Abby Roberts, Merrill Corporation | March 28, 2018
With the recent launch of our new Merrill DatasiteOne due diligence app, we’ve been thinking hard about other ways dealmakers can gain a competitive edge in today’s frothy market. Here’s what US and EMEA M&A experts told us about how they’re navigating the tricky shoals of demanding sellers and high deal valuations:
1. Speed. Impatient sellers will no longer wait for lagging suitors to catch up, no matter how much cash they have. Private equity buyers often have a leg-up over corporates when it comes to the ability to transact quickly without internal red tape. Corporates are keenly aware of this, however, and are honing their game. (To see how DatasiteOne increases diligence speed, see below.)
2. Seller’s choice. Sellers are no longer just looking for a quick exit, but often are in it for the long haul. The greatest advantage a buyer can bring to the table is really understanding the sector and establishing trust with the seller / future partner, says one private equity partner. Being able to clearly communicate to the seller your strategic plan for the business, including a robust add-on acquisition pipeline, can be a key differentiator.
3. Technology. No matter what industry you’re in, technology is disrupting it. Understanding an acquisition’s technological capabilities and what the growth / efficiency opportunity is post-deal is critical to competing in a high valuation world, dealmakers say. Of course, at Merrill we also believe that knowing how DatasiteOne’s new technology drives diligence speed and efficiency is a crucial advantage.
4. Valuation check-points. High prices and fast auction processes are driving creative pricing structures. Buyers are increasingly demanding completion accounts, which provides a mechanism post-close to confirm EBITDA and other critical financial numbers are accurate. On the flip side, sellers are pushing back on traditional earn-out structures that often left them with little negotiating leverage after deal-close.
5. Alternative deal structures. Much like couples living together before marriage, dealmakers are increasingly using partnerships and other quasi-liquidity events to test the waters before committing to a full exit. Private equity often wants current management buy-in, of course, and corporates are ramping up VC and other efforts to gain insights into critical technology or geographies. Sellers meanwhile often want to wait before a full exit because they believe their business will be worth more in the future.
6. Integration benefits. Realizing deal value through integration has never been more important. Corporates rely on integration success to justify high valuations, while private equity players increasingly see the ability to quickly scale businesses through integrating add-ons as a critical differentiator. Have a clear integration plan early on to help compete on price.
7. Hidden carrots. Understanding a seller’s perspective can provide insights into non-obvious ways win sellers over. For instance, some companies looking to divest assets quickly are finding private equity offers of shorter-than-usual Temporary Service Agreements (TSA) alluring, says one lawyer.