Business Intelligence Workshop 4 Email

The 2008 Business Intelligence Series ended amidst widespread uncertainty over the world economy. The opening workshop in the 2009 Business Intelligence Series entitled “Mergers & Acquisitions Update: The Buy Side” took place at the Stamford Plaza, Auckland, on Wednesday 12 August 2009 with over 120 M&A market participants present and keen to discuss the current state of the New Zealand M&A market, in particular from a buyer’s perspective.

Mark Lowndes introduced the speakers and the topics. In doing so, Mark referred to the view of some commentators that as many as 70% of acquisitions are ultimately destructive of value. This leads us to question why acquisitive parties persist with deals that add no value or worse, reduce value for stakeholders. Against this background, however, Mark commented that many acquirers see significant opportunity in the current market.

All this set the scene for a very interesting and authoritative session.

The three speakers, Paul Winton, Grant McGregor and Tenby Powell took turn to share their view of the recent and current M&A market, from a number of different perspectives. The presentations were then followed by panel discussion and some welcome audience participation.

Current State of the M&A Market

Paul Winton and Grant McGregor gave some interesting insights into the recent, current and future state of the New Zealand M&A market. Tenby Powell’s address struck a note of optimism for deal making in 2010, a year in which he sees plenty of opportunity.

Paul began by examining some key M&A trends for acquirers and then focussed on two specific factors: identifying the value proposition in a deal and how to lock in advisor value. Interestingly, the aims of middle market business owners have not fundamentally changed over the last few years. Business owners are still seeking to exit but as many are now seeking to extract time as dollars. Of particular interest to the advisor audience was Paul’s estimate that by 2016 there would be 30-40% more deals than today. Some insightful forecasting proposed that business buyers as a group would be younger and poorer than today’s counterparts.

Value Add: Paul’s data echoed Mark’s opening comments – from a sample of 4,000 acquisitions analysed between 1992 and 2006, nearly 60% were value destructive. On average, we are getting it wrong in 6 out of 10 attempts. Paul went on to demonstrate how important it is for acquirers to explicitly and quantitatively understand the value add of a deal and for the acquirer’s team to keep this as its firm unwavering focus.

Advisor Value: Paul identified 3 problems with transaction activity today:

Grant McGregor took the floor and the opportunity to introduce the key findings from the 2009 ANZ Privately-Owned Business Barometer. Before going on to discuss the current state of succession planning and taking a look at acquisition funding, Grant summarised the position of many businesses as, cost down, cash in and succession on the back-burner.

Succession: Grant gave the example of a number of businesses that had been taken off the market over the last year or so. With New Zealand business owners being comparatively poorly prepared for exit, things had, statistically, worsened over the last months with now only approximately 11% of owners having any real exit strategy. Grant echoed earlier statements when he said that owners were now as much as ever keen to exit time from their businesses but that some are just holding on. An emerging trend, according to Grant, is partial exit as a way to facilitate ownership transition.

The number of forced sellers has increased which is why a number of commentators see that opportunities abound for today’s acquirers.

Deal Finance: A heartening statistic is the comparative health of Australian and New Zealand banks which number 4 of only 11 banks worldwide with a AA credit rating. In terms of how acquisition funding is being deployed, Grant noted that there had been a return to the debt structures of 5 years ago (but at a higher price). To summarise some of Grant’s other comments:

It was clear from Tenby’s address that there is significant room for the personal approach in the acquisition of many SMEs in New Zealand. Using the example of the purchase of Hirepool businesses, Tenby gave a compelling view that many New Zealand owner-operators prefer the hands-on, sleeves-up, sitting room rather than boardroom discussion. This theme was developed in part of the panel discussion which examined the importance of relationship building with vendors as a way of assessing business opportunities and locking-in post-completion value.

The final section of the workshop presented a healthy panel and audience discussion of some pertinent issues. To summarise some of the key points:

Relationship Building with Vendors: Tenby suggested that where possible a significant amount of time should be invested in developing relationships with vendors. This was a very useful opportunity for due diligence, in particular on the abilities of key management for the post-completion phase.

Where are the M&A deals? The panel agreed that there will be increased activity in the medium term, perhaps picking up in 12 to 18 months. There is, however, plenty of current opportunity for buyers with a number of forced sales, as a result of over-leverage and other issues, coming to the market.

What are the 3 Secrets of Effective Due Diligence? Given the amount of M&A experience in the audience, Tenby offered some very practical pointers from the buyer’s perspective:

What do Successful Acquirers do to Capture Value? Again, the panel gave some very practical pointers, including: