Transactions Blog

After one of the toughest periods for M&A in decades, some high profile announcements have got everyone talking. We are entering a test period for M&A, where more quality assets are coming to market than we have seen in 18 months. Successful completions will depend on vendor price expectations coming into line with acquirers’ views. If the majority of these deals close, it may well signal a more buoyant 2010.

Ongoing challenges in the debt markets will create an hourglass shaped M&A market where there are a number of mid-market transactions and mega deals beyond , but where there is a dearth of deals in the upper mid-market due to equity and debt constraints.

However, marketing businesses to corporate acquirers will require a different approach, and realising value will depend on getting this right.

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The economic downturn continues to negatively impact deal activity and deal value in the first half of 2009. Global deal volume in the transportation and logistics (T&L) sector was down 45% in the second quarter of 2009, compared to the prior quarter, and overall deal value dropped 55% over the same time period.

Far behind the pace of 2007 and 2008, companies focused more on weathering the economic crisis instead of committing their available capital to new transactions. Credit restraints and a weaker operating environment have shifted attention in the sector toward smaller deals, minority stakes, divestitures and distressed targets. The three largest announcements during the first half of the year could be classified as “midmarket” and all related to minority purchases or purchases of remaining interest.

While global deal activity reflects the recent negative state of the economy, the importance of BRIC countries (Brazil, Russia, India and China) to the T&L deal market is increasing. During the first half of 2009, BRIC acquirers and targets accounted for 20 percent and 26 percent of the deals in the sector, respectively. This is up from 15 percent and 18 percent in 2008. Entities from Russia and China have accounted for most of this relative increase in BRIC deals.

For more info, please refer to the publication T&L Intersections 2009.

According to OECD Corporate governance principles (also stated in the 2009 Belgian Code on corporate governance), (non-executive) directors should have access to accurate, relevant and timely information including the recourse to independent external advice in order to fulfil their responsibilities.

In the context of transactions, the Belgian acquisition law dated 27 April 2007 specifies in Article 21 that independent directors have to designate independent valuation experts in the context of a transaction involving the majority shareholder. This process is commonly called a fairness opinion and is required to protect minority shareholders. But Belgian Company law also foresees that independent valuation experts be consulted and/or prepare reports in the case of intra-group conflicts of interests and in the case of a contribution in kind.

While corporate governance principles and related laws are naturally designed to protect minority interests and other stakeholders, academic researches also tend to demonstrate that a broad use of independent valuation experts is favourable to shareholders.

According to Bugeja[1], valuation experts tend to be used by target companies as it increases the likelihood that the bidder will higher the offer price. Additionally, the use of experts for valuation purposes is also linked to the complexity of the company to value. Based on the assumption that the valuation experts assist directors to provide shareholders with the correct recommendation then hiring a valuation expert is in shareholders’ interest.

The use of independent valuation experts rather than having financial expertise in the Board is stressed by Güner, Malmendier and Tate[2]. Indeed, their research tends to demonstrate that enhancing the financial expertise of the Board may not be beneficial to shareholders when other conflicts of interests are not adequately addressed. Indeed, the empirical results of the research show that the interest of bankers on the board could result in conflicts of interests between the objectives of the company and the financial institution.

As one of the famous Warren Buffet’s statements stressed “Price is what you pay. Value is what you get.”… and the whole game is having the first close to the latter!

In any sales process the seller is in a unique position to prepare and plan well before any information about a potential sale is known in the market. The pre-transaction planning process can serve to identify what the seller would like to achieve from the process, what kind of buyers should be sought, including potential synergies that could be available to these buyers. Further questions are the best way to approach the market in terms of preparation upfront: advisors, vendor diligence, vendor assistance, etc.

Once these decisions have been made and both internal and external resources available have been assessed, an initial timeline can be made.

 Who the buyers are that are being targeted (corporate or private equity players), can influence the approach to the whole transaction. As a consequence, a ‘one size fits all’ approach to planning for a transaction is inadequate and could lead to value destruction as well as wasted time and resources on both sides of the deal.

 Timing and planning also comes in to play when releasing information to potential buyers. Planning and preparation will be reflected in the consistency of the financial information produced – there will be a higher chance of picking up errors in reporting or following up/finding solutions to potential issues or weak areas in the business to be sold. The consistency between strategic thinking and financial information throughout the process will reassure buyers and avoid losing any momentum in the process.