Lead advisory and cross-border transactions in the post-pandemic era

Lead advisory and cross-border transactions in the post-pandemic era

Benjamin Yeo

Mergers and Acquisitions (M&A) stalled during the initial months after the global outbreak of COVID-19 in early 2020 due to the uncertainty created in global markets and travel restrictions hindering the ability to conduct physical due diligence. With a 'new normal' to how transactions are being executed in the post-pandemic era, there is now a flurry of M&A activity across the APAC region.
 
At the Moore Asia Pacific Online Conference held in December 2020, which focused on Meeting the Challenges Post Pandemic, Benjamin Yeo – Chair of the Moore Australia National Corporate Finance Committee, presents an overview of the Lead Advisory Services offered by the Moore Australia Corporate Finance Division, while sharing insights on how cross border transactions in the Asia Pacific (APAC) region differ and what makes them successful.
 



WHAT IS LEAD ADVISORY?
While most of the Moore APAC Offices provide Transaction Support Services including Financial Modelling; Independent Assurance; Financial Due Diligence; Valuation; and Independent Experts Reports, the Australian office has the internal expertise to provide Lead Advisory Services such as Divestments and Sales; Mergers and Acquisitions; Takeovers; Capital Raisings; and Strategic and Feasibility Advice.
 
Divestment and Sales
When engaged to advise on a divestment or sale transaction, the key stages and services include the following:
 
A discovery phase whereby we gain an in depth understanding of the business that is to be divested.

  • This includes a sector analysis and recent transaction report covering divestments and sales that have occurred in the sector over the past 12-24months.

The capital structure is then assessed, fair market value calculated, and the most suitable transaction structure is determined that will give the greatest chance of a successful sale.

Key to this is the creation of a tailored transaction process with a clear and concise marketing message that enables us to identify strategic buyers that would benefit from acquiring the business, and then connecting with their key decision makers.

 
As part of our engagement we manage other transaction advisers including lawyers, auditors, independent valuers and buy side advisors to limit management distraction and to ensure that the impact to the daily management of the business is minimised.
 
Once a suitable acquirer has been engaged, the formal negotiation of the transaction proceeds whereby we ensure price and terms are maximised. Finally, sale agreements are executed with the aid of independent legal advice, and the transaction is completed pending settlement.
 
Mergers and Acquisitions
With divestments and sales, we sit on the 'sell' side of the transaction, however with mergers and acquisitions we sit on the 'buy' side. The advisory styles between the two, while on different sides of the table, have similarities hence the two services go hand in hand.
 
When providing M&A advisory services, we begin by understanding the business and its strategy. This is crucial in enabling us to identify, evaluate, and then access acquisition targets.
 
The same platforms used for a sell side transaction is used to analyse the market and discover who is active in the sector, determining and assessing likely competition, including strengths and weaknesses, and various funding options that are available including debt, equity or a hybrid of both.
 
The benefit of being a member of the Moore Global network is that when we are engaged to advise on M&A, we can reach out to the regional offices and enquire if they have any potential strategy opportunities in their clients base, and facilitate a cross-border transaction (either domestically or internationally).
 
Similar to the Divestment and Sales Insight Reports generated, the M&A Strategy Reports produced are incredibly insightful and as a result are highly valued by our clients. In addition to the Strategy Reports is the development of a financial model for both the acquiring business as well as the business that is for sale. This enables the value of both businesses to be assessed, and provide insights into how the consolidated business will perform financially moving forward. This greatly assists in finalising the optimal acquisition structure and the funding options that are available.
 
Furthermore, we manage the due diligence process to minimise risk in transaction documentation including limited scope financial due diligence reports. However unlike a sell side transaction, once a suitable acquisition target has been engaged and the modelling and due diligence work is completed, the formal negotiation of the transaction proceeds whereby we ensure acquisition price is minimised and terms favourable to the acquirer.
 
Once price and terms have been agreed, sale agreements are drawn up by the legal advisers, then executed and the acquisition transaction is formally completed pending settlement.
 
Takeovers
In addition to buy and sell side advisory, the Corporate Finance Team is engaged to provide expert advice in both the defence and execution of takeover attempts. Defending a takeover is highly strategic with insights into motives, the ability to conduct extra ordinary due diligence, and the competence to mediate stakeholders are key advisory skills essential to any successful takeover defence.
 
Engaging an experienced Corporate Finance Adviser who has worked on both sides of a takeover transaction is essential, and the Moore Australia Corporate Finance Division is fortunate to have a number of advisers with this required experience.
 
Capital Raising
The the unique advice that the Moore Australia Corporate Finance Division can provide businesses looking to raise capital either via equity, debt or a hybrid of both includes:

  • Optimal offer structure, capital structure and valuation;

  • Suitable candidates to act as Chair, Executive and Non-Executive Directors;

  • Assistance with preparation of historical and forecast financial information;

  • Evaluation and appointment of advisers including Lead Manager(s);

  • Assistance with drafting marketing materials including Company Presentations, Term Sheets and Offer Documents;

  • Coordination of work streams in relation to offer marketing; and

  • Stakeholder management.

Strategic and Feasibility Advice
This is the Corporate Finance Consulting Service in which we provide an array of financial advice including:

  • Creating deal strategies;

  • Analysing and assessing industry dynamics;

  • Providing independent advice on valuations and producing expert financial models;

  • Develop capital structures and advice on financing options available in the current economic climate;

  • Manage stakeholders including debt providers;

  • Identify, evaluate and assess potential targets and suitors, including capabilities fit; and

  • Mediate between businesses as an independent advisor.

These five service lines make up the core Lead Advisory capabilities of the Moore Australia Corporate Finance Division.
 
ASIA-PACIFIC CROSS BORDER TRANSACTIONS IN THE POST PANDEMIC ERA
With the world currently wrestling COVID-19, and international travel heavily impacted, there is no doubt that the inability to conduct in person due diligence has impacted on the execution of cross border transactions.
 
Despite this, there remains strong interest within the Asia-Pacific Region for M&A transactions to continue and while the completion has slowed, the region in comparison to others remains highly active. This is partially explained by low cash rate across the region that enables companies to transact when previously the cost of debt prohibited such transactions.
 
Additionally, the market has been recently buoyed by the fact that there are multiple vaccinations being developed by global pharmaceutical companies scheduled to be released in the coming weeks and months. This will greatly assist the recovery from the effect of COVID-19 pandemic and see an increase in execution of those cross-border transactions within the APAC region that have been on hold during the past six months.
 
APAC’s position in the global transaction market has grown significantly over the last five years. While it is smaller than North America’s, the Asia-Pacific’s total transaction value was bigger than Europe's and all indications are that this gap will increase due to COVID-19 creating sustained uncertainty across the European region.
 
In saying this however, cross border transactions within our region have several unique attributes including:
 
Many companies in the region are not experienced in the inorganic growth model

  • This includes how to identify targets, close deals, and integrate new assets, and falls into the hands of Lead Advisory Teams in the APAC region who can provide this expert advice.

Small and medium-size transactions are most popular

  • Compared with other regions, small and mid-size deals (those with a deal value of less than USD$500 million) are far more common in APAC, making up approximately 50% by value in the region, compared with 18% by value for the rest of the world.

  • This falls directly into the market serviced by the Moore Network.

Minority deals represent almost half of all deal value

  • Transactions for APAC-based targets are far more likely to involve minority stakes, rather than controlling stakes or full buyouts.

  • As with smaller deal sizes in the region, the prevalence of minority-stakes deals reflects the dynamic market within our region.

  • Traditional private equity, institutional and family office investors are expanding to earlier rounds of minority investment to ensure that they have access for potential full acquisitions later on, especially regarding rapidly developing digital-economy-driven targets.

  • Clients within the Moore Network should always be open to entertaining interest due to this.

Investors are expanding into new industries instead of consolidating

  • A common deal strategy in any market is to buy multiple assets in the same industry and consolidate them, to expand their footprint, capture synergies, and generate scale efficiencies.

  • That strategy applies in APAC, but a relatively higher share of buyers in the region are now looking to explore new industries, compared with those in the rest of the world due to the restriction of globalisation as a result of COVID-19.

  • Buyers are looking beyond the traditional consolidation strategy to find growth in adjacent and differentiated industries, yet still create sustainable value.

  • Even though economic growth in APAC is slowing, it remains higher than in other markets.

As the APAC region is staring at the prospect of prolonged weak economic growth due to the effects of COVID-19 on businesses, advisors need to be aware that, historically, times of economic challenges in APAC have represented opportunities for value-creating M&A activity.
 
A review of approximately 1,500 transactions stretching back over four decades discovered several key findings as to how value-creation was affected by the overall economy when the deal was struck, including:
 
A slow economy can lead to higher value-creation
Dealmakers achieved higher returns from investments made when the economy was weak due to:

  • Valuations being lower, as economic uncertainty gets priced into assets;

  • There being less competition for assets, as companies that may buy when during good times become more conservative; and

  • Buyers that are active in down economies tend to be highly professional and experienced.

In weak economic times, diversification pays

  • Just like with a share portfolio, the market has, and continues to, clearly reward buyers willing to branch out into adjacent sectors and diversifying their revenue and earnings streams.

Serial dealmakers outperform in weak economies

  • Those brave enough to do deals in weak economic times are actually rewarded with a positive outperformance.

In the current COVID-19 affected market, four elements are critical for success in APAC transactions including:
 
The ability to define a clear investment strategy

  • To capture the M&A opportunity, APAC management teams need to think of transactions not as occasional events but as a continuous growth driver.

  • In addition, they should develop a portfolio and transaction strategy that supports inorganic growth, for both buying and selling assets.

The willingness to make M&A capabilities a source of competitive advantage

  • Given the historically low number of deals that APAC companies have likely completed, the second major area for buyers in the region to address is finding ways to build up strong capabilities in sourcing and assessing transactions.

  • Senior executives need to devote time and resources to corporate M&A, by establishing an advisory team with broad functional, finance, and industry expertise and the ability to execute cross-border deals.

The capability to focus on strategy during deal execution

  • Thorough due diligence is a critical aspect of deal execution, but buyers also need to analyse future growth plans, competitor dynamics, and industry fundamentals.

  • The strategic due diligence process should be able to gauge the increase in market share that a buyer could generate by combining its assets with those of the target.

Always think about integration before the deal closes

  • Middle management make successful transactions

  • Sophisticated buyers willing to ask the management team of an acquired company for ideas and insights about how to run the organisation, and how it might continue to grow ensures business continuity.

  • Buyers need to have the right monitoring and reporting mechanisms in place once a deal closes.

As economic expansion slows across APAC, companies need to turn to transactions to continue growing. This is true even with the recent market upheavals due to the COVID-19 pandemic.
 
Lead Advisory Transactions will only succeed if our clients understand the market, address their biggest internal challenges, and build key capabilities – opening opportunities for all service lines within the Moore network. As deal activity picks up, companies that understand the market will be positioned to capitalise on it. Conversely, those that try to cling to old ways are at risk of be overtaken.
 
Watch the presentation to hear an overview of a live sell side transaction involving a client - an end-to-end parking service provider headquartered in Melbourne, Australia, with a portfolio of 450 owned and managed car parks across five countries. The Moore Australia Corporate Finance Division is currently engaged to manage interest from Private Equity and Pension Funds across Singapore, Hong Kong and Japan who are actively investigating the company and its property portfolio for investment/acquisition.