M&A: The rules have changed: transactions for the future

Winning in a Changing World
1 April 2010

Lieve Creten Lieve Creten, Partner Deloitte

What can we expect from 2010 after the abominable merger and take-over market situation during the recent crisis? Lieve Creten, Partner at Deloitte, has a clear and definite answer: “Both large companies and private equity players are poised to strike.”

How has the merger and take-over market weathered the crisis?

Creten:As the crisis raged, the merger and takeover market all but ground to a halt. Traditionally, two significant players are active: larger companies or corporations and private equity players. Corporations have been too busy limiting the damage suffered during the crisis while private equity players were unable to find sufficient means to finance transactions due to the credit crisis. Not surprisingly, companies contemplating selling out were keenly aware of just how difficult finding a buyer would prove to be: there were simply not enough means and uncertainty towered. Even when sufficient funds were raised for a purchase, disagreement between sellers’ high price expectations and the low prices buyers were prepared to pay often proved insurmountable.

Is the transaction market now picking up?

Creten: Getting a detailed overview of the transaction field is always a difficult feat, and of course I cannot name any customers. What I can say is that quite a few transactions are in the pipeline. Additionally, a recent study by over a thousand financial experts predicts a wave of mergers and take-overs still this year. It will be a buyer’s market where ‘the right active at the right price’ will be the predominant mantra. Focus will be on fundamentally healthy companies in harm’s way through the crisis, companies with stable cash flows or niche companies capable of filling a void in the buyer’s strategy.
Things have been set in motion on the transaction market. Numerous entrepreneurs have been thinking of selling their companies, which the crisis of course made impossible. Those are the very entrepreneurs who are now preparing to market their companies.

So this is the right time to consider a take-over?

Creten: Absolutely. Precisely because of the low number of transactions we are seeing now. It is much like the stock market really: have the courage to stem the current. The crisis has brought about a divide: every sector has companies struggling to survive and companies that are thriving. If you are part of the latter group, now is the time to act and gain a competitive edge for the future.
Every potential buyer must ask himself: where does my future lie? What will be my footprint over the next four to five years? Of course, acting now requires a great deal of courage and caution. Here scenario planning might prove its worth. The market is too much in motion to assume just one fixed plot. Keep in mind how your decision is impacted by the effects of various parameters. If you have these covered, do not hesitate to act.

The take-over market is just like the stock market: have the courage to stem the current.

Lieve Creten, partner Deloitte


Are private equity players steering clear of the transaction market?

Creten: Most certainly not. Whichever way you look at it, mergers and take-overs are the core business of private equity. The credit crisis all but ground the transaction market to a halt for private equity players. However, by now countless private equity players are anxious to close transactions once more. Quite a few private equity players still have considerable funds to invest. Though they will be forced to turn their models around. Where before the financial lever of leverage was the weapon of choice for winning transactions, this will no longer hold true in the future.

What advice do you have for managers today?

Creten: Contemplate your strategy over a five year period. Everyone ought to be asking themselves: what is non-core, what might I do without? While at the same time asking: what is my core business, and which opportunities are available to reinforce that business? Keep in mind the various levels on which this must take place: which products/services will I be selling in which markets, which core processes are important and which are better outsourced? Today we are seeing optimism returning, but organic growth remains slow. Compared to the start of 2009, the markets show increased stability, giving companies and private equity more confidence to act. Though the rules have changed, there are plenty of opportunities to execute a carefully planned and well informed growth strategy. Who knows, perhaps 2010 will be a great vintage for take-overs!