Research announced today by Deloitte, the business advisory firm, has found that private equity has become hugely successful in defeating corporates in auctions, winning 74% of bids compared with only 30% five years ago.  By contrast, over half of companies in a turnaround situation state that failed M&A transactions are the chief cause of their woes.

Aidan Birkett, Managing Partner of Corporate Finance at Deloitte, commented: “In the corporate market, M&A really cuts the wheat from the chaff.  Many of the top performing companies in the FTSE 100 have achieved their status through the implementation of ambitious M&A strategies but success is determined by the quality of the in-house team.  Our research has found that most corporates have their rose-tinted spectacles on when assessing their own M&A capability.  Private equity, by contrast, has truly professionalised the process over recent years and is recognised for this achievement: the CFOs that we polled scored private equity capability as significantly higher than their own.  Both the private equity and corporate markets are piling money into M&A but their ability to pull it off diverges considerably.”

The research also shows the importance of engaging in the current M&A market.  Andrew Curwen, Head of European M&A at Deloitte, added:  “M&A should no longer be an optional extra for the corporate market. The influx of capital into private equity means that there could be around €1 trillion available to the European private equity market over the next three years: there are few corporates of any size who are now out of the target range of private equity.  It is important to remember that it is not just a question of throwing money at a deal.  Many private equity houses are winning at auction because they have a better execution model.

“Around half of FTSE 350 CFOs polled in this research said that private equity will have a high impact on driving deals in their industry.  Boards are not only under a great deal of external competitive pressure but there is pressure from activist shareholders too.  For many companies, riskier cross-border transactions are seen as one of the only ways to see off the competition and transform growth.  Indeed, we have seen a 78% increase in deals outside of existing geographical markets in the last three years.  Corporates need to shape up to compete successfully in the racier, international M&A market.”

Key findings:

• CFOs scored private equity capability significantly higher than corporates across most parts of an M&A transaction, including being more skilled in using capital markets, tactics in auctions and moving at speed;
• Half of CFOs believe private equity will have a high or very high impact on driving deals in their industries and three quarters believe this impact will grow;
• Over half of businesses with average performance cited failed M&A transactions as a chief cause of their performance problems;
• Most finance directors surveyed thought their M&A capability above average on all aspects of a transaction.

Angus Knowles-Cutler, Post Merger Integration Partner at Deloitte, added: “There is a more sinister side to corporate inefficiency in M&A.  We have found that poorly executed M&A is a leading cause of distress in an underperforming business.  Our own experience has shown that many corporates hold on to acquired businesses for less than five years, selling the business on for a fraction of the price when they feel the merger has not worked.  While the motivation behind this short-term approach is very different in the corporate market to the private equity market, it is a stark reminder of how corporates want to see success in the same sorts of time scale as private equity.  With this in mind, the corporate market would do well to look at and learn from the best practice exhibited by the smartest corporates and private equity houses.  Indeed we are already seeing ‘hybrid’ companies emerge: public listed companies that operate more like private equity houses.”

Key differentiators between private equity and corporate M&A:

• Private equity has a clarity of purpose around a transaction, often absent in corporate M&A;
• There is a lack of focus on achieving and monitoring success in the corporate M&A market, which is the key driving factor in private equity houses as they look to exit;
• Private equity devotes significant resources to researching targets, often well ahead of a business coming into play.  By contrast corporates typically have a more limited approach;
• While it is relatively easy for private equity to put incentive programmes in place for management teams, it appears that some corporates put this in the ‘too difficult’ box.

Ends

About the research

The report titled ‘Corporate fight back’ is based on an extensive, research programme.  To investigate fully the issue of improving corporates’ M&A capabilities Deloitte undertook research in the following four areas:

• Analysis of 1065 transactions involving UK-listed companies between 2001 and 2006 worth more than £113 billion in 11 different sectors to understand how the dynamics of deals are changing;
• Case studies based on face-to-face interviews with over 20 heads of M&A at leading FTSE 350 corporates on the application of private equity best practice;
• Commissioned Ipsos-Mori to interview independently 65 FTSE 350 CFOs or Finance Directors on the M&A capabilities of UK-listed corporates;
• Appraisal of 64 deals over the last several years on the preparedness of corporates to extract value from transactions through integration.

This year-long research project synthesises each of these separate strands to investigate how corporates can improve their M&A transactional capability.

About Deloitte

In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities.  Neither DTT nor any of its member firms has any liability for each other’s omissions.  Services are provided by member firms or their subsidiaries and not by DTT.  Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.
 
Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.