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The René Carayol column

Nothing wrong with PE a social conscience wouldn’t fix | Page 2

November 2013 | business-reporter.co.uk

Straight talker

Madelaine McTernan of Credit Suisse on M&A deals | Pages 8-9

MERGERS & ACQUISITIONS

The big fish are back M&A activity likely to rise as global economies gather pace

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Opening shots René Carayol BY 2007 the leaders of private equity (PE) firms had become the poster boys for the unacceptable face of capitalism in Britain. A few found themselves before Parliament’s Treasury Select Committee, where they were embarrassed and pushed to clean up their wanton public image.

More mega-deals, paid for with increasing debt and provocatively producing lightly taxed profits, had put PE firms under a harsh, unforgiving spotlight.

There was a growing perception that they were a bunch of sharp operators who bought failing companies with other people’s money. They then harshly stripped out huge amounts of cost, leaving nothing but the bare essentials, and re-packaged them for sale at a huge profit – while never caring about the social consequences.

Bigger and bigger deals reached their peak in 2007, when the US PE firm KKR and AXA PE backed the £11billion buyout of Alliance Boots. It grabbed attention because it was the biggest ever PE equity bid for a British business, and the first for a FTSE 100 company.

We are starting to see the initial signs of a reemergence of PE activity with Cinven (who backed IPC Media while I was on the board there for what is still the UK’s largest MBO, at £860million from Reed Elsevier), having spent £3.4billion over the past 12 months.

However, this is no return to those high-octane days in 2007 when the number of PE deals rose to a record 367, with a total value of £38billion.

CEOs are still not yet bold enough to take what could be a career-defining or career-limiting move.

Confidence is the key to all M&A activity, and currently that confidence is still too fragile.

There is nothing wrong with PE that a social conscience wouldn’t fix A very busy year for dealmaking in the telecoms sector has kick-started activity. With Vodafone getting Kabel Deutschland for £6billion and Telefonica paying £7billion for E-Plus, and the jaw-dropping sale of Vodafone’s stake in Verizon for £84billion.

There are four distinct phases in merger waves, reflecting the shift in business confidence. In the first phase, the economy is listless, and the only deals around are when a business badly stalls and there is no other option, and usually at bargain prices in a buyer’s market.

A growing economy initiates the second phase when finance is more readily available, consequently more deals are struck. But only confident buyers are playing.

By the third phase, things are moving rapidly and M&A has become all the rage and, vitally, CEOs feel safe to do a deal.

If we look at M&A waves since 1980, the premiums paid in phase one have averaged at just 10-18 per cent, rising to 20-35 per cent in phase two. Things go mad in phase three, where premiums roar past 50 per cent.

Logic disappears in the fourth and final phase. This

is when premiums rise well above 100 per cent and, despite history informing us this is when all the worst deals are done, it is also when most deals are done.

While there are many jaundiced views about the PE industry, my personal experience saw the encouragement of clear strategic thinking, strong management discipline, and a necessary focus on costs.

At IPC Media we were quite typical, spending three years as a private business, and performing a focused transformation that led to the eventual sale of the business to AOL Time Warner for £1.1billion in 2000.

This could not have been achieved without taking the company private, away from the distracting glare of quarterly reporting.

There is nothing wrong with PE that a social conscience wouldn’t fix, but as the man says, “we learn from history that man can never learn anything from history” – especially when there are obscene amounts of money to be had.

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IPOs hold the key to strategic plans INITIAL public offerings (IPOs) are helping to reignite interest in M&A, as cash is being freed up to invest in other businesses, while mega-deals are also expected to unlock confidence in the boardroom.

John Dwyer, UK and global deals leader at PWC, says: “IPOs are good for M&A as they provide liquidity for reinvestment. They provide a good feel for the economy and bring confidence. In the M&A market, confidence breeds confidence. IPOs are important in

terms of fundraising for private equity, they need the exits to go on the road again.

“We have a lot of IPO companies planning to list on the equity markets – some of these have been postponements until they had more confidence in the economy. This brings some momentum to M&A.” The return of mega-deals is also anticipated to encourage more M&A activity. Patrick Sarch, partner at law firm Clifford Chance, says: “We are seeing a lot

of things in the pipeline. Some of those bigger strategic deals, many of which have failed to make it to the finishing line over the past couple of years, we are now seeing more of and are hoping to convert more into completed deals.”

There have been numerous megadeals already announced this year. In the telecommunications sector, Vodafone and Verizon as well as Virgin Media and Liberty Global have all announced their plans to

merge, while in media Publicis Groupe and Omnicom Group have done the same.

Anna Faelten, deputy director of the Mergers and Acquisitions Research Centre (MARC) at City University London’s Cass Business School, says: “Vodafone and Verizon was a big deal and when these happen, it tends to make other dealmakers more open to discussion. But it also tends to be very sector-specific and we may see more of the same in telecoms.”

Confidence and M&A mega-deals return to the global market

By Joanne Frearson MERGERS and acquisitions are expected to improve as global economies gather pace, with an increase in activity being seen across all sectors in Europe and a likely escalation of hostile bids, as confidence about deal making improves among corporates.

Data by financial services firm Dealogic shows global M&A volume has reached $2.10trillion in the first nine months of 2013, up 17 per cent on the same period in 2012.

However, the data also indicates the number of deals has slowed, dropping 17 per cent in the same period, to 27,216 deals.

This suggests corporates are returning to the market slowly, but there is still some degree of risk aversion. It is anticipated this is likely to change as the global economic recovery

gathers momentum, with many suggesting the early stages of recovery are a good time to buy.

T he IM F latest World Economic Outlook (WEO) is forecasting global growth to rise to 3.6 per cent in 2014 from an average of 2.9 per cent in 2013. In the US, growth is expected to increase from 1.5 per cent this year to 2.5 per cent in 2014, while Europe is expected to gradually pull out of recession, with growth reaching 1 per cent next year.

Vikas Seth, co-head of Europe, Middle East and Africa (EMEA), M&A at Credit Suisse, says: “In terms of the outlook for M&A, the mood is a lot better today than it was at the start of the year. Anecdotal evidence from speaking to clients would suggest they are much more open to strategic dialogue.

Although most of the increase in activity this year has been in

The IMF, meeting earlier this year in Washington DC, has forecast growth to increase globally to 3.6 per cent in 2014

the media and telecom sectors in EMEA, we are also starting to observe more broad-based recovery.

“Typically, I think people like to buy early in the cycle of recovery. If you are buying into a recovery it gives you some runway. Firstly, you get to enjoy that recovery and secondly, it is more forgiving of mistakes that get made in the execution of post-merger integration along the way.”

As growth improves in these developed nations, there is talk that bids in Europe could become more hostile. Patrick Sarch, partner at law firm

Clifford Chance, says: “We think we may see more hostile bids in Europe. This is from a combination of buyer strength, lots of cash, available debt and h igh va lued equit y a nd undervalued targets. The reason is that there is a gap between buyers’ and sellers’ price expectations otherwise we would be seeing more deals.

“I think if a shareholder activist group sees a company as undervalued it will either try to buy it or activists will agitate for a spin-off, distribution of cash or an M&A exit. It has been absent, but the conditions are there for more hostile activity.”

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The M&A gurus who play things by the book Best-selling authors Joshua Rosenbaum and Joshua Pearl on the risky – and rewarding – business of mergers and acquisitions in 2013

By Joanne Frearson

Patrick James Miller

E

V E R FA NC I E D b e i n g a n investment banker and wanted to understand how to negotiate billion-dollar merger and acquisition deals? Joshua Rosenbaum and Joshua Pearl, authors of bestselling handbook Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions, are the men that can teach you this.

With 60,000 copies already sold worldwide, Investment Banking is the number-one ranked M&A book on Amazon. com. It’s a go-to guide for anyone wishing to break into the investment banking industry on both the buying and selling sides. They have recently released the second edition, which includes testimonials from the world’s leading financiers, including Josh Harris, co-founder of Apollo Management, David Rubenstein, co-founder of The Carlyle Group, and “Ace” Greenberg, chairman of Bear Stearns.

“We both studied either economics or finance at the undergraduate and MBA level,” explains Pearl. “However, in investment banking, when it comes to the interview, employers expect you to be not only well prepared, but also capable of doing the job on day one.

“So how do you prepare for the interview if you do not yet have any experience? We saw this dynamic when we were seeking jobs and found there was a lack of a truly comprehensive practical guide that could help you ace the interview.

“We wondered all along why no one had ever written the ultimate guide to investment banking. We realised, after writing it for several years, that the primary reason why no one had ever done this was because everyone was working these 100-hour-plus work weeks, and that there was simply no time to do anything else.”

The pair are both passionate about M&A and, as they speak to me over the phone from New York, the excitement of big deals in their voices is evident. Overall, Pearl and Rosenbau m e x pec t t here to be an increase in M&A activity, although they both think there is still some uncertainty from both buyers and sellers.

There are some signs of companies returning to M&A though. “In Q3 we saw more of the $10billion-plus deals,” says Pearl.

“In fact, we saw as many $10billion-plus deals in Q3 as we saw in Q1 and Q2 combined.

We have also seen private equity firms start to creep up in a larger percentage of global deal volumes.”

When it comes to M&A, both agree that horizontal mergers, or an acquisition of a company on the same level of the value chain, are more likely to have a higher degree of success. “The acquirer management team often know the companies in their sector extremely well and know where the synergies are,” Pearl explains. “Those transactions tend to have a much higher success of integration versus vertical when you are

Above: Investment Banking authors Joshua Pearl and Joshua Rosenbaum in their New York HQ

expanding upstream in the supply change or going downstream and acquiring a customer.”

Another element to look out for is a CEO’s track record. If a CEO has prior experience integrating companies and extracting synergies, the deal has a higher probability of success. If it is the first time the CEO is undertaking an M&A transaction, the strategic logic isn’t immediately apparent, or the buyer/seller cultures are very different, then those situations are less likely to succeed.

A lot looks favourable at the moment for M&A activity, according to Rosenbaum. He says: “For public companies, the stock prices are at, or near, post-crisis highs, which provides a little more confidence to do things.

“Many companies have historically high cash balances, and debt financing is still inexpensive. Additionally, we are in an environment where most companies are hesitant to rely purely on strong organic growth to drive outsized returns. Many companies are looking for synergistic opportunities to improve earnings.”

But it is not just all about looking for a company which has synergies and strong cash flow generation. Shareholder activism has been keeping companies in check and become a proliferating force behind M&A. Pearl says: “You have seen that predominantly in the first half of 2013. There has been a big jump in shareholder activism compared to what you have seen over the past 10 years. In many cases the management team is either not executing well, not utilising their balance sheet efficiently, and not maximising shareholder value.”

The technology sector is one area where shareholder activism has been a reason behind M&A deals. Rosenbaum says: “A couple of the largest names in the sector have had activists come along and advocate for change, whether it be new management, stock buybacks or asset sales.”

Although this all sounds positive, M&A is still not at a level where it could be, and uncertainty about global economics is still weighing on some investors.

“While there are clear positive indicators for M&A activity, some buyers are not yet ready to reach for the stars in terms of paying full premiums for companies,” Rosenbaum says. “They may be showing restraint due to lingering concerns about what is lurking around the corner, whether there could be another hiccup, such as a domestic political event, geopolitical situation, or something in the Eurozone or emerging markets.”

Rosenbaum explains that for some buyers, they are likely waiting to see greater job creation and more visibility and stability before they commit to larger M&A deals.

When it does start to improve more rapidly, he expects it to be across all sectors.

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Microsoft’s takeover just the next stage in Nokia’s reinvention

By Joanne Frearson

ExpertInsight

TELECOMS and technology has been one of the hottest M&A areas t his year, w it h f ir ms using consolidation to help them expand their market presence and get rid of existing businesses having a drag on their performance.

One of the most talked about deals has been between Microsoft and Nokia. Microsoft agreed in September to buy Nokia’s mobile phone business for €5.4billion.

Following the merger, Nokia plans to focus on its three established businesses – Nokia Solutions Network (NSN), which provides network infrastructure and services, HERE, a mapping and location service, and Advanced Technologies, which focuses on technology development and licensing.

Matthew Cross, partner at PWC, says: “Interestingly, some people are saying, by Nokia selling its handset business, it will give it a

Year

good platform to grow again. NSN h a s u nde r gone sig n i f ic a nt restructuring in the past year or so and is in much better shape than it was, and Nokia has successfully reinvented itself a number of times during its long history.”

In Nokia’s third-quarter interim report, its NSN business achieved underlying profitability for the sixth consecutive quarter, with a thirdquarter non-IFRS operating margin of 8.4 per cent, reflecting strong gross margin and continued

progress relative to its strategy in a seasonally weak quarter.

Despite volumes of its Lumia smartphone increasing 19 per cent quarter-on-quarter to 8.8 million units, Nokia has struggled against Samsung and Apple in this market.

One of the aims of its acquisition of Nokia’s handset business is for Microsoft to increase its market share in mobile devices.

Cross says: “Apple and Samsung are the two big players in the handset market, and the question everyone

Nokia CEO Stephen Elop at an event last month Getty

M&A in Turkey at a glance

2008

2009

2010

2011

2012

DEAL NUMBER

169

101

190

237

259

DEAL VOLUME

US$16.2 billion

US$5.2 billion

US$17.3 billion

US$15.0 billion

US$28.0 billion

PRIVATISATIONS/ SHARE IN TOTAL

US$5.2 billion/32%

US$1.2 billion/23%

US$2.9 billion / 17%

US$1.0 billion /7%

US$12.1 billion /43%

FOREIGN INVESTORS

85% of deal value

43% of deal value

60% of deal value

74% of deal value

46% (**) of deal value

FINANCIAL INVESTORS

30% of deal value

13% of deal value

5% of deal value

8% of deal value

6% of deal value

AVERAGE DEAL SIZE***

US$100m

US$51m

US$91m

US$63m

US$108m

SHARE OF LARGEST 10 DEALS IN TOTAL VOLUME

69%

44%

61%

56%

75%

LARGEST DEAL VALUE/SHARE IN TOTAL

US$3.1bn (Migros)/19%

US$485 m (Osmangazi Electricity Disco)/9%

US$5.8bn (Garanti Bank)/34%

US$2.1bn (Genel Enerji) / 14%

US$5.7bn (Bridges and Highways)/20%

Source: Deloitte, Annual Turkish M&A Review 2012; January 2013 Note: Data presented above include estimates for deals with undisclosed values and are adjusted for cancelled transactions. (*) Total deal volume in 2010 was adjusted for the cancelled privatisation tenders amounting to US$11.7billion. (**) Excluding privatisations, foreign investors’ share in the remainder of the deal value was 82 per cent. (***) Excluding top ten deals, the average deal size of the remainder was US$32, US$32, US$37, US$29 and US$28million in respective years.

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is asking is, can the two sustain their leading positions, or will they be challenged by a resurgence by Microsoft or someone else?

“One thing is certain, there will be further changes as technology seems to be a difficult area to stay on top for very long. There is debate as to whether Apple can sustain its premium pricing in the face of fierce competition from overseas.”

Francisco Jeronimo, research director of European consumer wireless and mobile com mu n ic at ion s at ma rket intelligence and advisory firm International Data Communications (IDC) EMEA, says: “We will probably see more agreements like this in the future. The market will become more concentrated as economies of scale are important to survive in a market where profits will come from several slices of a pie rather than one single business, particularly if that business is hardware.

“Mobile phone vendors will realise the only chance to succeed is by merging with content providers, with bigger manufacturers, or – less likely – with an operator or a large retail chain. Concentration is key to survive as margins will continue to be squeezed by the dominant players. While Nokia has realised that and is taking action, others will continue to see their financial situation deteriorate and will take the same decision when bankruptcy is a reality.”

M&A can aid your career path M&A CAN be helpful to your career and does not necessarily have to mean worries about redundancy, especially if you are involved in the planning stages.

Senior managers are often called upon to give their ideas about what is the best way to merge the synergies of businesses involved in M&A. This could provide them with an opportunity to move up the ladder.

Luke Egeler, M&A lead at Moorhouse, says that if you are involved in the process and have “laid out early on what success looks like” and what you are targeting for, it is very clear to see when you are doing a good job. “Every senior leader appreciates M&A is hard,” he continues.

“Many of them do not work out. If you manage a good result you can be noticed for it.”

Not all M&A means job promotion and many result in staff cutbacks. When redundancies are inevitable it is important to communicate this possibility early on to employees. Anna Faelten, deputy director of the Mergers and Acquisitions Research Centre (MARC) at Cass Business School City University London, says: “You need to have a plan of what you are trying to achieve. Do not lie and say there will not be any redundancies if you are not sure. Uncertainty means people are going to not perform the way you want and will just be looking for other jobs anyway.”

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With mergers, when the deal is done it’s only just begun…

S

UCCESSFULLY integrating two companies after a merger can make the difference bet ween a dea l whic h transforms the firm and propels it forward or one that leaves it struggling. Problems can occur after the deal is signed. Vital staff disgruntled with the M&A process can leave and business plans can grind to a halt.

Communicating to employees and having a clear goal from the beginning of what a M&A is to achieve can help firms mitigate problems in the process.

Luke Egeler, M&A lead at business

transformation consultancy Moorhouse, says: “Lots of mergers fail because they do not follow their original intended business case and they do not do postmerger integration well.

“A lot of businesses are all about the pre-deal and after they have signed it they forget that is the easy bit. As soon as you sign, from day one you are

bringing together personalities, people and culture – it is much more difficult to actually turn that around.

“If you do not plan you can lose the deal drivers which you had in the first place. You need to understand the synergies, how they are going to be mapped and how they are going to be tracked going forward.”

Mergers which are not successful can impact a firm’s brand and growth prospects, as well as cause loss of key people needed for the business.

Egeler says: “I worked for a large FTSE 100 company, which wanted to buy more resources. But the company it wanted to buy was not interested in being bought, so there was a hostile takeover. After the company was bought, the FTSE 100 firm thought it would just add it to their portfolio.

“But the guys that created the success of the company left the big firm. They did not want to be part of the merger, all the paperwork and hassles. They left to set up a more agile firm.

“Senior people either stick around to be part of the journey or they say thanks, we got the money and go start up another firm or something else. So instead of building on a growth trajectory, there is suddenly no growth as all the key people leave.”

Firms are starting to understand the risks involved postmerger. Ernst & Young

“A lot of businesses are all about the pre-deal, and after they have signed it they forget that is the easy bit” – Luke Egeler, Moorhouse

Emerging markets ‘buying European’ EMERGING market companies are starting to focus their M&A strategies towards developed countries so they can gain access to western products which they can use in their areas.

Global cross-border M&A volume for the first nine months of 2013 was $594.2billion, while there were 6,148 deals in this period, according to data from financial services firm Dealogic – and the technology sector has been a major interest to firms involved.

Patrick Sarch, partner at Clifford Chance, says: “There has been a move from potential buyers looking at high-growth markets to emerging economies switching back to focus on more developed markets. We think Asian buyers are looking at Europe more than Africa as commodities and natural resources become the least flavour of the month.

“They are looking to buy tech brands.

They are not trying to buy market share within Europe, but they are looking to export that knowledge back into their home country.”

Companies are also looking to buy firms in developed countries which have access to the emerging markets in a bid to capture the gains occurring in these high-growth geographies.

Vikas Seth, co-head of Europe, Middle East and Africa (EMEA) M&A at Credit Suisse, says: “I do sense an ongoing appetite to buy European assets for a number of reasons.

“There are companies here which people think have very good technology and are positioned well in both Europe and the emerging markets. One way to buy emerging market growth is not necessarily to buy a firm here, but to acquire a European company with a strong emerging market business presence.”

is seeing a lot interest from clients in trying to de-risk the problems associated with transactions.

Jon Hughes, who heads up the UK transactions team at Ernst & Young, says: “There is more work being done around the risk area as perceived by the acquirer on the asset – about where the synergies are, the integration plans and making sure the post-merger activity delivers both the synergies and also the strategic value the company wanted it to deliver.

“It is something we are seeing as best practice. The boards are now driving this and that is a strong change that was needed. You’ve got to plan for a merger and start from the bottom up and top down. You’ve got to think about how you integrate routes to markets, how you integrate culture, how you integrate manufacturing and technologies, what your footprint is.”

Research at HR professional body the Chartered Institute of Personnel and Development (CIPD) shows communication when M&A activity occurs is also equally important for employees as it is for customers.

Claire McCartney, adviser on resourcing and talent planning at CIPD, says: “Both employees and customers might have committed to an organisation specifically because of its culture, values, the behaviours of its people, and what it stands for.

“It is therefore very important to make sure that the merger or acquisition partner shares key elements of your culture and values and that you have a plan for aligning the best of the two cultures going forward.”

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Each deal is unique, so be prepared INDUSTRY VIEW Management teams embarking on M&A activity need to question their company’s capabilities to successfully execute the deal – the right resourcing model may be internal, external or a hybrid.

M&A activity has been quiet for five years and there is a temptation to handle acquisitions using generic project managers, or already busy line managers, with a view that it will probably go all right. Usually less than 10 per cent of transactionrelated deal costs are spent on securing the integration and synergy capture post-deal.

This is a false economy.

“Markets scrutinise M&A performance more now than ever,” says Andrew Scola, a founding partner at Global PMI Partners. “Too often companies embark on mergers and acquisitions without the skills and experience required to ensure success. Whilst M&A volumes are expected to rise, our research shows that only 24 per cent of companies have the capability to integrate.”

Some businesses in continually acquisitive sectors have retained deal-making and integration teams throughout the recession.

These companies do have an advantage; smaller integrations can be done with internal people who know the business already, are less expensive, easier to manage and more likely to be around to help with the next deal too. They augment or bring in consultants to mitigate risk, when deals are especially large, complex or concurrent, on the back of previous deal failures and to benefit from best practice and a fresh approach from external advisers.

There’s a shortage of experts as there simply hasn’t been as much M&A activity for five years. Each deal is unique, but all integrations have challenges - ensure you have the best team – and be prepared to bring in expertise when needed. andrew.scola@gpmip.com www.gpmip.com

European tech firms are of increasing interest in emerging markets

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Mergers & acquisitions

How due diligence can put you in charge INDUSTRY VIEW The importance of due diligence (DD) should never be understated.

Physician Thomas McCrae summed it up perfectly.

“More is missed by not looking than by not knowing.” As the recession ends, companies start to compete for acquisition targets. Many may cut short their DD due to time pressures or cost constraints. So what is enough DD and how can you use it to the best of your advantage?

At Chantrey Vellacott we believe, to start with, you should align your DD plan with the board’s agreed strategic plan.

We design our programmes to investigate whether an acquisition fits both commercially and financially. DD should at the very least be used to confirm what you have been told so far. Will history repeat itself? If not, adjust the transaction price and structure accordingly.

Importantly, always ask questions which try to uncover unrecognised risks. Are there issues in the staff base which could result in a claim or vacant position? Is there a risk a major client renegotiates terms or ends a contract?

Are there informal agreements which have not been documented or properly recognised within the accounts?

Well prepared DD can provide significant insights on an acquisition but this alone is not enough. The key is that results are acted on, DD is not for filing once complete. Boards should act on the recommendations and results, using them to ensure that they have a well thought through and structured integration plan.

Debbie Clarke (right) is head of corporate finance, Chantrey Vellacott DFK LLP 020 7509 9340 dclarke@ cvcapital. co.uk

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Joanne Frearson talks to Madelaine McTernan, managing director of investment banking at Credit Suisse

You need to start with a deal that meets a company’s strategic goals

M

ADELAINE McTERNAN gives me a warm smile as she greets me, shakes my hand and asks me to call her Maddy. I meet her at the Credit Suisse offices in Canary Wharf in a spacious boardroom, a place where many an M&A battle has undoubtedly been won and lost.

I wonder what conversations could have taken place within these walls. The room could potentially sit 40 or 50 people around the table – management teams meeting to discuss their latest acquisition plans in their bid to expand their global presence, or a CEO devising a strategy to stop their company becoming the target of a hostile takeover.

McTernan is the managing director of Credit Suisse’s investment banking division, and was recently appointed as the head of UK M&A at the bank – the first woman to be appointed to the role.

She is charming and effusive as she speaks to me. Her background is an impressive one – she’s been involved in some of the biggest mergers and acquisitions deals in the UK consumer

Portrait by Andrew Crowley

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“Management’s reputation is obviously paramount when it comes to M&A. Any large transaction is subject to a lot of scrutiny”

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Be prepared!

That’s the key for a successful business sale Overseas options could prove to be more profitable INDUSTRY VIEW

sector. They include Heineken and Carlsberg’s $20.2billion break-up bid for Scottish & Newcastle in 2008, Coca-Cola Hellenic’s relisting to the LSE, Misys’ $1.3billion disposal of its listed subsidiary Allscripts, SC Johnson’s acquisitions of parts of Sara Lee’s European HBC business and the sale of Alberto Culver’s European HBC business and subsequent acquisition of Simple skincare.

She studied law at Trinity College, Cambridge, and is a qualified solicitor.

After five years working at a magic circle law firm, McTernan became interested in moving across into banking after wanting to know more about what happened behind the deals. She was not only curious about how a deal gets done, but also why people were doing these transactions and what was the motivation behind them.

McTernan has a positive view for the outlook of M&A over the next year, but she expects activity to pick up gradually rather than envisioning a boom scenario.

She says: “I am very confident that M&A markets are going to strengthen next year. We are seeing an uptick in interest from clients in thinking about strategic opportunities. There are several factors that should support a pick-up in overall volumes – the UK economy is starting to build confidence and we see that a lot of corporates have pretty strong balance sheets. Strong debt markets mean most companies are able to raise funds.

“In the equity markets, we are seeing a bit of resurgence – the IPO market is starting to come back. But M&A tends to lag an uptick in equity markets so this is a good indicator that we will start to see a resurgence in M&A deals.”

The risks involved in corporate deals are still a concern for management teams. It is a balancing act to mitigate the risks in M&A transactions, explains McTernan. The terms of a transaction need to be right in the first place with factors such as financial impact (both in

terms of resulting capitalisation and earnings impact) being key. Then comes the requirement to integrate the acquisition effectively and ensure that the envisaged strategic benefits are realised.

McTernan says: “There are so many different potential challenges and you have to weigh up each of them. It can be a bit of a balancing act – in my job I see lots and lots of potential transactions and a very fair number of them do not happen as you cannot get the balance quite right. What makes a good deal very much depends transaction to transaction.

“I think you need to start with a deal which meets a company’s strategic goals, whether that be expansion into new

Getty

Jorgen Buhl Rasmussen, CEO of Carlsberg and JeanFrancois Van Boxmeer, CEO of Heineken, announcing their takeover of Scottish and Newcastle in 2008

obviously paramount when it comes to M&A,” she says. “I think the level of detail that people are required to explain in connection with a transaction, both on the strategic side and the financial, obviously means any large transaction is subject to a lot of scrutiny.

“People are very keen to make sure those things line up, because if they do not they can have pretty negative consequences.”

McTernan expects to see more activity in the telecom sector, which has had its good fair share of deals this year.

But she expects an increase in activity across sectors. “There are a whole host of companies that are often rumoured as potential bid targets in the UK that are potentially attractive to overseas buyers.”

S

Credit Suisse’s London offices

Getty

markets to drive growth – and obviously we have seen a fair amount of emerging markets M&A over recent years – or adding a new product opportunity.

The strategic rationale then has to be underpinned by positive financial effects on the company, such as returns and earnings growth.”

She says people are looking for targets that can continue to drive growth and obviously valuation remains the key factor in assessing these opportunities.

Companies must be able to access debt financing and supportive shareholders are very important when you are talking about public companies doing M&A. “Management’s reputation is

he is also anticipating more cross border M&A activity in the UK. The UK is an international market and currently around 50 per cent of M&A deals are cross border.

Presently, the UK is the most targeted nation in Europe with the number of deals reaching 1,616 total and volume standing at $107.8 billion for the first nine months of the year, according to data from financial services firm Dealogic. Although the data shows buyers are still reluctant to commit, with a 3 per cent drop in volume year-on-year.

But there have been signs that crossborder M&A activity has been picking up in the UK, with some big names involved in deals. Recently, Japanese beverage and food company Suntory bought GlaxoSmithKline’s drink businesses Lucozade and Ribena. McTernan expects the pick-up in cross border M&A will be across the board in all sectors.

“A lot of UK listed companies have got operations globally,” says McTernan.

“They are exposed to many different regions. That just increases the attraction, whether it be in Japan, China or someone from the US looking to make an acquisition to broaden their geographic base.”

We part ways at the boardroom, and I wonder if she is going to meet someone to discuss the next big deal or M&A battle to emerge in the UK.

F

or an owner, the prospect of a business sale represents the crystallisation of years of effort. Therefore finding the right buyer is crucial – but don’t assume they will be UK-based.

The best advice for a successful business sale can be summed up in one word: preparation. This applies to all aspects of a sale process, from ensuring the company is in good order, to looking at your personal tax position and the consideration of post-sale options.

The identity of the potential buyer is another area which will benefit from early consideration, including where they are based. Many UK business owners assume the most likely buyer to be another UK company. However, the M&A market is increasingly global, and this phenomenon is not restricted to listed companies or large private equity transactions.

More than 80 per cent of the M&A assignments we’ve been working on for the last 12 months have had overseas clients, with significant interest in UK assets from the US, Asia, the Middle East and Germany.

One reason for this is the relative weakness of sterling, which has meant the acquisition of assets in the UK appears relatively inexpensive from an overseas purchaser’s point of view. The UK is also a good platform for businesses looking to set up in Europe, as the language, employment landscape and legal system all assist overseas purchasers in establishing themselves with relative ease and low risk.

Of course, the appetite of overseas investors varies. Asian buyers are often attracted by brands and technology, and Middle Eastern investors are keen on tangible assets such as property, whereas US and European buyers look at a wide variety of trading businesses in seeking to open new markets.

So, in terms of preparation, UK owners must consider how attractive their business is – or could be – to overseas buyers as well as those closer to home.

Phil Cowan (left) is head of corporate finance at Moore Stephens +44 (0)20 7651 1807 phil.cowan@ moorestephens.com

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Mergers & acquisitions

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How synergy benefits can make or break transactions

Key audiences are shareholders and lenders who use the information to help support their own valuations INDUSTRY VIEW

T

he term “synergy benefits” will be familiar to many M&A practitioners, including investment bankers, CFOs, transaction advisers and legislators alike. But what exactly does the term mean, and why does identification and delivery of synergies have such a defining impact – both good and bad – on so many potential transactions?

Synergies define the financial benefits generated through cost savings and revenue growth opportunities when businesses come together through a transaction. The cost benefits are either driven through cost reduction (for example, leveraging increased economies of scale) and consolidation of overlapping organisational functions. Revenue synergies are created through cross-selling of complementary products and services, geographic expansion into new supply routes and pricing optimisation.

Financial institutions must be convinced potential synergy benefits are achievable during post-deal implementation before they gain comfort around the deal rationale and pricing, thus supporting their own valuation model before ultimately releasing capital to fund the deal.

Changes in the UK Takeover Code as a result of the Kraft-Cadbury transaction in 2010 now requires merger benefit statements to be shared with the market, outlining those merger benefits which are considered achievable as part of the transaction.

“Triangulation” is an invaluable technique often used when assessing and generating confidence in the assumed synergy benefits. Potential acquirers

are bound to have certain hypotheses regarding the transaction in their initial investment rationale, and triangulation of the potential benefits can be used to robustly test these assumptions.

Triangulation includes evaluating the quality of information available, historical track record of delivery and comparison against external transaction benchmarks underpinning management’s assumptions on the quantum of the synergy benefit.

Our experience suggests that stakeholders, such as financial institutions, have key questions on the buyer’s synergy case which they require independent assessment of: What is the quantum of the synergy benefits? Are they cost or revenue based? What is the phasing of the benefit? Has the business clearly articulated the timing of delivery of synergy benefits? Has management completed a robust analysis of cost required to successfully deliver the synergy benefits?

Let’s take these in turn, starting with “quantum”, or in plain English “how much?”

Synergies generally come in two forms, either reduced costs or increased revenues. The quantum of cost synergy benefits from the consolidated organisation is often the primary focus. For example, buyers must determine what savings can be achieved during the integration process through removing functional overlap and maximising economies of scale on property footprint, procurement and supply chain costs.

Revenue synergies by their nature are more difficult to quantify, and in most cases are discounted by analysts in their valuation model.

This is due to their dependency on market conditions, pricing and external factors outside of the control of the business.

Whatever the mix of cost and revenue synergies, it is important to establish the combined organisation’s financial baseline against which synergy benefits will be measured. Only benefits arising as a direct result of the transaction can be classed as synergies. For example, if two organisations claim they can save 10 per cent of their facilities management costs through an acquisition, but one of the businesses is partway through

a site-consolidation programme, how can investors gain comfort on the actual synergy benefits?

So, once there is confidence in the quantum of benefits, the next area to come under scrutiny is the timing or phasing of delivery of the synergy benefits. The proposed phasing of the synergy benefits offers insights into what planning the buyer has completed on the proposed acquisition.

Over-delivery of synergy benefits in the first year after acquisition closure can indicate inadequate planning around risk mitigation in the integration process by driving transformational change at an unrealistic pace.

This can often lead to benefit leakage. For example, driving consolidation of overlapping business functions in too short a time frame is potentially executed without giving the due time and care in managing the cultural and people changes – this could have a negative impact on performance in the medium term. In most deals, the company should target two-thirds of synergy benefits in the first two years reaching full run-rate in year three.

The third area which stakeholders tend to focus on is the one-off costs, or “costs to achieve” the synergy benefits. These play an important part in underpinning the delivery of the synergy benefits.

Businesses need to consider those activities which will deliver synergy benefits – for example, retention bonuses to ensure key staff remain in the business to embed successful transformation during the integration process. In most deals, the company should target a ratio of total one-off costs to achieve versus total synergy benefits of between 1.5 and 1:1, with the bulk of the one-off costs incurred in years one and two.

The UK Takeover Code requires explicit disclosure of potential synergy benefits, with “a statement that the expected synergy benefits will accrue as a direct result of the success of the offer and could not be achieved independently of the offer”. This is mandatory for transactions subject to the UK Takeover Code and is effective from September 2013.

In effect, this means that not only will buyers have to convince their own boards that an acquisition makes sense, they will have to share their analysis with the market at large. Key audiences for these public estimates of synergy benefits are shareholders and lenders, who use the information to help support their own valuations of the deal. Getting it wrong could undermine the buyer’s credibility, and make it harder to justify acquisitions in the future.

So what is most important to get right when it comes to synergies? Firstly, all stakeholders must understand the detail, including the crucial aspects of quantum, phasing, and cost to achieve.

Synergies must be prioritised, and should form the basis of integration planning. Internal stretch targets for synergies should be 20 to 30 per cent greater than publically stated goals, to increase probability of synergy target attainment. And finally, tie individual and team incentives to achieving synergies, to improve accountability and ownership.

Michel Driessen (left) is lead partner, Operational Transaction Services at EY +44(0)20 7951 2000 www.ey.com

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Inspector Dogberry A RECENT study by the Centre for European Economic Research (ZEW) in Mannheim has found in the three years following a cartel breakdown, mergers increase by up to 51 per cent.

The number of mergers worldwide increase further, to 83 per cent, when the sample is nar-

rowed to horizontal mergers only, or mergers between companies in the same industry operating on the same production stage.

The results suggest former cartel members might be trying to regain the market power they have lost by increasing merger activities. The study indicates the need to re-allocate or expand resources in competition authorities, law offices and consulting firms to be able to efficiently deal with the increased number of mergers.

It is possible cartels following a breakdown could consider mergers to be a “second-best”

Dogberry has been on assignment in Brazil and is excited about the 2014 FIFA World Cup and the 2016 Summer Olympic Games, as corporate activity is expected to heat up.

A Catalyst Corporate Finance report claims Brazil will be the fifth largest consumer market in the world by 2020, with a household consumption rate of $1.8 trillion. The middle class is expected to grow to around 133 million people by 2014 and 85 per cent of the population will live in urban areas.

The report explains Brazilian consumer spending power is attracting foreign corporates. They are making acquisitions of well-known domestic brands to gain access to these growth markets.

Sectors expected to be strong in M&A include food and drink, healthcare and education.

alternative and competition authorities should take this into consideration when they are examining M&A deals.

Cartel agreements between firms typically reduce competition and can cause substantial economic harm through elevated prices and reduced innovation activities. They are a major infringement of competition laws and are prohibited in many anti-trust legislations around the world.

In contrast, the main objective of a merger is to benefit from economies of scope and increase profits.

M&A is being driven in the food ingredient industry by consumer demand for healthier products.

Corporate finance specialist Mergers & Alliance claims in a report the absence of mid-sized players in the industry has prompted numerous smaller companies to seek consolidation as they lack the financial resources and economies of scale necessary to compete with the larger corporates.

There is high potential for consolidation in markets such as proteins, fibres, bakery and savoury ingredients.

Acquirers are willing to pay high multiples to access highgrowth sectors as well as establish customer relationships and gain technological expertise.

A good craft beer is what Dogberry likes to relax with on a night out and he is very much looking forward to the merger between Duvel Moortgat and Boulevard Brewing Company.

The two companies have recently joined forces to ensure continued growth for their respected brands. Boulevard is one of the largest craft brewers in the Midwest US and Duvel Moortgat is an independent craft brewer based in Belgium.

By uniting with Duvel Moortgat, Boulevard secures the resources

11

By Matt Smith, web administrator

u Editor’s pick Harvard Law School http://blogs.law.harvard.edu/ corpgov/category/mergers-andacquisitions/ Harvard Law School’s highlypraised blog features a section on M&A that is frequently updated, very readable, and clearly presented. New posts are uploaded roughly every other day, covering both changes to related areas of US law and the faculty writers’ thoughts on big stories in the area.

M&A Portal

A superior blend

Twitter: @dogberryTweets

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Mergers & acquisitions

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to embark on a significant expansion of its Kansas City facilities, and gains the depth and experience of the 142-year-old firm to help extend its strong regional presence throughout the US and Europe.

The Drum

www.mandaportal.com/Content/ Blog

www.thedrum.com/content/ mergers-and-acquisitions

Those looking for a slightly lighter read should take a look at M&A Portal, written

by Zephyr database director Lisa Wright, who shares her analysis and opinion on related news and trends. Expect to read about everything from the reprivatisation of Lloyds to New York Fashion Week.

Marketing and media magazine The Drum has a mergers and acquisitions section on its website, offering its writers’ thoughts on the latest developments. Run by partners at corporate finance advisers Green Square, take a look to learn about cloud computing, investing in Russia, and the newera music business.

Forrester M&A http://blogs.forrester.com/category/mergers_and_acquisitions

M&A Quick Reference Guide (Free – Android)

Mergers & Acquisitions Filings (£13.99 – iOS)

Brush up on your mergers and acquisitions terms with this handy searchable glossary app for your Android smartphone.

This interesting app gives you access to the US SEC’s database of filings, along with social annotations for each entry.

Ever-reliable research specialist Forrester covers M&A on this blog. Although posts can be infrequent, the archive offers a selection of interesting, statistics-backed articles combining the firm’s surveys and statistics with news stories.

Running a global M&A process European growth is an increasingly common example of this strategic reasoning.

For this reason, emerging markets are becoming an increasingly important part of the M&A process. While most UK M&A activity is still domestic, the involvement of overseas acquirers can be vital as it means that, even if this is the end result, the acquirer is focused on the need to deliver a premium valuation in order to compete.

We always advise caution that the shareholders maintain control when conducting a global process.

Approaching too many potential buyers is akin to putting a For Sale sign outside the front door.

An essential part of the adviser’s role is therefore to assess where the likely buyer will come from, using their market knowledge to focus the process on the key geographic regions.

INDUSTRY VIEW

W

hen shareholders appoint an M&A adviser, they do so on the understanding they are recruiting a skilled negotiator to the process.

While this is certainly a major part of the equation, the hardest job remains identifying the right strategic buyer. After all, not even the world’s best negotiator can persuade someone to pay a premium price for something they do not really want.

The M&A landscape has evolved into a global environment. This has always been the case for larger transactions but now includes smaller mid-market deals.

If any evidence were required, our latest sales mandate has attracted interest from a European private equity fund, Arabic royalty and a French family office. These contacts are essential to running a global process.

Strategic acquirers can be summarised as those who can either grow the target business using their own infrastructure, or use the target to expand its existing operations. Acquisitions made merely to add scale rarely

derive premium prices in the current environment.

Overseas companies acquiring UK assets as a platform to

Darren Murphy is head of corporate finance at Sopher+Co +44 (0)20 7297 4416 darrenm@sopherco.com

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M&A: the world’s best lecture tutorial in a nutshell – Ashridge http://youtu.be/sQ6xACl8hJk The people behind ‘the best M&A course in Europe’ present five tips for successful mergers.

Germany

China

ExpertInsight

RESEARCH by financial services firm Dealogic shows China has the most M&A deal volume in the Asian Pacific (ex Japan) region for the first nine months of 2013.

Over the period 2,582 deals were announced in China, with volume up 20 per cent to $156.9billion from $131billion a year ago, marking the highest first nine months’ volume on

record. Domestic volume in China totalled $132.8billion, up 13 per cent from $117.3billion in the same period for 2012.

Overall, Asia Pacific-targeted M&A volume was $348.8billion in the first nine months of 2013, up 3 per cent from $337.2billion in the same period last year. Although activity dropped 9 per cent yearon-year to 6,753 deals, in Q3 2013 volume increased to $127.1billion via 2,265 deals, up 5 per cent on the third quarter of 2012.

THERE has been a resurgence in Germany’s private equity buyout market, with deal value reaching €9billion in the past three months, the highest the country has recorded since the first quarter of 2007, according to data published by the Centre for Management Buyout Research (CMBOR).

Overall in Europe, there has been a surge in deal values in the third quarter, with 119 deals completed taking the value of €19.7billion. This was the highest value since the fourth quarter of 2010 and up 129 per cent from the previous quarter, which recorded €8.6billion.

Christiian Marriott, investor relations director at Equistone Partners Europe, says: “We have seen a strong quarter for private equity across Europe, with deal values nearly equalling those of the first half of the year. A number of indicators are suggesting

confidence is high in the buyout market, with a combination of availability of debt and recently raised funds benefiting overall market activity.”

The three largest deals originated from Germany and they accounted for a 40 per cent share of the largest top 10 deals.

Sachin Date, private equity leader for Europe, Middle East, India and Africa (EMEIA) at EY, comments: “Germany is being viewed as a safe haven for investment and is ticking all the necessary quality boxes for investors. Its economy is sound and the recent elections passed without any real cause for concern.

“It is also encouraging to see the deal pipeline still growing and a number of deals should complete this year, particularly in Germany.

Whether this upsurge in activity means the European PE industry is back in full recovery mode

remains to be seen, but the signs are certainly positive.”

Germany’s deal value was also 80 per cent higher than that the UK achieved, which stood at €5.1billion.

Turkey’s thriving economy makes it attractive for investors worldwide How mergers and acquisitions in Turkey are bucking the trend for cautiousness INDUSTRY VIEW

A

ccording to the Annual Turkish M&A Review 2012, issued by Deloitte, Turkey had a lively M&A environment in 2012 due to its remarkably strong economic performance posted in 2011, while global markets still struggled for recovery. Turkey’s GDP growth rate in 2012 was modest compared with the previous two years, whereas the healthy growth pattern, supported by a dynamic business environment, continued to attract significant interest from investors all over the world, leading to an all-time record number of deals.

Out of 259 transactions in 2012, 103 had a disclosed deal value adding up to US$22.1billion. Considering the estimated value of deals with undisclosed values, the total M&A volume was around US$28billion in 2012. While this represents an 87 per cent year-on-year increase (2011 – US$15billion), it was due to the material contribution of privatisations and a couple of sizeable private-sector deals. Excluding those, the profile of M&A activity was quite similar to 2011 and the majority of the deals occurred in the middle market. With an average postcrisis annual deal volume of US$15billion in private sector

M&A is thriving in Turkey’s growing economy

transactions, Turkey can be said to be enjoying a consistent level of M&A activity.

Privatisations, after a long period of silence, were back on the scene in the last quarter of 2012 and made up a considerable part of the annual volume, through 19 transactions with a deal value of US$12.1billion, corresponding to 43 per cent of the total deal volume.

Privatisation of bridges and highways, which comprised 20 per cent of the total deal value by itself with a deal value of US$5.7billion, was certainly the deal of the year, and the second largest privatisation in Turkey to date. The remainder of the privatisation volume came mainly from sales of energy generation assets and renewed tenders of electricity distribution companies, which had originally been tendered in 2010 but not been closed at that time. The ten largest transactions comprised 75 per cent of the total deal volume (including estimates for undisclosed values) in 2012. Excluding those top 10 deals, the remainder totalled a deal volume of US$7billion, corresponding to an average deal size of around US$28million. Some 214 transactions – each with a value of less than US$50million – accounted for 83 per cent of the total deal number, and represented only 9 per cent of the total deal value.

Foreign investors shared the total deal volume and number almost evenly with local investors, although the latter played a dominant role in privatisations. Foreign investors generated a deal volume of US$13billion (including estimates for undisclosed values), through 119 transactions. Excluding privatisations, the footprint in private-sector deals was again by foreign investors,

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United States US firms have increased M&A activity in emerging and high-growth markets in the first half of 2013, with 116 deals completed compared with 110 in the second half of 2012.

KPMG International’s latest High Growth Markets Tracker study found the most popular geographic targets for US companies in the first half of 2013 were South and East Asia and China. Other countries high on the popularity lists included Brazil, India, Central America and the Caribbean.

Mark Barnes, national leader of KPMG’s US High Growth Markets practice, says: “US companies are exhibiting higher levels of confidence domestically and we’re starting to see this translate into increased acquisition activity in emerging markets.

“The US was one of only a few developed economies to have an uptick in developed to high-growth market deals, as overall activity was at its lowest since 2009.”

Overall, high-growth to developed deal volume dropped 26 per cent – from 228 acquisitions during the second half of 2012 to 169 in the first half of 2013.

US companies were also the most popular targets for emerging and high-growth market companies, with 31 acquisitions made in the US in the first half of 2013. This was down from the 52 deals completed in the second half of 2012.

Overall, South and East Asia and China were the top acquirers in high-growth to developed deals in the first half of 2013.

Phil Isom, head of KPMG Corporate Finance, says: “Although high-growth to developed market transactions have declined over the last year, the US continues to hold attractive investment options for companies around the globe looking to accelerate growth by making acquisitions that expand their geographic footprint.

“In terms of the uptick in developed to high-growth market deals, US market conditions, highlighted by relatively easy access to capital, elevated cash levels on corporate balance sheets, and low interest rates, have resulted in an increased capacity for US companies to do deals.”

Spain INBOUND M&A activity is much stronger in Spain than outbound, says an Experian Corpfin Business Report, with the US being the most prolific investors in the country.

Data from global corporate finance information provider Experian Corpfin shows in the period from January 2011 to August 2013, US businesses were involved in 46 deals worth €3.6billion.

The report says the increased interest by foreign investors and slower outbound activities by Spanish companies might be explained by the economic situation. The economy

ACQUIRER

ORIGIN

TARGET

SECTOR

STAKE

DEAL VALUE

Koç Holding; UEM Goup Berhad; Gözde Girişim

Turkey

Highways and bridges

Infrastructure

100%

US$5.720m

Sberbank

Russia

Denizbank

Financial services

99.9%

US$3.793m

Çelikler İnşaat

Turkey

Seyitömer Termik Santrali

Energy

100%

US$2.248m

Cengiz – Kolin – Limak Consortium

Turkey

Boğaziçi Elektrik Dağıtım

Energy

100%

US$1.960m

SAB Miller

UK

Anadolu Efes

Food & beverages

24%

US$1.900m

Turkey

Gediz Elektrik Dağıtım

Energy

100%

US$1.231m

France

TAV Havalimanları Holding

Infrastructure

38%

US$874m

Amgen

US

Mustafa Nevzat İlaç

Pharmaceuticals

95%

US$669m

Cengiz – Kolin – Limak Consortium

Turkey

Akdeniz Elektrik Dağıtım

Energy

100%

US$546m

Burgan Bank

Kuwait

Eurobank Tekfen

Financial services

99.3%

US$359m

Elsan-Tümaş-Karaçay Consortium Aeroports de Paris Group

Source: Deloitte, Annual Turkish M&A Review 2012; January 2013. Note: If its terms were disclosed, E.On’s acquisition of 50 per cent of Enerjisa from Verbund would be expected to enter the top ten list.

contributing to 82 per cent of deal volume in the private sector, while local investors had only an 18 per cent share.

With an all-time-high of 57 transactions and a total deal value of around US$1.6billion (including estimates for undisclosed values), financial investors have proved themselves a fundamental part of the Turkish M&A environment. E-commerce, retail, manufacturing and services were the favorites of private equity firms.

As the Turkish M&A environment matures, several secondary sales occurred in 2012. In addition to several private equity exits (Pronet, Doors, Havaş, Ode Yalıtım and Numarine), there were notable secondary transactions in the financial services (Denizbank,

Eurobank Tekfen) and energy and infrastructure sectors.

Despite the patchiness of the global recovery and pessimistic growth prospects, Turkey sustains its positive attributes well above the average. Also, the recent upgrade in the sovereign credit rating to investment grade is expected to improve investor confidence.

Continuing investor interest in the Turkish market and fast-growing Turkish companies help us remain positive as regards the outlook for the coming year.

Incentives in Turkey The Turkish government has been implementing a series of incentives schemes. Over the past decade, it has

shrank for the seventh consecutive quarter in 2013 second quarter, although the pace slowed to just -0.1 per cent, while year-on-year, output was down 1.6 per cent and 7.5 per cent from peak in 2008 first quarter.

Sectors which foreign investors have been foc usi ng on were manufacturing, with a recorded 120 deals, worth €15billion between the months January 2011 to August 2013.

This was followed by computer activities, with 67 deals worth €1.8billion, with the wholesale and retail sector, with 64 deals worth €13billion, in third place.

But the financial intermediation sector topped the leaderboard in terms of value, with 62 deals and a worth of €26.5billion.

implemented three incentives programmes – in 2003, 2006 and in 2009 – and announced a fourth for April 2012. These programmes have resulted in a radical transformation of the Turkish economy. The primary objectives of the new scheme are to reduce the current account deficit, boost production and investment for high-import dependent intermediate goods, as well as to increase investment in less-developed regions.

The new system comprises four different schemes: general incentives, regional incentives, incentives for large-scale investments and incentives for strategic investments. More specifically, Turkey offers investors VAT exemption and corporate tax reduction, as well as support for social security premiums, interest payment and land allocation. Under the new system the government will balance levels of local development, particularly by focusing on boosting investment in less developed areas. To maximise the impact, Turkey has been categorised into six regions according to their levels of development. Therefore incentives for investors in less-developed regions will benefit from a larger scope of support. The new system also gives priority to several specific sectors, such as defence, automotive, aerospace and aviation, maritime freight/passenger transportation, pharmaceuticals, education, tourism and mining.

Investment in these sectors will be supported across Turkey by means of incentives provided for Region 5, the second least-developed region. This new system is expected to contribute to the structural transformation of Turkey’s industries, particularly through strategic investments, by encouraging domestic production of goods that are commonly imported. The main purpose of the incentives for strategic investments is to promote and support investments in sectors with considerable trade deficit. It is important to highlight that strategic investments will be strongly supported in all regions with the same incentives. info@invest.gov.tr www.invest.gov.tr

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The future

Successful M&A – was Benjamin Franklin wrong?

G rowth through acquisition can form a significant aspect of a successful strategy. Yet opportunities can be left unexploited or missed, sometimes through a lack of advice.

Disagreeing with Benjamin Franklin is risky, but when he said “wise men don’t need advice. Fools won’t take it”, he was only partially right. No matter how wise a buyer, acquisitions are complex and obtaining the right advice can contribute significantly to success.

A brief article cannot address all of the areas where advice can be of significant value. However, considering five core areas can assist in assessing the degree to which external advice will increase the likelihood of successful M&A.

Can we deliver the deal?

Acquisitions are time-intensive and, typically, those tasked with delivering the transaction also have a “day job”.

Allied to this, successful acquisitions typically require wide subject matter knowledge (including finance, strategy,

commercials, tax, IT and HR) and skill sets (including objectivity, persuasion, negotiation and determination). Thus, a team approach is normally required and determining, early in the process, the optimum level of external support and advice typically pays dividends.

Is the price right?

In theory, if the price is right anything can and should be bought. But theory and practice seldom make comfortable bedfellows. In particular, how is price defined? There is the obvious cash cost, but price considerations also include many other factors, not least risk and opportunity costs. Thus, determining the right price is far from simple.

The due diligence process should ascertain whether the parameters upon which the headline deal terms were struck stand up to scrutiny and inform the considerable complexities of the pricing decision. Therefore, assembling the right due diligence team, internally and externally, is critical to the success of a transaction by maximising risk identification and allowing upside potentials to be properly assessed.

Mountains or molehills?

Some obstacles to deals may be more molehills than mountains

Businesses are built by humans; humans are imperfect, and so every deal will inevitably have issues. The question is whether these issues are molehills with solutions or insurmountable mountains.

Deals can fail because of issues that appeared to be mountains but, with access to suitable experience, ingenuity and knowledge, could have been downsized to molehills. Consequently, ensuring access to suitable providers of

solutions can significantly enhance the prospect of successful M&A.

The bank

The banking environment is improving, but bankers remain nervous, and nerves typically increase the cost of capital one way or another. So considering the best strategies for assuaging banks’ concerns can reduce the cost of capital and increase transactional success. The view of an independent adviser can often go a long way to easing a banker’s concerns.

Can we implement?

The hard work doesn’t stop when the deal is signed. If the deal was right but the implementation wrong, success can be reduced or turned into failure.

Therefore, implementation strategy is of as much importance as execution strategy. Much of the implementation strategy can be created, tested and refined during the execution phase.

Ensuring suitable knowledge, experience and capacity for this to happen in parallel with execution can therefore be a factor in determining transaction success.

Ultimately, as with all business decisions, the use of external advisers will be determined by cost/benefit analysis. However, with the right advisers, transaction costs should be highly limited compared with the overall deal value, with the costs much outweighed by the benefits.

Jonathan Brierley is transaction services director at BDO LLP jonathan.brierley@bdo.co.uk www.bdo.co.uk

In focus: M&A: the economic barometer

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t has become apparent, in contrast to most financial markets, which respond with relative predictability to crisis and stimulus alike, that global M&A is more closely aligned to the macroeconomic fundamentals of its host markets.

M&A is recovering.

All financial markets are recovering. But M&A is slower simply because its future depends on the actual and anticipated financial performance of real tangible operating businesses, industry sectors and geographic regions. A year ago, as we and countless others were prognosticating about what lay ahead in 2013, I was

concerned about what effect M&A sluggishness may have on our industry and the economy. Yet it has become quite obvious that M&A is actually the truest indicator of the shape of business ahead.

And while deals like business fundamentals remain in slow recovery mode, the market is anything but stagnant.

Turning our attention to focus less on value and volume of transactions and more on demographics and psychographics provides valuable insight to buyers and sellers alike. M&A opportunities today are most aptly assessed in the context of expanding

economic relations between both developed and emerging nations, the fluctuations of sector popularity and the evolution of corporate strategy.

One year after his report on the diminished global M&A market – The Long Pause – we returned to M&A stalwart Marshall Sonenshine, chairman and managing partner of New York investment bank Sonenshine Partners and professor of finance and economics at Columbia University, to address the mixed signal that M&A data continues to present.

Sonenshine’s analysis of the continued decoupling of the equities and M&A markets is reported in The M&A Advisor’s latest M&A Market Monitor, The Most Truthful Market: Low Growth And The Long Slog Back For M&A. This insightful assessment on the state of the M&A market is available exclusively now to readers of Business Reporter’s 2013 global M&A report.

To get your copy visit www. maadvisor.net/truthful.html.

David Fergusson (left) is president of The M&A Advisor, the world’s foremost M&A leadership organisation +001 718 997 7900 www.maadvisor.com

Pensions challenge INDUSTRY VIEW Defined benefit (DB) pension schemes are a key consideration for businesses involved in a corporate transaction, whether buying, selling, refinancing or restructuring.

Understanding the financial obligations and risks involved is paramount, but a DB scheme does not need to be viewed as a barrier to transaction.

An effective due diligence process will not only highlight any pitfalls and support the negotiation of a suitable pricing adjustment, but also identify areas where additional value could be unlocked. The new statutory objective that has been placed on the Pensions Regulator, seeking to reduce any adverse impact of pension funding on business investment and growth, should lead to a more balanced regulatory approach which can only help facilitate future deals involving DB schemes.

For a buyer, there are often measures which can be taken to help manage the funding requirements and mitigate pension risks. These can include changes to the benefits provided, exercises to reduce or re-shape the liabilities, and de-risking strategies relating to the scheme’s funding level.

There has been much innovation in this area and these strategies have increased in popularity as companies see the success others have achieved.

In conjunction with the actions taken elsewhere in the business, these can improve both the ongoing value of the business and any subsequent resale price.

Considering pensions early in the assessment of a transaction is important.

This includes engaging with scheme trustees to understand their views of any change in the strength of the employer support. The company will want to ensure any trustee response is proportionate and does not place unexpected pressure on future cashflow.

Nick Griggs is head of corporate consulting at Barnett Waddingham nick.griggs@barnettwaddingham.co.uk

Business Reporter · November 2013

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Mergers & acquisitions – Industry view

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The debate

What makes a successful exit strategy?

Nigel Stone Partner Boodle Hatfield LLP The key to a successful exit is to plan early. Many of the dos and don’ts are common sense – here are some: 1 At the start, when establishing the business, ensure that the business plan envisages the sale and bring the constitution (articles of association and shareholders’ agreement) into line with it. Drag-along and tag-along rights are key to prevent minorities controlling the process.

2 Consider bringing the wider staff membership on side with incentivisation linked to a successful outcome, especially if part of the price is tied up in an earn-out.

3 Ensure all financial information is robust and transparently presented.

4 Resolve difficulties before the sale process begins: avoid selling when there is litigation, a supply dispute, a loss-making part of the business or the wrong leader of a division.

5 Choose the right advisers, even if it means sidelining an existing one for the sale process.

Jeff Roberts Partner and head of corporate Collyer Bristow LLP

Charles Simpson Partner Saffery Champness

Tim Clare Principal consultant Environ

Preparation is everything!

Whether you are looking for a trade sale or to exit via an IPO check your contractual position to ensure it supports your exit strategy.

Spend some time early on in the process to identify potential issues and put plans in place to deal with them – for example, if a third party such as a bank has the potential to put up roadblocks, engage with them up front and try to get them onside.

Issues that are identified early on in the process can usually be dealt with. Leaving issues to be found by a prospective buyer during the due diligence stage could put the entire deal at risk.

Get business fit. Whatever the size of your business, you want to realise the highest possible value for it. The best way to do this is to ensure nothing is left to chance.

Don’t forget the people – make sure your management team and workforce are well motivated and engaged.

A successful exit strategy will depend on knowing how the exit is to be achieved at an early stage.

Getting “top dollar” will be based on a thorough understanding of the state of the deal market. Are there buyers? Are they acquisitive? Does it make strategic sense for them?

And, can they fund it?

These are all questions, the answers to which, while not quite binary, do need to be in the positive to maximise value at the time of divestment. If they, or indeed just one of them, are not, then it is not likely that value will be maximised.

Of course, a successful exit strategy is also based on making the right investment in the first place, and a canny investor will understand, both on the way in and before deciding whether to invest, what the market is likely to look like at the projected time of divestment, and thus where to find the value exit when the right time comes.

For a successful exit, typically measured by return on capital, firms should adopt the following:

+44 (0)20 7470 4441 jeff.roberts@collyerbristow.com

+44 (0)20 7841 4000 charles.simpson@saffery.com

Ensure you look beyond obvious risks. The breadth of environmental, health and safety issues businesses have to manage has grown significantly over the last decade.

Preventing pollution and meeting permit requirements have been supplemented with new legislation driving reduction and reporting requirements for wastes, energy and carbon, and hazardous chemicals.

The problem in transactions is that these issues are usually the last to be considered. Having not featured high on either side’s agendas, there is often an eleventh-hour rush to assess them, but poorly presented information and uncertainties slow the process and routinely hand the buyer an extra negotiating tool.

A successful exit strategy identifies potential issues before the sale process begins, giving time to remedy problems and get regulatory paperwork in order to show there has been effective management. A well-presented vendor due diligence assessment can then limit or remove uncertainty, and where there are issues, provide a professional opinion of likelihood and cost. +44 (0)20 7808 1420 www.environcorp.com

+44 (0)20 7951 8792 mdriessen@uk.ey.com

ExpertInsight

+44 (0)20 7079 8140 nstone@boodlehatfield.com

Generic versus specific: for M&A, there’s only one choice INDUSTRY VIEW

On a mission to make life easier

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n the world of M&A there’s a lot to be said for simplicity and single-minded focus. It’s an exacting and stressful process, especially for analysts in charge of facilitating due diligence.

They need tools specially designed for the job at hand. Trustworthy tools that don’t come with War And Peace-sized user manuals.

Think of a car in rugged terrain. A family sedan might get you from A to B, but the ride won’t be smooth, and there may be tears from the passengers. A specialist vehicle on the other hand, say a 4WD, gets you across the river, not stuck in

rising waters, and not taking the long way round to find a bridge.

There are lots of generic VDRs more akin to the family sedan but there is only one VDR designed especially for the rugged landscape of M&A. The world’s only company with a Virtual Data Room designed exclusively for M&A is ansarada.

The company’s mission is to make life easier for everyone working in M&A, and since 2005 it has helped people working on more than 5,000 deals do just that. “The bigger we get as a company the more focused we are on M&A,” says ansarada’s Jan Gronning, “and for dealmakers, that’s empowering.”

Jan Gronning is managing director, EMEA of ansarada +44 (0)20 3058 1060 www.ansarada.com

Michel Driessen Lead Partner, Operational Transaction Services, EY

1 Monitor against the original deal rationale and business case, including whether the original expected exit strategy is still relevant, or if the market has changed.

2 Structured portfolio reviews of performance and contribution to the broader strategic goals are important.

Companies can use an asset exit as a strategic tool, rather than as a reactive move to free up cash or pay down debt.

3 Preparing early and having a plan, to instil greater buyer confidence, gain control over the process and realise greater capital return.

4 Consider the full range of potential buyers. Include strategic, financial, domestic and overseas options to create strong interest for an asset which can, in turn, lead to higher valuations.

5 Appointing and incentivising the right team, with the relevant skills to deliver, is key to any strategy.