M&A: under the microscope

The PricewaterhouseCooper''s partner argues that corporate and private equity investors should be held accountable for the deals they sponsor.

M&A remains highly topical even in the ongoing depressed economic climate. Several publications have requested a brief synopsis of the key findings from the recent M&A survey undertaken by PricewaterhouseCoopers' Transaction Services team in Hong Kong and China.

DTja vu

On reflection, however, the words of a reporter at the press briefing we conducted the day the results were published suggested a different approach might be better. Holding a dictaphone in his outstretched hand, the reporter began "Your findings are very interesting" û so far so good û "but we've heard them all before, haven't we? Tell us what is really new about M&A in Asia".

While the survey findings themselves may not have been particularly surprising, they do serve to reinforce some important messages. One area in particular relates to the need to upgrade the quality of M&A practices and procedures in Asia. True, this has been a recurring theme for a number of years, but the question surely is why? Are improvements not being made in the way M&A transactions are conducted?

Setting the standard

The pace of change has been slower than might have been expected. Management teams in Asia continue to take short-cuts in the deal evaluation and execution process, and often end up overpaying as a result of overoptimism or failure to appreciate and/or identify specific transaction risks.

World class companies and top tier private equity/venture capital institutions, of which there are clearly a number in Asia, treat M&A as a core part of their business, with substantial profile afforded thereto. This includes a dedicated, multidisciplinary infrastructure to support the business development or investment officer, and a more critical - perhaps more realistic - approach to assessing potential opportunities. There is a noticeable difference in attitude and mindset compared with many other organizations in the region, and clients in the former category that we have worked with have proved the benefits. Certainly this is the standard that others must attain if they are to maximize the returns on the deals they undertake, and put themselves in the best position to compete in the global market place.

Quality not quantity

The fact of the matter is that, in Asia, discussion and debate on the health of the corporate M&A market, and indeed the private equity industry as well, has tended to focus on overly simplistic, quantitative measures of activity - that is, the number and value of deals completed in any given period. Press and other media, research analysts, economic commentators, they all want to know about the number of deals announced this month, this quarter, this year, as compared with last. Sweeping conclusions are drawn. Little attention is paid, certainly by external commentators, to the quality of the transactions being undertaken. For example:

Corporate M&A. How much critical discussion do we see on the overall merits of each deal? Is due consideration given to the stand-alone fair market value of the target, and how this compares with the purchase price offered? What synergies, and risk assessment, are inherent in the acquirer's offer? How often do commentators look back on deals executed two or three years previously and assess whether shareholder value was added or destroyed? How much questioning of the vendor is there? Did they achieve a good price? And what about the other terms and conditions of the deal?

Private equity and venture capital transactions. Thus far there has been little information and/or debate on the success of private equity/venture capital investments in Asia Pacific. With the industry still relatively young compared with the US and Europe there have been a limited number of exits from which a definitive conclusion can be drawn. Notwithstanding this it is clear that many funds have suffered from investments that have gone sour in recent years, yet most of the focus from external industry commentators continues to centre on the amount of funds raised and the number and value of deals closed.

Not only is there little attention paid to the quality of the deals being undertaken, but the reported statistics are misleading as well. M&A activity in the private sector is typically excluded, as is any reflection of the level of deals contemplated but subsequently not completed. There is also often a substantial time lag between the initial deal negotiation and completion, which makes any comparison of deal statistics from period to period fundamentally flawed for the purpose of assessing underlying deal activity. To compound the problem further the definition of M&A differs between reports as well, with some all-inclusive and others excluding certain categories such as IPO and buyout activity, for example.

So why the obsession with quantitative, rather than qualitative, measures of M&A performance?

Lack of transparency

It's an old issue in Asia, but particularly topical at the present time. Not only is qualitative information on deals not readily available, but it is difficult to extract even if you do try and conduct your own research. From time to time empirical studies in various markets have attempted to provide insights into certain aspects of M&A - for example the often quoted statistic that eight out of ten deals fail to generate the returns originally targeted - but there continues to be a lack of reliable, impartial and timely information that facilitates an informed view at any point in time as to the quality of transactions being undertaken.

Even internally, many organisations (40% in the PricewaterhouseCoopers survey) fail to exercise any formal assessment of the success or failure of a transaction. While respondents said that a key control in the M&A process was the fact that individuals are held accountable, there was an acknowledgment that there was rarely any look-back to learn from what went well and where improvements could be made next time round. In the absence of such a "hindsight review" it is questionable to what extent dealmakers in Asia really consider that they will be held accountable.

The reality is that many deals that appear successful in the initial months after completion are ultimately shown to have destroyed shareholder value. On this basis one would expect a number of questions to be asked in those cases about where things did not go to plan. The issue is, is this actually happening with an appropriate degree of rigor at pre-set milestones, for example one year, two years, three years after the deal is completed?

Recent changes in generally accepted accounting practices will go some way to making companies more accountable for the deals they underwrite. Any impairment in the value of goodwill, for example as a result of synergies paid for but ultimately not realised, is now required to be taken in full as a charge through the income statement, in one accounting period. Over time this is likely to make dealmakers more cognizant of the fact that, ultimately, they will be held accountable for the transactions they enter into.

Accountability is key

Of course, it's not all bad news. Many companies and private equity/venture capital funds in Asia are already exercising best practices in the execution of their transactions. But we believe the bar needs to be raised for other M&A participants as well, both buyers and sellers alike. This requires an increase in pressure from stakeholders - including shareholders, pension fund and insurance company investors, employees, banks and other creditors, regulators and economic commentators - in order that management teams are made to feel that they really will be held accountable for the deals they sponsor. This, in turn, should lead to increased emphasis on longer-term measures of value, and a more disciplined approach to M&A.

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