Transactions Blog

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!

How cheaper are companies being sold nowadays? After a long period of almost flat purchase price multiples, these are now falling significantly. The average purchase price multiple in Q3 2008 fell to 8.7x EBITDA, well below 10.5x EBITDA the quarter before. Psychological resistance for vendors to accept the new market conditions clearly changed and need to further change.

 Average LBO debt multiples (if any …) declined markedly as compared to previous quarters, in line with the fall in purchase price multiples. The decrease in debt multiples is partly explained by more post crunch deals launched to the market this quarter, thus lowering the debt multiples. In Q3 the average total debt to EBITDA multiple had dropped to 4.5x, well below 5.5x for Q2.

 What is interesting is that while debt multiples are now closely in line with 2004 levels, purchase price multiples have only decreased to 2006 levels. This discrepancy is due to the larger equity cheques now being written by sponsors.

 Indeed, equity contributions at 3Q2008 ended the quarter at 43% (as compared to c. 34% a year ago). For the first time since S&P started tracking the leveraged loan market, private equity sponsors are contributing more cash to buyouts than senior lenders. In an average buyout launched in 2008, average equity contribution is c44% (2007: 34%) while first lien bank debt contributed 41.6% (2007: 49%).