Like most areas of the global economy, M&A activity has been adversely affected by the credit crunch. Global activity in 2008 was down compared to 2007, and the downward trend in M&A deal volumes is expected to continue in 2009.
Large, transformational deals, such as BHP Billiton’s €130bn bid for Rio Tinto, have either failed to complete or get off the ground due to concerns over the global economy and the capital constraints of commercial banking.
Yet, opportunities remain. Strategic buyers – corporates with strong balance sheets and access to funding – are predicted to broker transactions. In particular, buyers are awaiting distressed assets to appear on the block, as companies are required to divest non-core businesses and under-performing divisions to achieve their financial and strategic objectives.
It is against this backdrop that Hay Group and Mergermarket conducted research among 560 leading international corporate decision-makers – board level executives who have worked on deals worth in excess of $500m in the past three years – on the role that intangible elements play within the M&A process. Intangibles are defined as the relational, organisational and human capital elements of a transaction.
The survey found that a third of respondents fail to conduct any formal review of the intangibles. Moreover, only 25 per cent of due diligence time is spent quantifying and assessing the intangible elements of a target company, in stable market conditions. Most effort and attention is instead focused on financial due diligence.
During an economic crisis, the immediate priority is to look at the cash flow and how to protect it, and even less consideration is given to the intangible aspects of a deal. Yet, there are long-term strategic considerations which executives must keep in mind.
“Looking at the intangibles now is what will make the deal valuable tomorrow. Executives should avoid importing financial issues into the company. They must ask the question: is there a real strategic advantage in the long-term and can this be done through looking at the intangibles?” says David Derain, global M&A director at Hay Group.
While ignoring intangibles is perhaps understandable in the heat of transaction, it appears irrational in the medium to long term. Companies, which carry out an intangibles review, report an increased transaction success rate (70 per cent) compared with companies that do not (30 per cent).
In hindsight, two-thirds of executives believe an increased and earlier focus on intangibles when engaging in M&A activity would have improved the chances of success of the deal. Finally, the research indicates that 61 per cent of business leaders plan to increase the focus on intangibles in forthcoming M&A deals. This is further evidence that the parameters of what constitutes a successful deal, needs reassessment in light of current market conditions.
Increase your chance of M&A success
Those conscientious, not to mention brave, executives who want to create shareholder value with strategic acquisitions during this period should consider the following points:
Get a clear and accurate picture of the value of your targets’ intangibles. Spend more time and energy on understanding the intangible asset “fit” between your company and your target.
Ask detailed questions as early as possible in the M&A process about
- organisational capital, such as governance, decision-making and culture;
- relationship capital, such as customer loyalty, brand behaviours, supplier networks and joint venture partnerships;
- human capital, such as leadership capability, employee engagement and productivity.
Emphasise cost and revenue savings to secure cash position and to take advantage of the eventual upturn in the economy.
Engage your top team, managers and staff with your vision of the future and the benefits for all.
Lack of attention in terms of protecting the intangibles before, during and after the M&A deal can create major problems for CEOs years after the ink has dried on a contract. A pre-emptive approach right from the start is paramount in achieving successful integration of intangibles, and avoids the need to invest time and money to put things right in the long-term.
- David Derain, global M&A director, Hay Group.
|
EMAIL THIS ARTICLE 
PRINT THIS PAGE