M&As - ENA M&As: strategic divestment approach.
Eversheds' study suggests that changes in the commercial and regulatory landscape have made deals less certain and more complex, with divestments taking longer to complete -- with most companies spending on average three to six months on a routine deal, increasing to one to two years for larger deals.
There is a step change in how divestments are being managed, particularly among the most experienced practitioners with 57 per cent taking a new approach to divestments, with those who had worked on 10 or more deals in the past five years being the most likely to change their approach to make deals more certain to close.
These sellers are now spending significantly more time in the early stages of the deal, with a noticeable shift from a 'sign and manage' process to a 'manage and sign' approach, which involves starting deal preparation earlier, creating detailed separation plans and more vendor due diligence. This follows the approach Eversheds has been developing with its new Dealmaster tool.
In assessing potential buyers, more than half of respondents (54 per cent) said price was not their main consideration, with deal certainty taking precedence for many sellers. Consequently, sellers are focussing on other issues such as the buyer's historic track record and credibility in completing deals and running a business, the likelihood of competition or other regulatory delays, and the welfare of employees or other stakeholders.
Despite this step change, the study shows that there is still significant conflict within businesses around how to manage divestment activity. More than two thirds (72 per cent) of in-house lawyer respondents had experienced tensions or significant differences with their business colleagues when planning a divestment. The common complaint among this group was that divestments were more complicated, yet did not receive the same attention from the business as acquisitions.
Added to this, the study reveals the most problematic area of a divestment to be around understanding precisely what is being sold. This is due to the 20-year trend in integrating businesses into shared service centres rather than maintaining standalone operations and systems. The top challenge cited by respondents was the difficulty in identifying and valuing assets for sale and allocating appropriate costs to these assets. IT separation and transfer, centralised finances and crossover of employee and management function emerge from the report as particularly problematic areas for businesses and are the current drivers for a more planned approach. Respondents highlighted how the lack of integration between a business' legal, IT and commercial personnel makes it difficult to identify potential issues in this area, leading to delays and post-closure issues.
Unlike many of the other regions that participated in the survey, Middle Eastern respondents did not suffer with excessive compliance, unpredictable authorities, or unclear regulatory requirements. Instead, it would appear that the region poses some unique hurdles to divestment, with almost 60 per cent of respondents indicating that challenges often occurred at the negotiation stage of a deal.
The report also reveals early planning to be essential on cross border deals. Nadim Kayyali, Head of Corporate for Eversheds in the Middle East commented, "Put simply, breaking up is becoming much harder to do. Separating assets is increasingly complicated due to the centralised nature of many organisations. Deal teams must have the opportunity to prepare their businesses for the challenges they face on complicated divestments. This requires a much closer working relationship between the lawyers negotiating deal terms and regulatory clearances, and the operations team executing the commercial transaction and separation plans -- a point that came through very clearly from the businesses involved in the study."
Kayyali added, "It is clear from the report that businesses need to look closely at their current processes around managing divestments to ensure they maximise the benefit of such deals, rather than tying themselves up in separation knots further down the line which could have been avoided at an earlier stage."
Collectively the respondents to the Eversheds study have worked on more than 2,400 M&A deals across 60 jurisdictions during the past five years. Nearly two fifths of these were divestments. Drawing on this vast experience, the study concludes with six key points to increasing deal value and certainty:
- Adopt a clear and cooperative approach to communicating with the buyer
- Keep in regular contact with local management at the target company to maintain morale
- Have clear separation plans, which you share with the buyer
- Keep a close eye on conflicts of interest n Build flexibility into legal contracts n Plan for delays
Nadim Kayyali concluded, "The report shows that a typical separation does not end at completion of the divestment and, often, due to transitional issues, separation can continue for years after the deal has supposedly closed. As the Eversheds M&A Blueprint revealed integration teams to be essential for the buyer, Streamlining for Success shows separation teams for the seller to be equally important."
41 per cent of businesses are focussed on divestment and acquisition.
54 per cent of businesses said price was not main consideration.
Study reveals a shift towards a 'manage and sign'.
THE MAIN CHALLENGES TO DEALS IN THE REGION INCLUDE:
Larger percentage of family-owned businesses: Businesses based in the Middle East are often family owned and therefore deals require approval from multiple family members before they close. Respondents reported delays waiting for commercial terms to be authorised by all counterparty stakeholders.
Cultural nuances: Respondents from small- to mid-sized entities operating in the Middle East noted that it was easier to sell intra- regionally than it was to deal with Asian, European, or US acquirers. Largely this was because management teams were more comfortable being transferred to a company that shared their cultural and operational approach to business. Respondents also noted that management teams not wanting to be sold to a foreign buyer had the potential to break a deal.
Restrictions on foreign investors: Laws restricting foreign ownership to minority stakes or demanding that any foreign buyer work with a local JV partner were seen as the most challenging aspect of any deal involving a counterparty from outside the region. The same issue was reported by multinationals in the region. They noted that, when selling their stake in a business, they were often reliant on the behaviour of an unpredictable local partner that had little incentive to dress the business up for potential buyers.
Source: Streamlining for success
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