Insight from our experts

Drivers in the M&A market.

Paul Frantz
Quick Facts Name: Michelle Kershaw
Company: Pinsent Masons LLP
Position: Senior Associate
Pinsent Masons logo

Given the current market turmoil, is now the time for your business to consider M&A? Below, Michelle Kershaw, Senior Associate from Pinsent Masons LLP discusses opportunities ripe for the picking.


A recent look back at M&A

It was all going so well in the world of M&A in the first few years of the century. Deals were ever increasing in both volume and value. Credit was readily available, cash rich businesses sought to consolidate and buy ever increasing slices of the market, private equity firms took advantage of the readily available credit to carry out a campaign of buyouts, ensuring they earned high rates of return with a low cash commitment.

Then came the Credit Crunch and everything changed. Almost overnight credit ceased to be available and deals which rely upon it have been stopped in their tracks. For those not needing credit there are new pressures to consider, consumer spending has plummeted causing cash flow problems for even the healthiest of businesses.

The inability to value assets in an ever decreasing market and general uncertainty about the world economy has combined to send deal numbers into free fall. The initial shock was painful for many and yet life, and business, goes on.


An ability to adapt?

Essential to any successful business is an ability to adapt. Whilst motivations and methods may change, businesses must keep moving forward or flounder where they stand. For those companies who have been on the consolidation track, now is the time to step back and take a careful look at their portfolio. What is core and what is not? What is performing and what is struggling?

Whilst disposing of non-core assets in the current market may not ensure an ideal price, the benefits to the core business of additional cash and a more focused approach may make it worthwhile.

For companies with strong balance sheets and lots of cash and Private Equity firms with reserves of equity and unused lines of credit available to them, there are bargains out there ripe for the picking. Well advised companies will reap the rewards of carefully considered and meticulously executed acquisitions.

Thorough due diligence is, more than ever before, essential to understanding a target business and its prospects. Timing, especially where buying a distressed business, is key - buy too soon and you may pay too much, wait too long and the goodwill, customers and employees may slip away. As ever, following through with planned synergies is vital to ensure the success of any deal.


Shifting the focus

Whilst size continues to matter it seems that the focus is moving to the mid market. The larger deals simply require more debt than is available and more risk than many are willing to take.

Certain sectors are also showing signs of flourishing such as pharmaceuticals, telecoms and energy, where bolt on businesses with high margins can generate cash. Alternatively, some buyers are turning their cash to good use protecting their supply chain by bringing struggling suppliers into the fold.

Once the decision has been made to either dispose of or acquire a business, then, provided the target remains solvent, in many ways the process remains unchanged. Issues such as the structure of the deal; valuation of the business and the balance of risk all remain open to negotiation; however, in a market with a limited number of buyers, those shopping may find their bargaining position is improved.


Consider the complications

Where the target business is insolvent, then the issues are significantly different and despite the inherent urgency in acquiring such a business, buyers should be cautious. Aside from the difficulties of valuation and ensuring that such value is protected, there are a number of practical issues to be considered.

Whilst buying the shares in a company may bring unknown liabilities, buying the business out of the company may cause complications with properties, employees and contracts and both routes will have tax implications. Understanding the risks and ensuring they are properly dealt with in a very short period of time can be challenging.

Where a business operates from leasehold premises obtaining landlord's consent in the time available will be difficult. Buyers should therefore consider the risk that leases will be breached and properties no longer available to them. Care should be taken to ensure that the assets the buyer thinks it is acquiring do in fact belong to the seller and not to landlords, shareholders, other group companies or third parties.

Employees are key to any business and a buyer needs to ensure it will receive the employees it expects and no more. Understanding the risks involved in leaving employees behind is essential as surprises can be costly. Finally, as ever, there are tax implications to be borne in mind. Depending on whether you are buying a going concern or simply cherry picking assets, VAT may or may not be payable. Stamp duty land tax may be payable on properties acquired and tax losses may be lost.

Seizing the opportunity

Due diligence is key but the time available to investigate a business will be limited. Companies considering making distressed acquisitions should obtain professional advice now, plan ahead, ensure they have considered the risk areas and be prepared to focus on them.

Ultimately an acquisition of a distressed business is likely to involve at best an incomplete understanding of the assets and liabilities being acquired and at worst, blind faith. Whilst buyers of healthier businesses may find themselves able to negotiate strong contracts which protect them from a number of risks of their chosen target, those acquiring from an insolvency practitioner will have no such luck.

There will be no recourse against the seller for any skeletons discovered in their newly purchased closet and this increased risk should be borne in mind from the outset and factored into the price.

These issues are not new in distressed acquisitions and are by no means insurmountable; where the deal fits the risks are often worthwhile. In short, the M&A market may have stumbled in recent months but the game is certainly not over. There remain good reasons to both buy and sell and for the astute out there the aim must be to position their business to survive the crunch with the best possible outlook, because one thing is inevitable, sooner or later this Credit Crunch will end.