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Hedge Fund Monthly
A New “Rule Book” for M&As

Purandar Rao, Partner and Far East Leader for Transaction Support
Ernst & Young Solutions LLP

November 2009

There have been many casualties over the past year, in particular, investor confidence in economic and financial forecasts underpinning company valuations. While an economic downturn was not entirely unexpected, the sudden impact on international trade and the knock-on effects on overall demand have caught many by surprise.

The traditional merger and acquisition (M&A) “rule book” as we knew it has changed dramatically in the last six months against the backdrop of a transformed deal landscape. Where corporate players feared to tread, they now lead the charge as did the big guns of private equity before. Where credit flowed freely in a buoyant market, debt-financed acquisitions have become far and few in between. We are now witnessing the re-writing of the new M&A “rule book” – one that advocates flexibility, creativity and a measure of calculated boldness in deal-making.

Corporate players are recognising that there are opportunities now to approach the businesses that they have always wanted to own but thought would never become available. Many of them are sitting on a lot of cash and have previously lost out to private equity on deals. The story replicates throughout the region where corporate acquirers await opportunities, whether regional or global, to capitalise on the relatively attractive valuations to pursue strategic growth in new markets. A study of executives at 570 leading global companies which was conducted by Ernst & Young in June saw 34% of the respondents stating an intention to carry out strategic acquisitions in the next 12 months and 21% intending to carry out strategic acquisitions in new areas of business.

However, while corporate players are becoming more active, it would be hasty to dismiss private equity’s role in the evolving economic environment. With an estimated US$1 trillion of committed funds worldwide, they remain vital in the restructuring of entities with distressed financing structures.

New Approaches

The ways that buyers and sellers approach transactions are evolving. Companies are increasingly considering multiple transaction types, such as third-party sales, spin-offs and joint ventures. All-share mergers are also on the table as companies, motivated by the primary objective of surviving the financial crisis, combine with competitors to achieve cost savings.

As acquisition funding dries up, buyers are now considering new alternative financing arrangements that run the gamut from vendor finance and partial equity sales to deferred sales and asset swaps. They are also looking at rationalising their portfolios and divesting non-core assets to raise cash for redeployment to more strategic acquisitions. Meanwhile, sellers can help the sale process by working with financiers earlier in the process and actively marketing assets to banks prior to bidding.

Given the changing market dynamics, successfully negotiating and bridging the gap between buyer and seller price expectations has also become more challenging than before.

While buyers gear up for value deals, one of their key challenges is to convince stakeholders of the benefits of acquisitions in this climate, as transactions are scrutinised when balance sheets come under pressure. Buyers also need to grapple with the reliability of cashflow forecasts and valuation models in the face of market uncertainties.

Sellers can support the sale process by tailoring their sell-side preparation to the needs of individual buyers. Financial due diligence alone is no longer sufficient to meet the buyer’s new demands in this volatile market. Sell-side preparation now needs to cover a wider spectrum, such as tax, commercial, human resource, technology, operational and separation issues – all within an accelerated timescale. Sellers must increasingly think from the buyer’s perspective, be aware of weaknesses in the business to be divested and be prepared to explain and propose solutions. This increased transparency will no doubt require more preparation work from the seller but reduces the “black box” from a buyer’s perspective, and this may help to bridge price expectation gap between the two parties.

Hard numbers asides, companies with the ability and willingness to buy sometimes encounter the unyielding roadblock of a reluctant seller. More often than not, sentiment comes into play. For example, the founders of family-run businesses and their descendents often guard their legacies closely. The challenge is for the buyer to demonstrate the value proposition of their proposal and inject flexibility in transaction structures. Buyers may need to soften their approach, scale back their ambitions temporarily and concede to a partnership or minority stake, as opposed to full-fledged takeover.

On the other hand, a compelling reason for domestic family businesses to consider M&A is that international players are increasingly penetrating their local markets and intensifying competition. Domestic players need to rethink the viability of staying local and consider the necessity of growing their regional reach, such as via a partnership with regional and global players or through some other form of M&A.

Flexibility is the New Operative Word

We are clearly in a buyers’ market for the foreseeable future. Nonetheless, it remains that both buyers and sellers need to be more flexible than ever. With increasingly volatile markets, both parties must adapt to the changing circumstances throughout the M&A process, collaborating to ensure that their objectives can be met. As this scenario plays out through the deal landscape in various permutations and combinations, we can look forward to a brand new M&A “rule book” with the eventual economic recovery.



This article first appeared in Spotlight on business (Pg 26, Issue 3, 2009). For more information, please visit




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