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Wednesday, 5th August 2020
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Private equity continues to dominate M&A deals - is it time for corporates to fight back? Back  
David Carson outlines how there has been a shift in the M&A marketplace with private equity now out-performing corporate. This is putting in-house teams under increasing pressure, he says and asks whether it is time now for the corporates to fight back?
M&A activity may have reached the dizzy heights of the dot com boom but a new era has emerged. While the M&A market has leapt back to life over the last three years, three forces have converged to reshape the fundamental dynamics of the M&A marketplace. Investor activism and globalisation have contributed to this shift but it is private capital and, in particular, private equity that has really shaken the market up. Corporate teams are now finding that they could learn a thing or two from their private equity counterparts.

Recent years have seen investors take a much more proactive interest in the ability of public companies to get the most value out of the portfolio of corporate assets they control. Coupled with globalisation coming to the fore for many companies who are increasingly looking to enter overseas markets, often through acquisitions, we are once again seeing a huge amount of M&A activity. 2006 was a record year for activity and 2007 certainly looks promising. The most interesting development however may well be the fact the private equity has grown so rapidly over the last few years that it is now outmanoeuvring corporates in transactions.

Private equity - forging ahead
Recent research carried out by Deloitte in the UK found that private equity has become hugely successful in defeating corporates in auctions, winning 74 per cent of bids compared with only 30 per cent five years ago. This is as a result of better execution rather than paying more. Private equity has truly professionalised the process over recent years and is recognised for this achievement: the CFOs that were polled scored private equity capability as significantly higher than their own. Both private equity and corporate markets are piling money into M&A but their ability to pull it off diverges considerably.

We are certainly seeing a similar situation developing here. A number of high profile investors are putting their mark on the M&A landscape in Ireland. Recent examples include Ion Equity's acquisitions of SWS Group and of Shell.

The corporate dilemma
Of course, increased competition in the marketplace is to be welcomed and the current situation means that corporate in-house teams are certainly sitting up and taking notice. The fact that CFOs think private equity more capable speaks volumes. Most elite world beating companies are built through savvy, well executed M&A strategies. If they are losing out at auctions to investors, ambitious expansion goals may well be harder to attain. Success is determined by the quality of the in-house team and the research has found that many corporates have their rose-tinted spectacles on when assessing their own M&A capability.

There are lessons to be learnt by Irish companies who are engaging in M&A activity. For those companies in Ireland who are looking to expand, increased professionalism and diligence in their acquisition process is certainly the order of the day.

But perhaps more importantly, companies who may be acquisition targets to foreign companies need to be aware of the options available to them for a successful transaction. Private equity can not be overlooked as a suitor as, firstly and quite frankly, they have money to spend. 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.

In addition, the success of a deal and the ability of a suitor to ensure a successful transition period should be of utmost concern to a target. It is important to remember that it is not just a question of throwing money at a deal. The execution model used by a potential suitor is critical to the success of the deal and many private equity houses are winning at auction because they have a better execution model.

The upshot of poor execution
There is a more sinister side to corporate inefficiency in M&A. Our experience shows that poorly executed M&A is a leading cause of distress in an underperforming business. 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.

Best practice - top tips
So how do corporate teams address this problem? Making sure that a company develops a focussed, faster moving M&A capability for the long term should be top of the corporate agenda. The following five disciplines should be looked at:
Clarity of Purpose: M&A should be seen as a core discipline. Responsibilities for transactions should be very clear across all phases of every transaction.

Parent Power: Success requires corporates to beef-up their parenting prowess. Financial institutions are stepping up the pressure on listed firms to demonstrate they are the best owners of their portfolio of companies.

Know your prey: Given the pace at which M&A activity is conducted, corporates need to devote significant resources to identifying targets well ahead of them coming into play.
Incentives to execute: Following the completion of a deal, intense early action and a huge focus on setting the near-term objectives will lead to a profitable exit.

Integration: Too few corporates treat the integration as a separate part of the overall transaction. Best practice firms start planning for the integration in the pre-deal phase.

Looking ahead…
A significant percentage of CFOs polled in the recent Deloitte 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. This increased activity will translate into the Irish marketplace and will mean 2007 will be another busy year for M&A activity.

Given the increased competition, riskier cross-border transactions are seen as one of the only ways to see off the competition and transform growth. This will in turn put corporate teams under the spotlight. In order to start the fightback against private equity, corporates need to shape up now in order to compete successfully in both the national and international M&A market.

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