In pursuit of Corporate RecoveryClear-headed thinking |
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More than ever, it is vital that businesses adopt clear-headed thinking and take decisive action to optimise business value and achieve long-term goals. At Deloitte, our Corporate Finance specialists have the experience, insight and knowledge to support you on the road to corporate recovery.
Your challenge, our response
Question 2: How can value be maximised from M&A?
Question 3: What factors need to be considered when exiting an underperforming or non-core business?
Question 1: There’s talk that the economy is coming out of recession. What new challenges will this pose?
Our response
“During a recession, and especially one where credit has been as hard to obtain as recently, many organisations focus on managing down working capital to both generate cash and to minimise their exposure to bad debt and obsolete inventory.
“To take advantage of the opportunities presented for growth as the economy recovers, there can be a need for selective reinvestment in some aspects of working capital in order to gain market share and volume. The choice of where and how much to invest is often the difference between fully exploiting these opportunities or not.“
Andrew Harris, Associate Partner in Reorganisation Services 020 7936 3000
"Turnaround experts are very busy at the moment however much of the work is restructuring balance sheets rather than underlying businesses. That is a reflection of the fact that the underlying trading has not deteriorated too badly in many companies. Looking forward there will still be a large number of over leveraged balance sheets to be fixed either by equity injection, debt write off or M&A. The impending wave of facilities to be refinanced will mean that much of this activity will be in 2010.”
Henry Nicholson, Partner in Reorganisation Services 020 7936 3000
Question 2: How can value be maximised from M&A?
Our response
"Value is largely created or destroyed only once an acquisition has been completed. The most common source of value destruction is a poorly managed integration…failing to develop an integration blueprint, failing to be clear about how you will deliver the synergies, failing to appoint a dedicated integration Director, failing to manage the competing interests of different stakeholder groups - these are the common errors that time and time again lead to value erosion."
Belinda Richards, Partner in Post Merger Integration 020 7936 3000
“Demergers have a good record of creating value for both Parents and the de-merged child, especially in Manufacturing and TMT where share prices have risen on average 38% and 29% respectively after a year (based on research on 10 years of demergers around the world). A key factor driving value creation is, surprisingly, not the prevailing economic conditions, but the period spent preparing for separation. Companies that spend 9 months between announcing the separation and completing the deal and therefore can best prepare their business for sale and transfer, create twice as much value as those that do it faster.”
George Budden, Partner in Post Merger Integration 020 7936 3000
“Current market conditions are changing the emphasis of M&A processes which is impacting the due diligence process in general. With less competitive sale processes through vendor controlled auctions, buyers are much more in control of the due diligence. Acquisition due diligence is tending to focus more on the key value drivers and risks in the initial stages enabling buyers to get comfortable with valuations to avoid unnecessarily investing time and cost. Confirmatory due diligence is tending to be more back end loaded. In addition, the emphasis of acquisition due diligence is being focused more on the future prospects of the target business, given current market conditions, which includes detailed analysis of restructuring plans and how the buyer will integrate the target into existing operations.”
Tim Mahapatra, Partner, Head of Transaction Services 020 7936 3000
"Funding for acquisitions clearly needs to be appropriate to the deal and the market opportunity. The start point in today's market should be a cautious structure with plenty of equity style funding and a very "manageable" quantum of debt. The business needs to be able to operate "freely" in its market and must not be over burdened by the funding structure placed above it."
"If some kind of "earn out" is necessary to bridge a pricing gap then the terms of the earn-out clearly need to be factored into the deal structure."
Paul Zimmerman, Partner in Corporate Finance Advisory 020 7936 3000
Question 3: What factors need to be considered when exiting an underperforming or non-core business?
Our response
"Often the devil really is in the detail. Every aspect of the business needs to be considered and no stone left unturned. By properly preparing and addressing the issues up front our clients reduce the risk of price chipping and failed deals."
Maxine Saunders, Partner in Transaction Services 020 7936 3000
“On occasions circumstances result in time being of the essence in exiting from underperforming or non-core activities. Our experience in conducting over 30 Fast Track M&A disposals over the last 2 years provides clients with the insight, support and advice they need to maximize value in often difficult situations.”
Anup Shah, Lead Partner in Special Situations 020 7936 3000
"One commonly overlooked error when disposing of a non-core businesses is the failure to consider how complex the carve-out issues and execution will be. Even a simple carve-out can take many months to deliver - and in the meantime, business performance will need to be maintained to preserve the value of the business. Focussing on the early development and pricing of TSA's will help to shorten the timeline to a deal and will open the door to the widest range of possible buyers. This will minimise any value leakage that will inevitably arise from a slower approach to managing the execution of the carve-out."
Belinda Richards, Partner in Post Merger Integration 020 7936 3000
“Sometimes the managed wind down of a business is preferable over a sale; for example, you may not want to sell to a competitor (and competitors are the only potential buyers) or the sales value is less than the residual value on closure.” The key factors to consider are likely to include:
- How can you maximise the residual value
- Do you close the business rapidly or through a managed wind down (and over what timeframe)
- How do you minimise the cost
- What are the contingency plans
- What are the on-going liabilities (e.g. pensions)
- How do you optimise the tax position
- How can you minimise the reputational impact
- What are the operational practicalities (inc. employee, customer and supplier responses)
David Taylor, Director in Reorganisation Services 020 7936 3000