The global economic uncertainty caused by Covid-19 continues and as expected, M&A market activity has slowed. Following a three-fold increase in the annual volume of spin-offs and carve-outs since 2016, total buyout volume in the first half of 2020 dropped 23% annually. However activity is expected to pick back up again, led by private equity firms.

PE ready for bargains

PE firms had a lot of dry powder going into the pandemic and their focus is now turning to potential carve-out deals in distressed industries such as aviation, hospitality and real estate. Companies in these sectors are poised to offload non-core products and brands as they try to shore up their balance sheets.

It's clear that firms see value coming out of this crisis. In recent months many have raised ‘special situation' funds which have been completely – if not over – funded. 

But as they look to their next carve-out acquisition, they're going to face some key challenges.

Costly deal overruns

Recent independent research commissioned by TMF Group found that about a fifth of cross-border carve-outs result in millions of dollars wasted because of inefficiencies. Delays can equate to more than 16% of the original deal value.

A lot of the obstacles that can hold up deals for months relate to local legal and regulatory issues.

Understanding the steps you need to take as a buyer – and in what order – from the transaction right through to entity setup and being operational is key to minimising these costly delays.

Buyers need to be aware that steps can differ country-to-country. For example in Germany, you must open a bank account before setting up your company. In other countries this process is typically reversed. Covid-19 may also contribute to delays in company creation. Government agencies that closed during first wave lockdown periods are now working through application backlogs, and this should be factored into timelines.

No TSA puts buyers in the hot seat

The pandemic has put sellers under a lot of pressure, and many will be seeking an all-or-nothing type of deal. This means the usual items such as the Transition Services Agreement (TSA), governing the temporary provision of services to the NewCo, may be limited or completely off the table.

This is not such a bad thing for PE firms from a savings perspective. But it does leave them without a safety net and adds pressure to have all the necessary functions in place from day one. For this reason it's essential to address the TSA issue and determine associated liabilities as soon as possible, so you can bring in third party provider support.

Originally published by TMF, August 2020

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