22 December 2021

Wipeout on the M&A wave

Businesses need to have line of sight to how they will unlock transaction value and prepare to realise it.
Australia Corporate/Commercial Law
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Odds are stacked against capturing full value of boom

Global M&A frenzy

As the world emerges from the pandemic, there's been a huge boom in M&A activity, the like of which has rarely been seen before. And it looks set to continue well into CY22.

In Australia this year, deals worth over $347 billion have been inked, setting a national record, with several weeks to go until New Year's Eve corks pop in the boardrooms of the country's investment banks. Significant businesses like Sydney Airport, West Connex, Ausnet, Australian Pharmaceutical Industries, Oil Search, Spark and ME Bank have all become targets.

And it's not just locally — worldwide M&A transactions have also hit record numbers.

The trend is significant, not only in volume, but also for the prices being paid. In the US, private equity firms are paying eye-watering premiums of almost 70% on prior share prices to secure assets, with some deals reaching dizzy mid-20s EBITDA multiples in some instances. It is estimated that there is still US $1 trillion of 'dry powder' waiting to be put into play.

This worldwide binge is being fuelled by a number of factors. On the sell side, there are those businesses which have under-performed during the pandemic, and need a capital injection and strategy refresh. For buyers, there is a compelling need to scale up in areas that take advantage of trends accelerated by the pandemic, such as digitisation, personalisation and convenience. And all of this is underpinned by next-to-zero interest rates, large capital war chests and a strong desire to achieve positive returns.

It's a similar uplift in deals to the one seen after the GFC – but this time it's in an environment of robust balance sheets, confident boardrooms, availability of credit and government stimulus still priming the pump.

Finish line fever

With the scramble for assets, it's tempting to focus on the 'art of the deal' and not pay due attention to the important post deal planning that should accompany any acquisition. Empirical studies show that up to 70% of mergers and acquisitions do not lead to a successful outcome, and the reasons for this are many and varied.

At the start of any M&A journey, we tend to see organisations absorbed by the sheer scale of work needed to clinch the deal. This 'finish line fever' means organisations place wholesale emphasis on the acquisition, and are left paralysed (or fatigued) with what to prioritise and how to direct investment with a new asset or integration. If it's a 100-metre sprint to transact, the marathon starts once the deal is done.

For example, often the requisite Post Merger Integration (PMI) planning has not been completed early enough in the deal process when KPIs for what success looks like need to be set. A simple analysis of P&L prior and post deal can be misleading – a richer fabric of synergy goals need to be woven, with risks identified, quantified and mitigated. We encourage organisations to make bold and hard decisions early to ruthlessly prioritise post-deal planning – most organisations don't need more options, they need fewer.

Often, the anticipated synergies have been badly conceived, due to poor base financial data, unrealistic timelines, or implausible expectations.

Many an organisation has underestimated the challenge of stepping outside of its area of expertise, or crossing new borders. Selling different drinks to the same customers was not as easy as it sounded, as Kirin found out with their ill-fated purchase of Dairy Farmers, or the indigestion experienced by CUB when they tried to swallow up Southcorp.

Cultural integration

The management of the project itself can be a major pitfall, with many transactions skimping on PMI resources and not always choosing the best steering committee members. Sometimes a project conceived in the boardroom doesn't fully appreciate the complexity of its execution in the workplace. Companies often find out that they are under-powered in delivery capability when a PMI begins, and many executives find it hard to balance their time between PMI and BAU. Often, the operational costs of the merger can get out of hand without delivery discipline and getting the right support alongside Executive.

But the area that brings most PMIs to grief is culture. The excitement of new opportunities can often be undermined by the fear of change, particularly when two businesses with different cultures are combined. Re-alignment of management structures and spans of control and a new set of terms and conditions can unnerve and unfocus a workforce, particularly in an environment of large-scale redundancies. A mishandled project can also see loss of key personnel and the resulting impact on performance.

Avoiding wipeout

We see two types of people in the deal world — those who create value and those who capture it, and it is post transaction where organisations most often fall over. Businesses need to have line of sight to how they will unlock transaction value and prepare to realise it.

By not getting swept up in finish line fever and allocating dedicated time and resources to detailed PMI planning, organisations can ensure they not only create value in completing the deal, but also capture maximum value after the deal is signed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

22 December 2021

Wipeout on the M&A wave

Australia Corporate/Commercial Law
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