Newsletter – May 2011
Resurgence of M&A activities: a moment of truth for the private equity sector
In spite of the uncertainties at the heart of the Euro zone and those brought on by the “Arab Spring” uprisings on the price of oil, recovery apparently continues for mergers and acquisitions activities.
This renewal of M&A activity is essentially driven by companies that maintained important levels of liquid assets and who are now using these means to generate external growth.
Private equity players are also participating in this re-launch of M&A activities. In general however, the increase in activity unfolds in a particular context. On one hand, the last significant “vintages”, those immediately preceding the crisis, were characterized by extremely expensive acquisitions from which it will be difficult to turn out a profit. On the other hand, in spite of economic recovery, efforts to raise funds have had slim success and acquisitions are made essentially by means of funds raised just prior to the crisis and not yet invested.
The performance of the current, post-crisis “vintages”, will be fundamental to restoring the reputation of this key sector of company financing. To generate performance in the years to come, the players can no longer count on strong economic growth which characterized the years preceding the financial crisis at the end of 2008. Furthermore, one must admit that the two pillars which served to establish the reputation of outperformance of the sector over several decades, focus on the core business and leverage of the debt applied to companies in the portfolio – are not as effective since being widely integrated into the management practices of most companies.
Thus, the performance of the private equity sector in years to come is even more uncertain than it was previously. To distinguish themselves among their peers and generate the expected level of performance, the players will have to aim more than ever for excellence in all aspects of the management of their portfolio, and these aspects are many.
We will simply highlight here two themes which have significant impact on the performance of the sector.
The first one is the minimization of an aspect we could call “time to full execution mode”, that is the time required for the acquired company to be ready to implement the strategy as defined at the time of closing. Indeed, inaccurate assessment of how the acquired company actually operates evaluation often results in delays, at best. These delays have serious consequences on the effective implementation of the value creation plan and provoke lasting negative effects on the performance of the investment. These delays are always caused by the inability of a part of the organization to deliver results that could be expected as a matter of course.
The second theme is about maximizing vigilant monitoring of the company’s evolution from acquisition to transfer. Rapid changes of the environment and the constraints of globalization can easily jeopardise a company’s capacity to generate value for its shareholders.
Addressing these two themes means dealing with the issue of company value. In spite of facts demonstrating over time that the value of a company lies essentially with its intangible assets (as opposed to “book assets”), the debate on the creation of value within a company remains curiously split into two distinct and separate dimensions. On the one hand, the “financial ” and ” strategic” considerations, more strictly reserved for the Board of Directors and on the other hand, the quality of the management of the company itself, considered as purely “operational”, and therefore the reserved domain of the Executive Board, but if a company’s value is determined by its intangible assets than it is a dynamic concept which absolutely needs to be discussed and managed in an integrated manner.
In this context, we believe that private equity players will have to outclass themselves in one of their key areas of expertise – company diagnostics – to restore the reputation of their industry. As previously stated, this work starts before the effective acquisition of the company and continues, in coherence with the first analyses, throughout the life of the investment.
Resurgence of M&A activities: a moment of truth for the private equity sector
In spite of the uncertainties at the heart of the Euro zone and those brought on by the “Arab Spring” uprisings on the price of oil, recovery apparently continues for mergers and acquisitions activities.
This renewal of M&A activity is essentially driven by companies that maintained important levels of liquid assets and who are now using these means to generate external growth.
Private equity players are also participating in this re-launch of M&A activities. In general however, the increase in activity unfolds in a particular context. On one hand, the last significant “vintages”, those immediately preceding the crisis, were characterized by extremely expensive acquisitions from which it will be difficult to turn out a profit. On the other hand, in spite of economic recovery, efforts to raise funds have had slim success and acquisitions are made essentially by means of funds raised just prior to the crisis and not yet invested.
The performance of the current, post-crisis “vintages”, will be fundamental to restoring the reputation of this key sector of company financing. To generate performance in the years to come, the players can no longer count on strong economic growth which characterized the years preceding the financial crisis at the end of 2008. Furthermore, one must admit that the two pillars which served to establish the reputation of outperformance of the sector over several decades, focus on the core business and leverage of the debt applied to companies in the portfolio – are not as effective since being widely integrated into the management practices of most companies.
Thus, the performance of the private equity sector in years to come is even more uncertain than it was previously. To distinguish themselves among their peers and generate the expected level of performance, the players will have to aim more than ever for excellence in all aspects of the management of their portfolio, and these aspects are many.
We will simply highlight here two themes which have significant impact on the performance of the sector.
The first one is the minimization of an aspect we could call “time to full execution mode”, that is the time required for the acquired company to be ready to implement the strategy as defined at the time of closing. Indeed, inaccurate assessment of how the acquired company actually operates evaluation often results in delays, at best. These delays have serious consequences on the effective implementation of the value creation plan and provoke lasting negative effects on the performance of the investment. These delays are always caused by the inability of a part of the organization to deliver results that could be expected as a matter of course.
The second theme is about maximizing vigilant monitoring of the company’s evolution from acquisition to transfer. Rapid changes of the environment and the constraints of globalization can easily jeopardise a company’s capacity to generate value for its shareholders.
Addressing these two themes means dealing with the issue of company value. In spite of facts demonstrating over time that the value of a company lies essentially with its intangible assets (as opposed to “book assets”), the debate on the creation of value within a company remains curiously split into two distinct and separate dimensions. On the one hand, the “financial ” and ” strategic” considerations, more strictly reserved for the Board of Directors and on the other hand, the quality of the management of the company itself, considered as purely “operational”, and therefore the reserved domain of the Executive Board, but if a company’s value is determined by its intangible assets than it is a dynamic concept which absolutely needs to be discussed and managed in an integrated manner.
In this context, we believe that private equity players will have to outclass themselves in one of their key areas of expertise – company diagnostics – to restore the reputation of their industry. As previously stated, this work starts before the effective acquisition of the company and continues, in coherence with the first analyses, throughout the life of the investment.