Part I: On Sourcing a Target in the Global Market
Alvarez & Marsal is a global professional services firm that delivers performance improvement, turnaround management and business advisory services. Paul Aversano is a Managing Director in A&M’s Private Equity Services practice and the Global Practice Leader for the firm’s Transaction Advisory Group. For 20 years, Aversano has specialized in leading both buyside and sell-side financial accounting due diligence projects for complex public and private company transactions, as well as transactions in the capital markets. He works to deliver the firm’s services to clients in North America, Europe, the Middle East, India, Asia and Latin America.
Aversano says his years in the business have convinced him that there is a strong trend toward industry-specific M&A expertise: “In the past there were more generalists in market expansion. Now the industry is more focused and going deeper into each sector. Corporations are selling assets and businesses if they are not dominant in the market.” Even in private equity, he says, “The day of generalist funds doing deals are kind of over. It’s a barbell effect in private equity. On the corporate side, they’re going deep where they can dominate a market.” Aversano adds that, in today’s market, most deals are being sourced based primarily on valuation. “Valuations are very high and difficult to transact, so we are seeing deal flow going into places where valuations are lower. In Europe, valuations are lower and we’re seeing more deals going there right now than in the past 10 years. In Brazil, the currency has devalued 40 percent and we’re seeing US-based firms saying the valuations look attractive. They’re saying ‘rather than competing with everyone in the US, let me look at getting into Latin America.’ They’re looking at China and we’re even seeing people doing deals in Africa for the first time.”
Part II: What Makes a Winning Pitch?
“What our clients tell us first and foremost it’s the relationship with the management team of the target company,” says Paul Aversano of Alvarez & Marsal. “I travel all over the world. Everyone’s money is the same color. It boils down to – one – the chemistry of the teams and the culture of working together and – two– what are you going to do for me? Besides the economics, is it going to help us grow, get broader expertise, broader distribution channels.” In his experience, Aversano says, the most successful pitches came from managers who met and got to know the target’s management. “We like the management team and we can see ourselves working with them. Relationships are first priority,” he said. “The second priority obviously is valuation. Also, the certainty of closure and the timing of closure – how quickly you can do it – those are important.” When he started in the M&A business in the 1990s, the typical diligence period was 90 days. “Then the dot- com boom came and it was five days,” he notes.
Part III: Partner Identified – Working Out the Deal
A&M’s Paul Aversano says the confidentiality agreement “becomes paramount where you have one or two competitors in a particular industry” involved in a deal. “We’re seeing more and more ‘clean rooms’ – where the buyer and seller out put everything – data rooms on steroids. Five years ago I didn’t know the term. Now it’s becoming a trend.”
“If a client of mine really likes the target they will want to spend as much time with management pre-LOI as possible,” said A&M’s Paul Aversano. “The more information you can get before the LOI, the more certain you can be that the deal will work. Sometimes it works against you – somebody may bid higher.” Is there ever enough information from these meetings? Aversano says yes, but that it must be confirmed with due diligence. “Cross-border – outside of the US and Europe – it is very difficult to spend more time with management. Part of it is geographic, but also it’s cultural.” He said some Asian countries will not allow foreigners to gain majority control. “In India, you have to deal with ‘promoters’ [agents who
represent the management teams] you may not even get in to meet with the actual management.” So from a cross-border perspective, Aversano says, gaining enough information is challenging. But as noted in previous chapters of this series, the global M&A market is maturing; advisors, lawyers and accountants are gaining experience in cross-border deals. “Yes the emerging markets are maturing, but people ran in to these high-growth markets 10 even 5 years ago and got burned and that’s still fresh in their minds.”
Part IV: The Letter of Intent: Good Faith but Intense Diligence Ahead
A&M’s Paul Aversano agrees that cultural issues are a big thing. In deciding to proceed to the LOI, Aversano asks “how certain are we going to get to the finish line with these folks. Anything can throw off a deal. There’s so much geopolitical risk these days – an Ebola virus in Africa affects the US stock market. There’s volatility in China, turmoil in the Ukraine and the Middle East.”
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