By their nature, M&A transactions are challenging at the best of times - never mind during periods of political and economic uncertainty. History is littered with unsuccessful deal-making that more often than not leads to poor staff retention rates, buy side write-downs, divestment, dissolution and/or bankruptcy.

Typically, failed transactions are caused by a culmination of different issues. So what are some of the major industry pitfalls that merging parties ought to be aware of?

Lack of strategy

Believe it or not, many investors do not focus on the long term strategy associated with a merger or acquisition. The logic behind a deal is all too often side-lined for short term goals and perceptions driven by politics, ego and self-interest. In 2005 EBay’s acquisition of Skype, which left many dumbfounded, was valued at $2.6 billion. The lack of rationale behind the deal was a topic of much criticism. Four years and following an £860 million write-down, the e-commerce corporation announced the sale of over half of the telecommunications company. Although it is clear that in order to gain better insight long-term, reforms that substitute quarterly updates for more extensive financial reporting periods need to be implemented, the issue of an effective incentives system remains unsolved.

Cultural incompatibility

Disregarded for the most part, culture actually plays a big role in the success or failure of a merger. According to the Society for Human Resource Management, clashes account for more than 30% of overall failures. A particularly high profile case gone awry was AOL’s merger with Time Warner in 2001 referred to subsequently by Jeff Bewkes as ‘the biggest mistake in corporate history’.

The deal which equated to a $99 billion loss and led to the eventual divorce of the conglomerate in 2009, caused numerous job losses, retirement plans, workplace disruptions and probes by the SEC and Justice Department over the eight year period.

Although there are a number of variables outside of a buyers’ control, a focus on realistic and applicable core values, an effective internal communications strategy and an engaged workforce can help safeguard against the worst outcomes.

Poor due diligence

Being unprepared for the due diligence phase is among the most common reasons for botched deals. M&A transactions rarely fail due to lack of knowledge however. Over half of them go pear-shaped because those involved in the deal are reluctant to confront issues head on. All areas of potential liability therefore need to be acknowledged and investigated.

Buyers are often guilty of proceeding with a deal despite the challenges they face because of the amount of time and money involved. Being prepared to call it a day if risk outweighs benefit is critical. Allocating inadequate resources during the review stage cost Bank of America $50 billion in legal fees following the acquisition of Countrywide Financial in 2008. The former, which also suffered significant reputational damage, paid the ultimate price for mistakes made by the mortgage lender.

Going about due diligence strategically in both a logical and rational way is paramount to ensure success, as is transparency. Although it may seem counterintuitive, in order to increase trust and iron out potential issues from the get go, sellers should guide buyers to areas of potential difficulty rather than wait for them to learn of the issue themselves much later on in the process, which could result in a breakdown of trust.

Not using the right tool for the job

These days the majority of transaction due diligence is carried out online and handled by virtual data rooms (VDRs) facilitating, among other things, the digitisation of documents, the automation of tasks and the streamlining of workflows.

Given the need for highly secure access to confidential documents during the due diligence phase, security should be the priority for everyone implementing a VDR. Two-factor authentication, automated encryption and a detailed rights management system that enables the administrator to grant different permissions is essential.

A VDR should allow for high-speed access to documents, high-speed batch uploads to process large volumes of documents and real time document translation given the increasingly international nature of M&A transactions.

The software should also allow all parties to conduct their due diligence in a structured and transparent manner. A clear and flexible index structure that supports document review workflows, a structured Q&A and a reporting process that creates a clear audit trail should all be sought out and secured.

About Drooms:

Drooms, Europe’s leading virtual data room provider, works with 25,000 companies around the world including leading consultancy firms, law firms, global real estate companies and corporations such as Morgan Stanley, JLL, JP Morgan, CBRE, and UBS. Over 10,000 complex transactions amounting to a total of over EUR 300 billion have been handled by the software specialist.

Although the exact start date of the financial crash will differ depending on who you talk to, August 2017 was widely acknowledged as the 10-year anniversary of the first signs of the global financial crisis. In the two years that followed, 2008 and 2009 saw the shockwaves of the crash hit the M&A industry, with global M&A volumes falling over 40%, and reported deal values by nearly 55%.

The results of the crash changed the market significantly. Companies now implement increased geographical diversification and investment strategies in secondary markets. In the UK alone, Chinese investment has tripled and US activity has grown 40% since 2014.

Ten years on from the crash, volumes are 5% higher than the 2008 peak, disclosed aggregate values are 12% higher, and the proportion of transactions with undisclosed values is higher than ever, at nearly 60%*. So what happened to the M&A market over the last decade?

Looking back: global transaction volumes

 In the year to the 31st July 2008, overall global transaction volumes fell 7.5% to 9,425 global reported deals. In the following year, they fell another 37%, to a trough of only 60% of their 2008 level (5,962 deals) as companies and investors chose to hold tight and wait out the storm. The drop resulted from lower deal values in sinking equity markets, access to financing for larger transactions and general uncertainty on the economic outlook.

The effects hit some regions harder than others in 2009. The DAX region (Germany, Austria, Switzerland) saw a 24% fall, The Iberian Peninsula (Spain and Portugal) dropped dramatically by 34% and the Nordic region was hit harder, with an abrupt 7% decline in 2008 and a further 39% decline in 2009, pushing transaction volumes 43% below their peak.  The Indochinese market followed a similar pattern with a gentler decline, with volumes growing 1.6% in 2008 (from 368 to 374), then falling by a further 22.5% in 2009.

The UK and North America, the traditional engines of transaction volume, which together accounted for around 75% of deals in 2008, saw the fastest declines. UK volumes fell 7.5% and US volumes by nearly 9%. In 2009, it was the UK market which saw the most severe contraction, as volumes fell by half, pushing transaction numbers down to 817 from 1,762 in 2007. This decline in volumes over the two-year period was significantly greater than the decline anywhere else.

The peak and the trough: Disclosed values  

Disclosed values tell a more nuanced story. The headlines looked worse, with a decline in global disclosed value of 55%. This makes sense, because smaller deals are less likely to have valuations disclosed. This is usually due to private shareholders not wanting the financial terms to be disclosed and no regulatory pressure to disclose deals below a certain threshold.

This varied by region far more than the slowdown in volumes did. For example, the US had the most abrupt decline in 2008 (down 48%) and a gentler decline in 2009 (down a further 17%, for an overall 57% reduction in reported transaction values). In contrast, the DAX region actually increased deal values in 2008, albeit by less than 1%, then saw a 44% slowdown in 2009.

The UK’s decline mirrored the DAX, but more starkly, with values declining by less than 1% in 2008 then dropping 52% in 2009. The Nordics suffered even more in value terms, as reported aggregate values dropped by nearly a quarter (24%) in 2008 and a further 72% in 2009, closing nearly 80% down on the peak.

In the year to 2007, the UK and North America accounted for 82% of global reported transaction value; in the year to 2009, despite their precipitous declines, they still accounted for 80% of global reported value.

Overall, aggregate reported deal values fell faster than transaction volumes, as larger deals which tend to be higher-risk were cancelled or delayed and, wherever possible, sellers sought to avoid disclosing the terms of transactions which may well have been concluded at lower valuations than they would have been 12 or 18 months earlier.

10 years on: a market snapshot

Ten years after these significant declines in volume and reported value, what does the landscape look like?

The North American market has increased volumes 80% from the 2009 trough, to 6,067 deals in the 12 months to 31 July 2017, while reported transaction value has surged at more than double that rate, increasing 170% from 2009 to 2017 and is now 16% above the 2007 peak. The business services and media and technology sectors remain key to US growth, together accounting for half of all inbound acquisitions, with the world’s best-developed funding environment for start-up and high-growth companies.

The DAX region shows a similar profile, with transaction volumes up 58% and values nearly doubling to 130% of their 2009 level. The Iberian Peninsula has shown gentler growth and remains below its 2007 peak. With volumes increasing 40% from 2009 to 2017, aggregate values remain 30% down on their 2007 levels while volumes. However, as the Spanish economy turns a corner, Chinese interest in the market rose markedly this year.

Indochinese volumes are up the most compared to 2007, now at 30% above their peak, while values have nearly tripled - with aggregate reported transaction values topping £100bn compared to £26bn in 2007. Transaction flow between China and Europe is expected to grow even stronger.

The Nordic region has shown the greatest growth, as volumes more than doubled from 2009 to 2017 and are now 24% above their 2007 peak, while aggregate valuations more than tripled from £14bn to £55bn, although this is still 15% down on the 2007 peak of £65bn. Chinese interest remains important in this market and American acquisitions increased quickly in the second half of 2016.

Volumes in the UK market have nearly doubled from 2009 to 2017, but remain 8% down on their 2007 peak, while reported values grew 61% from 2009 and remain 23% down.

 To infinity and beyond

 Despite the effects of the crash still reverberating through the political sphere, the market as a whole has shown itself remarkably sanguine about what would previously have been considered major macro-political uncertainty. Political change and economic uncertainty in Europe, the unpredictable statements and actions of President Trump, and the self-imposed uncertainty caused by the Brexit vote and subsequent approach to negotiations have all had relatively little effect on the markets.

This remains a strong sellers’ market. The drive for growth from strategic acquirers has seen volumes rise steadily since the trough, and accelerate since 2011, albeit with a few bumps in the road causing short-term and temporary slowdowns.

The wall of private equity money in search of high-quality investment opportunities, combined with the influx of new investors such as debt and pension funds that are willing to make direct private equity-style investments for bond-like yields, have driven values for differentiated, market-leading businesses to compelling levels not seen for over 10 years.

The ready availability of super-cheap debt has helped fuel and finance these valuations. Owners of well-performing businesses considering their exit options may be well-advised to take advantage of these conditions, which have now surpassed the previous highs of the 2007 peak in most markets.

*  Livingstone Global Acquirer report H2 2016 http://livingstonepartners.com/wp-content/uploads/2017/03/Global-Acquirer-Trends.Digital.pdf

D: +44 (0)20 7484 4731  l  M: +44 (0)7903 161330

15 Adam Street, London WC2N 6RJ

http://livingstonepartners.com/uk/

In a move seen by many as one friend loaning another some money to help them through troubled times and garner favours, Google has paid $1.1 billion to smartphone manufacturer HTC to expand their Smartphone business. HTC, once a major player in the market have visibly struggled in the face of huge growth by competitors such as Apple, Samsung and more recently, Huawei.

The injection of cash is believed to be focused on the development of Google’s Pixel range of smartphones currently developed by HTC with the Californian company acquiring the team who develop the hardware and securing a non-exclusive licence on HTC’s intellectual property.

Google Focus on Hardware

The deal is further proof that Google are investing heavily in the hardware market to ensure a strong future for Android and its own status within the smartphone hardware market.  "We think this is a very important step for Google in our hardware efforts," Rick Osterloh, Google's senior vice president of hardware, said. "We've been focusing on building our core capabilities. But with this agreement, we're taking a very large leap forward."

The move is an attempt to prevent Google from being left out of the loop in the smartphone industry as current Android devices can easily be adapted to bypass Google's services altogether. It appears that Google are attempting to take a leaf out of Apple’s book by ensuring smooth rollouts of their mobile operating system, such as the recent IOS 11 update, combined with a boost to their own Pixel handsets. Pixel arrived with great fanfare, but has not yet made significant in-roads to displacing either Apple or Samsung. In purchasing the HTC team who have developed it, Google are clearly hoping that will change.

Google will retain some caution however, given that they have attempted to enter the market before with their 2011 purchase of Motorola Mobility for $12.5 billion. That move was both disastrous and relatively short-lived with Google off-loading the business for just $3 billion in 2014.

The deal is yet to be ratified by the regulatory bodies, but caught many industry experts by surprise with the majority believing the deal would constitute a full takeover. Rumours were so abundant that Google purchasing HTC outright was imminent that the Taiwanese stock market suspended trading on HTC on Tuesday.

The move comes with several risks for the Californian tech giant, with the major one being the possibility of alienating Samsung who currently run Android on their popular range of smartphones. But what is clear is that the big winner from this deal is HTC, the struggling Taiwanese company who have now not only strengthened ties with an important ally, but crucially have acquired a much-needed cash injection which will allow them to concentrate on the further development of smartphones and also on their Virtual Reality headset, Vive, which is not only favoured by Google, but is also outselling the Facebook owned Oculus Rift by almost double.

What is certain is that this deal will be watched closely by several hardware developers wary of Google’s manoeuvres in a very lucrative market and the potential for added competition.

photo credit: Karlis Dambrans

With the ups and downs of global uncertainty in today’s markets finding a buyer can prove difficult. Here Finance Monthly hears from Lord Leigh of Hurley of Cavendish Corporate Finance LLP on his five key tips to ensuring a business gives itself the best chance of attracting an overseas buyer.

The UK continues to be one of the most attractive markets for foreign direct investment (FDI) and inbound M&A activity. According to Ernst & Young’s 2017 ‘European Attractiveness Survey’, the UK was named the second most attractive market for FDI while Lloyds Banking Group’s June Investor Sentiment Index revealed that UK investor sentiment remains at near record levels, with overall sentiment up 3.87% compared to the same period last year.

Both these indicators are positive signals for potential overseas buyers of British companies and a fall in Sterling has also helped to make UK businesses more attractive, though the continued robustness of the UK economy and the performance of the corporate sector also underpin healthy M&A activity. Mergermarket reports that in H1 2017, the UK was responsible for 22% of all European M&A inbound activity, with UK activity totalling £46.6bn and Europe totalling $211.1bn.

Despite this encouraging backdrop, uncertainty, largely surrounding the outcome of Brexit, still persists, so it’s important for British businesses to take all the steps they can to ensure they are as attractive as possible to foreign buyers, who typically pay a premium compared to domestic buyers when acquiring a UK company.

1. Understand your buyer

The more aware you are of the foreign buyers’ motive for purchasing your business, the more value you will able to demonstrate to the prospect. There are typically four reasons an overseas buyer would be interested in a UK business: it provides access to the British market, or an entryway into European and international markets, it has attractive tech and intellectual property potential, or the business is able to merge with one of the foreign buyers’ existing businesses to generate cost savings and efficiencies. Identifying a buyers’ intention before engaging in the deal process will significantly increase your chances of selling and achieving maximum value for your company.

2. Develop a post-Brexit strategy

Although the UK is currently well positioned for FDI, the EY 2017 Attractiveness Survey reveals that a number of respondents think that, in the medium-term, the UK’s attractiveness as an FDI location will deteriorate, with 31% of respondent investor’s worldwide saying they expect this to be the case in the coming three years, although 32% say they expect it to improve. One can assume that this is potentially due to the uncertainty around Brexit and the UK’s access to the European single market.

To counter this scepticism, it is important for businesses to develop a post-Brexit strategy. For companies who do not export outside Britain, they will need to demonstrate that they have the capabilities to survive and grow solely in the UK market. Companies that do export outside of the UK will need to show that they can continue to easily sell their goods in the EU and have potential international markets they can access if selling in the EU becomes more problematic.  A good example is the recent sale of smoked salmon producer John Ross Junior, a company with a Royal Warrant, which we advised. The company proved its international capabilities by highlighting the 30 countries they supply and the opportunity for future growth in other regions, which were key factors in the decision of publicly listed Estonian company, PR Foods, to buy the business.

3. Foster key relationships

Foreign buyers want to see a highly connected UK business, and having strong networks is key for sealing contracts and fostering growth. Prospective buyers want to be reassured that the company does not have particular reliance on any one customer and should they purchase the business, there will be high retention rate among customers, employees and suppliers.

4. Update your books

The extent of the due diligence that the buyer will undertake depends on the sector, the buyer’s existing knowledge of the target company and the laws of that country. English law states ‘caveat emptor’ or ‘buyer beware’, meaning that the buyer alone is responsible for checking the quality and suitability of the company before a final sale is made. Having updated financial statements and a strong finance team to help respond to the likely multiple queries a potential buyer will have, should ensure a smooth and speedy process when engaging with a prospective buyer.

5. Appoint an advisor with specialist expertise

Selecting the right advisor for a sales process is key, especially when an overseas buyer is involved. Compared to domestic M&A, foreign deals demand an understanding of cultural differences, state versus domestic laws, and regulatory approval processes. Engaging an advisor with specialist expertise in your sector, the mid-size market and that has a global reach to find potential acquirers will optimise the sales process and ensure that the deal executed will be the best outcome for your business.

To many casual observers, this Summer’s football transfer window appears to have left the realms of reality. Transfer fees for players have broken records and the total spend in the English Premier League alone stands at an incredible £1.17 billion and with deals still being thrashed out in boardrooms around Europe, that figure is likely to increase.

Even the managers are aghast, with Arsene Wenger deriding the £200 million transfer of Brazillian superstar Neymar Jr to French club Paris St. Germain claiming that the club “cannot justify the investment.” But are the transfer fees actually the ‘crazy money’ that Chelsea manager Antonio Conte has claimed?

As the three-month Summer Transfer Window winds down, it’s easy to look at the figures that clubs seem to be casually throwing around in player transfers and agree with Wenger and Conte, but there is a data to suggest that clubs are actually spending responsibly and well within their means compared to revenue. Despite the fact that Premier League clubs have already broken the record £1.16 billion spent in 2016, the league remains the richest in the world. It has recently begun its new TV deal with Sky and BT which earning the clubs £5.19 billion, and, in addition to this domestic arrangement, TV Deals from overseas will also contribute £1.07 billion a year currently, with contracts already signed to increase these payments from 2019 to as much as £3.2 billion. If you consider from the last full published accounts of all Premier League teams that there was also another £1.74 billion in revenue from merchandise, gate receipts and prize money, the pot of money available becomes larger, allowing for greater investment as it would in any business. The fact is that these figures demonstrate that the £1.17 billion spent in this transfer market does not even reach 20% of the businesses’ yearly revenue.

The graphic above shows that Manchester United have invested 22% of their yearly revenue into players this summer, which breaches that 20% threshold clubs like to adhere to, however it’s important to note that the clubs do not view the outlay as a short-term investment.  So a £50 million transfer fee may grab a headline and incite mass hysteria on Twitter, but it will be spread out over the duration of the players contract which in most cases is 4-5 years. In some instances the payments are not just lump sums, but are subject to performance and add-ons dependent on the team’s success, which in turn will bring in increased revenues, sponsorship and ideally prize money meaning that the transfer fee may increase from the outside, but in actuality will constitute a lesser percentage of the clubs revenue for that year.

Many clubs have put in place specific player analysis teams to ensure all transfers are in line with the club’s growth projections and business models. Players are investments, so beyond the obvious on-pitch contribution, clubs have developed models to assist in defining the likelihood of creating a significant return on investment that would make the fee worthwhile.

This is also the case in the world record breaking transfer of Neymar widely derided by press, public and football managers alike. If Paris St. Germain were adhering to the standard and historically accepted 20% of revenue ceiling for player transfers, then Neymar should not have been signed as it exceeds that figure by £50 million. But the analysis predicts that Neymar should add over 6 points to PSG’s season tally, which may be enough to re-capture the league title they ceded to Monaco last year, and increase the chances of further progression in the coveted Champions League. Six points and a good cup run is not all Neymar will be improving. PSG have stated that the signing of Neymar Jr is on a five-year contract with the player spending his peak years both on the pitch and as an advertising and merchandise magnet which is likely to increase the revenue of PSG significantly.  Whether it will be significant to cover the investment over 5 years remains to be seen, but it's certainly not as outlandish as it first appears.

The reality is that despite the hysteria and whingeing from opposing managers, the majority of clubs are investing in a way that would be perfectly acceptable in other sectors. And although in the future we will undoubtedly see the first billion pound transfer splashed across the headlines, it will only be when the revenue allows.

Alumnus of Wharton School (General Management) and The Doon School (India’s top School), Business Advisor by profession, and mountaineer at heart, Suraj Nangia strongly believes in living life off the edge, he has climbed 4 out of the seven summits - Mt. Kilimanjaro (Africa), Mt. Elbrus (Europe), Mt. Aconcagua (South America), Mt. Kosciuszko (Australia) and Mt. Cook (New Zeeland).

A true sports enthusiast, he is national swimmer and participated in India’s Longest race (19 km) in 2001 and ranked 24/150, played state cricket and represented U-19 for Delhi, represented State U-15 & U-17 in Squash.

Salsa is the flavour of his life and lets him connect to his soul. He was a salsa dance instructor at Salsa India between 2007 and 2015, still manages to attend salsa nights to keep his feet moving.

He has all the prerequisite to be a successful entrepreneur - a risk taker, somebody who can persevere through all odds, one who has an in depth knowledge of the domain, somebody privy to the burning needs of an industry, one who constantly strives to achieve more.

Second in command of a 220 + professionals firm, Nangia & Co. LLP, a consultancy firm that offers 360 degree services to clients across verticals, helping its clients with India Entry Strategy, Handling complex international M&A Matters, corporate taxation, professional taxation, international taxation, indirect taxation, transfer pricing, litigation support, corporate governance, risk advisory, IFRS services, corporate financial advisory and audit& assurance. Apart from leading the Tax, Compliance and M&A practice, Suraj also handles all financial matters of the firm. Foreseeing the growth opportunity owing to ‘Start-up India’, he recently established a dedicated practice catering the start-ups in India.

His zeal to never stay static and to keep moving has hugely fuelled Nangia & Co.’s growth trajectory - be it in terms of expanding to new verticals or to keeping the cycle of learning running.

What is India’s M&A growth trajectory?

M&A is the path businesses take to achieve exponential and not just linear growth and therefore continues to generate interest. The Indian M&A landscape is no different. Mergers and acquisitions have become an integral part of the Indian economy and daily headlines. Based on macroeconomic indicators, India is on a growth trajectory, with the M&A trend likely to continue.

There has been a spate of high-profile transactions in India in the last few years, whether domestic or international, and both inbound and outbound. With the government continually working towards reforms on all fronts, be it in its regulatory policies to attract foreign investors, providing an impetus to the manufacturing sector with Make in India, improving India’s Ease of Doing Business rankings, or providing solace to the much-beleaguered infrastructure sector by paving the path for real estate investment trusts (REITs)/infrastructure investment trusts (InvITs), there is no looking back.

M&A deals are likely to be the favoured route for foreign direct investment flows into India in 2017, as market consolidation is expected in sectors facing a cash crunch such as e-commerce and telecommunications. The renewable energy sector is likely to see M&A deals, but it could also attract Greenfield investments. The new insolvency and bankruptcy regime will also facilitate the sale of distressed assets, and thereby a hike in M&A activity.

What about the tax concerns that new entrants will have?

Ever since the Vodafone tax litigation took the Indian M&A landscape by storm in 2007, tax aspects surrounding any M&As in India came to the forefront—so much so that corporates have now started taking tax insurance to insulate themselves from the uncertainties and vagaries of interpretation of Indian tax laws. Of course, while the government is making strides in trying to deliver the comfort of certainty to the investor community (by issuing clarifications on various aspects of indirect transfers), it is also tightening the screws on various fronts—the renegotiation of India’s tax treaties, the looming advent of General Anti Avoidance Rules (GAAR) in 2017 and the signing of Multilateral Instrument under Base Erosion and Profit Shifting (BEPS) project.

What differentiates Nangia & Co. from its competitors?

While other firms lay emphasis on the number of resources, Nangia & Co LLP from the very beginning had decided to remain a boutique firm so as to provide personalized and competent services to clients. Having been in the industry for over 35 years, the team still consists of about 220 people who work in close quarters with the rest of their teammates. This lends a sense of openness and ownership among all the resources. Another major factor is the competency of our people who keep themselves updated with the going ons of the industry and moving ahead with the times. There is a healthy mix of domain experts who bring to the table their own expertise which helps the firm impart 360 degree services across a section of verticals.

Contact Details:

Suraj.nangia@nangia.com

www.nangia.com

By Henry Umney, CEO, ClusterSeven

 In the financial and banking sector, M&A activity is expected to be healthy, due to disposal of non-core businesses by global banks, potential relaxation of regulation in the US, and the European Central Bank encouraging cross-border diversification and consolidation for value creation.  

 Strategically, M&A offers a great opportunity to organisations, with the potential of propelling some banks and financial institutions to top positions in the industry. This said, for organisations to truly take advantage of M&A scenarios, it’s crucial that from the word go, the new entity is able to demonstrate to and convince the regulators and the market that they are agile, effective and well-managed businesses. The regulatory deadlines are stringent and carry huge non-compliance penalties, which have the potential to inflict chaos and havoc for the new entity in the market. 

Extricating businesses

Organisations involved in a M&A need to disentangle processes from their original environment to migrate them to the new entity so that the merged business is operational from day one. For instance, traders need to connect to the new entity’s systems and market data feeds on the very first day of the cross-over so that their trading activity is not compromised.

However, there are many technology-related operational challenges to divesting and merging entities, including poor IT integration, data amalgamation, compliance and regulations and the rampant use of the Microsoft Excel spreadsheet. In fact, the impact of the spreadsheet is often under-estimated, which threatens the success of these highly strategic, M&A-driven transformational initiatives.

The financial controls that are in operation in organisations are spread across multiple enterprise systems and a multitude of critical spreadsheets that span the entire business. Most organisations understand the importance of extricating the enterprise systems and connecting them to the new environment in a M&A scenario. However, there are also a number of complex, business-critical processes that reside in intricately connected spreadsheets, that organisations don’t always have visibility and indeed an understanding of. This makes securely disentangling and migrating key processes and financial controls to the new entity problematic, risky and challenging.

Ensuring timely knowledge transfer of financial controls and business processes is yet another challenge that organisations undergoing an M&A situation face. As companies amalgamate, organisations make significant cost savings through combining processes and merging personnel roles, frequently resulting in employees departing the organisation. To suitably transfer the knowledge from the acquired or merging entity, organisations need to have a full understanding of the complex critical spreadsheets that are relied upon for financial control, information on the individuals who control and manage those processes, their integrity and where they exist in the business.

Manually separating processes costly and error-ridden

In the first instance, many organisations attempt a manual approach to understanding the spreadsheet landscape and the complex interlinkages across the environment in order to extricate businesses. It rarely works – the process is complicated, time-consuming, costly in man-power, error-ridden and with stringent deadlines to provide documentary evidence to authorities, it is commonly wasted effort.

On the other hand, technology enables the merging or acquired entity to understand its business processes, identify the individuals who are applying the controls and put automation around those procedures. This also reduces the key man dependency and ensures the necessary knowledge transfer to the new organisation.

Scottish Widows Investment Partnership (SWIP) separates from Lloyds Banking Group – a case study

The disentangling of the Scottish Widows Investment Partnership (SWIP) from Lloyds Banking Group to Aberdeen Asset Management in 2014 is a prime example of the value of a technology-driven approach to M&A-led operational transformation.

Following its acquisition, SWIP needed to separate its business from Lloyds so that the necessary and critical processes could be migrated to Aberdeen Asset Management. For example, where certain processes relied on market data feeds that were owned by Lloyds, or had linkages to systems owned by Lloyds.

Due to the number of intricately spreadsheets across the vast spreadsheet landscape and the complexities of the business processes residing in this environment at SWIP, manually understanding the lay of the land was impossible. So, by utilising technology, SWIP was able to inventory the spreadsheet landscape, identify the business-critical processes, understand them and pinpoint the files that required remediation. Simultaneously, the technology helped expose the data lineage for all the individual files, clearly revealing their data sources and relationships with other spreadsheets. SWIP was able to securely migrate the relevant business processes to Aberdeen Asset Management and where necessary decommission the redundant processes.

Paying heed to role of the spreadsheet is prudent

In any M&A initiative, there is always a substantial amount of work related to complex, business-critical processes that reside in spreadsheets and the dependencies of such processes on enterprise systems and vice versa.

Technology offers a fail-safe and automated mechanism – including everything from identifying and understanding the processes, establishing the data linkages across the spreadsheet landscape through to remediation, migration and decommissioning. Teams that prudently adopt a technology-led approach to drive M&A-led operational transformation initiatives, find it extremely constructive and beneficial to the business. It mitigates the risks, minimises the disturbances that separating financial controls and processes can cause for the new entity and gives the organisation the best possible start from market, regulatory and financial standpoints.

About the author

Henry joined ClusterSeven in 2006 and for over 10 years was responsible for the commercial operations of ClusterSeven, overseeing globally all Sales and Client activity as well as Partner engagements. In July 2017, he was appointed Interim CEO and is strongly positioned to take the business forward. He brings over 20 years’ experience and expertise from the financial service and technology sectors. Prior to ClusterSeven, he held the position of sales director in Microgen, London and various sales management positions in AFA Systems and DART, both in the UK and Asia.

Website: http://clusterseven.com/

Twitter: @ClusterSeven

According to a new whitepaper from asset management strategy consultancy Casey Quirk, a practice of Deloitte Consulting LLP, the industry is likely to experience "the largest competitive re-alignment in asset management history" through merger and acquisition activity from 2017 to 2020.

According to its new Investment Management M&A Outlook, "Skill Through Scale? The Role of M&A in a Consolidating Industry," Casey Quirk expects strong merger and acquisition activity in 2017 with a continued historic pace of deals through 2020.

Among the factors driving this brisk activity in 2017 and beyond are an aging population, affecting industry asset levels and flows, as well as a broad shift to passive management that has created pressure on industry fees and placed greater value on firms with valuable distribution platforms and those investing in technology. Forty-four deals took place in the first quarter of 2017, and Casey Quirk expects 2017's volume to likely outpace the last two years.

"Investment management has become a fiercely competitive industry, increasingly shaped by the same winner-take-all dynamics influencing other maturing financial services sectors," said Ben Phillips, a principal and investment management lead strategist with Casey Quirk and one of the authors. "Amid this challenged marketplace, the gap is widening between leading and lagging asset and wealth management firms. Unlike deals of the past, consolidation pressures, with a focus on scale, will likely drive the next round of M&A activity to position firms for growth."

According to Casey Quirk, most of the investment management merger and acquisition deals in 2017 and in the next few years should fall in the following categories:

• Transformative scale acquisitions driven by the quest for revenue and cost synergies. These deals should be larger than in the past several years and should include more global mergers of equals.
• Capability-based transactions, mostly representing additions of innovative investment products and technology needs.
• Shifting value chain deals, with many asset managers acquiring firms that help them extend their capabilities in such areas as distribution, wealth management or advice.
• Pure consolidation deals structured to spread costs over a larger client asset base; several may take place in the US mutual fund marketplace.

"Economic pressure, distributor consolidation, the need for new capabilities, and a shifting value chain are the catalysts that are fueling M&A activity," said Masaki Noda, Deloitte Risk and Financial Advisory managing director, Deloitte & Touche LLP, and co-author of the paper. "Asset managers are feeling pressure from many corners and are looking for ways to secure a competitive advantage. Strategic deals may be the answer."

In 2016, 133 mergers and acquisitions occurred in the asset management and wealth management industries, down slightly from 145 in 2015, but with a higher average deal value, up from $240.9 million in 2015 to $536.4 million last year. In investment management, about half of the deals rose from the need to add capabilities such as innovative investment strategies or access to new market segments. In wealth management, the vast majority of transactions—64 out of 78—resulted from consolidation, as various smaller wealth managers sought to improve profitability through economies of scale. Merger and acquisition deal volume by category is from SNL Financial, Pionline.com, Casey Quirk analysis and Deloitte analysis.

(Source: Casey Quirk)

In today's low interest rate environment, leverage remains the smart option for financing mid-market acquisitions. For starters, it satisfies the corporate desire for enhanced returns on equity and cash conservation. Moreover, the competition for deals among established lenders and the many recent entrants into the market has driven down loan pricing and diversified product offerings making a tailor-made solution more achievable than ever before.

Lee Federman, Partner in the Banking and Finance team at law firm Dentons, here sets out some of the key issues borrowers should be aware of before embarking on a search for the right financing arrangements.

Evolving lending landscape

While established clearing and investment bank lenders remain active, they have been increasingly limited in their activities by regulatory and capital constraints. This has allowed debt funds such as Ares, Alcentra and KKR, to increase their market share with fixed income becoming the strategic asset of choice for investors. For a higher coupon, specialist debt funds have been able to offer increased leverage, larger bilateral commitments and greater covenant headroom and flexibility. So called 'challenger banks' such as OakNorth and Metro are also increasingly visible, particularly at the smaller end of the market.

Cost of funds

The primary financing consideration for a borrower will be the overall cost of funds. Lenders' 'all in yield' will likely include a fixed margin (set over LIBOR or EURIBOR potentially ratcheting up or down in line with the borrower group's prevailing leverage), arrangement fees payable at closing and any other periodic fees such as commitment fees on working capital facilities. Fees will also arise if a hedging product such as a cap or collar is purchased to protect against fluctuations in the underlying interest rate.

In a market currently suffering from a lack of M&A activity, strong borrowers often negotiate with debt providers in parallel to create the competitive tension needed to push down pricing and improve terms – specialist debt advisory firms can further facilitate this process.

Cash retention

Cash retention will also be at the forefront of the CFO's mind. Banks typically expect at least part of their term facilities to amortise quarterly to aid deleveraging and reduce refinancing risk. Some debt funds however may allow a more relaxed amortisation profile or potentially even a single bullet repayment at maturity. Debt funds rely on a stable coupon to satisfy their investors' return requirements and are often comfortable for available cash to remain in the business for reinvestment and income generation purposes.

Mandatory prepayments

All lenders will expect their loans to be immediately prepayable upon a change of control of the borrower or where it becomes unlawful for the lender to continue to lend. Debt funds may however be more relaxed than banks on mandatory prepayments out of net disposal or insurance proceeds and also in relation to the annual excess cashflow sweep after debt service (the amount of which is usually determined in line with leverage levels).

Financial covenants

Borrowers will have to comply with up to four financial covenants on an acquisition financing, each of which is designed to test its financial health and serve as an early warning sign if its condition starts to deteriorate:

• Leverage. This is the ratio of net debt to earnings and tests the overall sustainability of debt in the borrower's business. It is typically calculated on an adjusted basis to take into account acquisitions or disposals over the relevant testing period.

• Cashflow Cover. This is essentially a liquidity ratio matching the Group's operating cashflow against its principal and interest debt service obligations (otherwise known as the 1:1 test).

• Interest Cover. This is the ratio of earnings to interest costs and demonstrates the ease with which the borrower can meet its cash pay interest expense from operating profits.

• Capex. This is an annual limit on capital expenditure spend set with limited headroom against the borrower's business plan. Stronger borrowers will seek further operational flexibility by carrying forward and/or carrying back unused capex allowances to preceding and/or succeeding financial years.

It is important that the financial covenant related definitions in the loan documentation conform to the agreed financial model and the expectations of the CFO. Each of these financial covenants (with the exception of the capex covenant) is tested quarterly looking back at the results from the last 12 months.

In the current competitive lending market, some lenders may be willing to drop some of these four covenants (‘covenant loose’) or all of them (‘covenant lite’) – the latter is however still fairly rare for mid-market deals

Equity cures

Strong borrowers will seek to negotiate the right to inject new equity into the structure to cure an actual or potential breach of financial covenant and stave off any potential lender enforcement action. To the extent acceptable to the lender, such new money will likely be limited in usage and amount. At least part of it will also have to be applied in prepayment of the loan.

Negative covenants

Negative covenants are another key part of a lender's credit protection. They are designed to restrict the borrower from undertaking certain actions which may cause value leakage out of the borrower's group (e.g. disposals, acquisitions, debt incurrence, distributions to shareholders) and are subject to a set of pre-agreed exceptions and monetary baskets. The borrower will focus on these exceptions more than any other area of the loan documentation to ensure that it has appropriate flexibility to operate unfettered in the ordinary course of its business and to implement its business plan and growth objectives.

Security and guarantees

Lenders' principal downside protection comes in the form of asset security and guarantees. Typically, lenders will expect to receive security and guarantees from entities in the group representing at least 85% of the earnings, turnover and assets of the relevant group (including share pledges over all material entities). On cross border transactions, local lawyers should always be instructed as early as possible to identify any issues in or limitations to the grant of security or guarantees and a set of agreed security principles should be drawn up.

Financial information

Lenders will always expect a raft of detailed financial information. Monthly management accounts, quarterly financials and annual audited financial statements will be required along with quarterly financial covenant compliance certificates. Borrowers will further be expected to provide a budget, financial model and give an annual presentation on the on-going business and financial performance of the borrower.

Acquisition diligence

Lenders will not typically undertake their own diligence on the target company but they will expect to be able to rely on all due diligence reports prepared for the borrower. This supplements the representations provided to them in the loan agreement. The lender will also expect to be kept informed on the negotiations on the acquisition documents and to receive copies of the signed versions as a closing condition to the loan.

In our April Thought Leader Section, we look at the acquisition of one of Europe’s most-awarded creative independent agencies - Lemz, by Havas Group - one of the world’s largest communication groups. We had the opportunity to interview Adriana Roman-Holly – Director at Ciesco Group, who led the team that advised Lemz. Here she tells us about Ciesco Group’s involvement in the transaction and the challenges along the way, while also discussing the global M&A activity in 2016 and 2017.

Could you tell us a bit about the transaction and Ciesco Group’s involvement in it?

Havas Group (HAV:EN; market cap of €3.0bn), one of the world’s largest communication groups acquired Amsterdam-based Lemz, one of Europe’s most-awarded creative independent agencies.

Widely recognised as a pioneer of the pro-social marketing movement, Lemz uses its innovative creative consulting approach to “help brands make sense” by delivering creative campaigns that are meaningful, purpose-driven and socially relevant.

Building on their successful track record, Lemz shareholders acknowledged the need to address strategic growth options for the company to maximise the future prospects and value of the business. In Havas Group they have found a like-minded partner sharing similar strategic ambitions, passion and culture. Lemz will join forces with Havas Boondoggle, the Group’s existing Amsterdam-based creative agency. The new 80-talent-strong agency, “Havas Lemz”, will leverage on the Group’s Together strategy to build a powerful creative hub.

Ciesco Group acted as exclusive advisors to the shareholders of Lemz. We were mandated to seek a like-minded partner that would enable Lemz to operate on a larger scale and increase their impact on the social good scene, without compromising the high-quality creative output the agency has been known for. Havas Group was identified as the perfect fit in terms of vision, ambition, making sense support and chemistry with Lemz. We pursued a very structured process and managed the end-to-end process - from preparing the business for sale through to negotiation of the sale and purchase agreement on behalf of the shareholders with a major strategic player with complementary strengths.

Given Havas’s commitment to creating meaningful connections between people and brands through creativity, media and innovation and Lemz’s pro-social creative credentials, this transaction makes sense for all involved. It is a huge opportunity for Lemz, its talents and clients to benefit from becoming part of a bigger group. Using the creative firepower of Lemz, Havas can expect to deliver a number of stellar campaigns, while standing for something beyond advertising. The new 80-talent-strong agency Havas-Lemz is set to become the “most meaningful agency in the Netherlands”, a unique hub where ideas, people and talents flourish and turn into impactful integrated creativity.

What were the challenges in relation to finding the best possible partner for Lemz?

 A deal like this will always face multiple challenges. Finding the perfect partner who would share Lemz’s vision and ambitions, managing value expectations and execution risks were all critical. Through our unrivalled experience, individual approach and vast industry knowledge we worked together with Lemz shareholders and provided them with independent, sound advice, efficient execution and direct support throughout the process.

How would you describe 2016’s global M&A activity in technology enabled-media and marketing sectors?

 By all accounts, 2016 was an extraordinary year that brought with it a myriad of opportunities and challenges across the globe and presented a wide scope of issues and events. Despite the tumultuous year, M&A opportunities within the sector remained buoyant and firmly on the agenda of many corporates.

Each year our market intelligence team at Ciesco tracks global M&A transactions in the sector. We tracked 1,175 M&A transactions throughout 2016, an increase of 6% year on year in global deal activity. The announced deal values totaled over $82bn (excluding the three mega-deals), up 36% from the prior year. This marks the third consecutive year in which deal activity has increased. Marketing Technology remained the most active sector in 2016 in the digital, marketing, media and related technology industry. Despite being the most active sector, the number of deals announced fell by 12% to 102 deals (116 in 2015). As with the previous year, the Mobile sector was the second most popular sector behind Marketing Technology. Similarly to Marketing Technology, deal volume in the Mobile sector was also down slightly, from 102 in 2015 to 90 in 2016. The next most popular sectors were Advertising & Creative, Data & Analytics, Public Relations, Digital Media, and eCRM.

This remains an exciting and dynamic sector for M&A with new technology entrants, start-ups offering specific niche disciplines, a broad array of new media channels that are all combining to disrupt conventional models.

What is Ciesco’s outlook for M&A activity in 2017?

 We expect 2017 to be a busy year with new business models developing where their services are powered by sophisticated data capture and analysis and that fuse high quality real-time creative content with integrated media solutions for delivery and measurement through the new media channels. Independent media and data analytics businesses will command a premium valuation in 2017 M&A activity.

We also expect consultancies to continue to make inroads into the marketing sector with an emphasis on strategy/creative and digital services. This will continue to threaten the big agency networks who will struggle to compete with the combination of the traditional and new services now being delivered by the consultancy firms.

About Adriana Roman-Holly

Adriana leads Ciesco’s day to day corporate finance work both originating and working on a wide variety of transactions. Prior to joining Ciesco, she spent 5 years at Pall Mall Capital, a London-based investment banking boutique, handling corporate finance advisory and M&A transactions, as well as working on Equity and Debt placements across a wide range of sectors (business services, leisure, infrastructure, technology, consumer products, etc.). Her earlier career included US experience where she worked on US and international assignments at Brown Gibbons Lang & Company, a leading Midwest investment banking firm, as well as acting as a Project Manager for a London-based global consultancy firm specialising in business intelligence services.

Adriana has a MBA degree in Banking & Finance from Case Western Reserve University (US), as well as an MA in International Economic Relations.

Firm Profile

 Ciesco is a London-based boutique corporate finance advisory firm, specialising in M&A advisory and business strategy for the digital, media, marketing and technology sectors, with coverage of Europe, Asia and North America. Ciesco works with entrepreneurs and global corporates who require specialist advice on domestic or cross-border transactions, divestitures and business strategy, as well as private equity firms looking for growth or exit opportunities for their portfolio companies. Led by practitioners with deep industry experience and expertise within new media and disruptive technologies, Ciesco is able to deliver its clients independent and sound advice and execution, as well as access to an extensive network of direct contacts with high quality investors globally.

Website: http://ciescogroup.com/

JLT Specialty, the specialist insurance broker and risk consultant, saw a 60% increase in the number of insured deals during 2016 compared to 2015 globally. This type of Mergers and Acquisitions (M&A) insurance, also known as Warranty and Indemnity (W&I) insurance - of which the real estate and private equity sector remain the key beneficiaries of - is designed to pay out if a buyer discovers the business bought is not what the seller advised it would be.

In its annual M&A Insurance Index report, JLT found that the average limit of insurance (as a percentage of the enterprise value) increased by 16% in 2016 compared to the previous year. This equates to an average insured amount of 29% of the total deal value for global transactions outside of the US.

This may be a reaction to perceived heightened investment risk driven by economic uncertainty around the Brexit negotiations, but equally it may reflect the ever-falling premium rates, as today it is possible to get more protection for less premium. Levels of cover in the US were lower at 23% of deal value, but Japan and Singapore saw the highest levels of protection at 30% and 34% respectively.

Overall market capacity has increased, largely due to new insurer entrants. Existing insurers and managing general agents are also significantly increasing their individual line sizes with a number now able to deploy $US100m+ per deal, allowing high limits of insurance to be met by a single or small number, of insurers. This has advantages from an execution risk perspective, as well as potential benefits in the event of a claim.

The real estate sector continues to be one of the main users of M&A insurance. Alongside this, private equity deals still represent a majority of insured transactions, with industrial and retail markets becoming increasingly frequent users. In what is becoming common practice across numerous business sectors, the seller often facilitates the use of insurance very early on in the deal process to optimise its exit from the transaction.

Furthermore, JLT found that whilst the seller commences the insurance process 40% of the time, it is the buyer that is the insured party on 93% of deals. This reflects a strong seller marketplace where selling parties have been able to negotiate reduced liability under the sale agreement and offer a W&I insurance policy to the buyer instead.

Ben Crabtree, Partner, Mergers and Acquisitions, JLT Specialty, said: “The events of 2016 in the UK and Europe have served as a test of maturity for the M&A insurance market, which perhaps surprisingly, has continued to soften further, both in terms of premium rates and policy retention levels, compared to 2015. This underlines the fact that competition between insurers remains at unprecedented levels. However, the market may harden a little if the current increase in claims activity we’re seeing continues.”

(Source: JLT Specialty)

Written by Nick Pointon, Head of M&A at SQS

In June 2015, US security regulators investigated a group of hackers, known as FIN4. The group were suspected of breaking into corporate email accounts of 100 listed companies and stealing information in relation to mergers^[1] for financial gain. Hackers are always on the lookout for opportunities to exploit vulnerable IT systems during mergers or acquisitions.

Starwood Group, an American hotel and leisure company, was the victim of a data breach in 2015 caused by malware infected point-of-sale terminals, shortly after the acquisition by Marriott Corporation had been announced. As a result of the breach, hackers gained access to customer names, payment card numbers, security codes, and expiration dates. It was later questioned whether IT systems were appropriately assessed before the acquisition was made public knowledge.

There is so much going on in the process of an acquisition or a business merger that IT systems are often neglected. This creates vulnerabilities, potentially exposing sensitive information which cyber criminals can exploit. IT teams must focus their attention on ensuring the security of existing systems before a company even considers undergoing an acquisition or merger.

Pre-acquisition technical due diligence

Technical due diligence refers to the period during which IT systems are inspected, reviewed and assessed for areas of vulnerability that need to be addressed. Organisations looking to be acquired or merge, should begin a process of technical due diligence internally before seeking interested parties. By carrying out such an internal technical due diligence, the company being acquired can be satisfied its systems are robust, secure and fit for purpose, and the acquirer’s due diligence will not expose any issues that may jeopardise the deal.

In addition to the security vulnerabilities, many organisations carry open-source licensing risks.  Open-source modules or snippets of code are commonly incorporated by developers into software to aid rapid development.  Although this open-source code is freely downloadable, it is normally subject to an open-source licence, and this licence places restrictions and obligations on what can be done with this code. Companies often have no idea what open-source code is used in their systems and any breach of licensing restrictions can be costly to fix and endanger the deal. So the internal technical due diligence should include an assessment of open-source licensing risk, allowing the company to resolve any problems in advance.

By conducting thorough technical due diligence before embarking on the process of an acquisition, organisations will have a greater appeal to interested parties and can ensure the deal will proceed smoothly. Those looking to acquire will have a clearer understanding of the technical assets for sale, with the added reassurance there won’t be any unpleasant surprises.

Yahoo recently felt the ramifications of neglecting IT systems in anticipation of the Verizon acquisition, after it was revealed earlier this year that 500 million customer email accounts were hacked. This now has the potential to affect the final deal - Verizon have issued a statement stating that the company is looking to alter the terms of the deal, as it felt Yahoo wasn’t completely transparent about the breach. This is a prime example of technical due diligence that hasn’t been thoroughly conducted and proves issues unearthed during the closing stages of an acquisition have the potential to affect the final sale price.

Pre-implementation hurdles

Once an acquisition has been agreed in principle, senior stakeholders must then address which systems are being continued and which should be decommissioned. A skilled project manager must be chosen to manage and monitor the implementation of the systems; ensuring decisions impacting the seamless integration of the acquisition are made on time.

Companies often underestimate the amount of work that goes into managing the process of an acquisition. This can result in the appointment of a project manager without the necessary skills needed to efficiently run the entire process. All too often it is assumed acquisitions only affect the financial and legal teams, when in reality it affects every department. An individual is needed with the skills to communicate across all departments and at all levels.

Post-acquisition finishing touches

The sale is agreed and personnel have merged, but it doesn’t stop there. Post-acquisition integration is a separate project in its own right and requires close engagement from senior stakeholders. Merging IT systems across companies can affect the smooth running of daily operations, exposing flaws in acquired systems likely to cause system downtime. By bringing third-party experts on-board, companies facing both pre- and post-acquisition challenges can be kept safe in the knowledge that IT systems are maintained and sensitive data is kept safe.

No matter how big or small the company or the number of employees, acquisitions are always a major upheaval. In order to allow the organisation to continue to operate efficiently both during and after the deal, it is vital the entire integration is properly planned and effectively executed.  This planning starts during due diligence by carrying out a thorough assessment of the technology and systems.  And the process continues with the execution of the integration project, which requires a skilled project manager supported by engaged stakeholders and effective communication at all levels in the new organisation.