wishes to give to a  review team and then extends an invitation.

With the aim of driving the best valuation, company managers will know exactly the nature and level of the due diligence review being done through the datasite reporting functionality and reviewers can more quickly get to the heart of the matter through the use of key word searching that is both repository-wide and instantaneous.  Virtual data rooms make the entire process more efficient ensuring a secure environment and providing the certainty of closing.

Sellers need to have the experience of dealing with all the intangibles that go into a successful deal. In today’s risk-adverse market, the chances of a deal being withdrawn or renegotiated are higher than ever.  Failure to account for the factors mentioned above can have serious consequences. To drive the best results and highest valuation, draw on the professional expertise of mid-market deal experts and take advantage of the technology.

If you are considering a capital fundraising activity for your company but have little experience with the M&A market, don’t go it alone. Ensure that you are best positioned for success by starting the process early, working with professionals who have experience selling companies of your size, in your market space, and leveraging technology to bring your M&A deal to market as quickly and efficiently as possible.

1 “Deal Drivers: The comprehensive full year review of North American mergers and acquisitions.” mergermarket in

association with Merrill DataSite: February 2011.

2 PitchBook, Annual Private Equity Breakdown 2011: COPYRIGHT © 2011 by PitchBook Data, Inc.

3 "The Future of M&A",  mergermarket in association with Merrill DataSite and Remark, the events and publications arm of The Mergermarket Group: January 2011.