The number of mergers and acquisitions (M&As) in 2021 smashed previous records, rising 24% on the previous year to a total of 62,000 deals. However, unprecedented economic developments such as soaring inflation rates and a recession potentially looming, have created a much more uncertain market.
What’s more, research from Deloitte in 2017 showed that less than 50% of M&As deliver their promised value, highlighting that even in a more positive economic climate, firms struggle to seal a deal that fairly reflects their worth.
In many cases this is due to poor preparation and the absence of an established financial advisory team, resulting in information being presented that isn’t reliable or able to stand up to robust governance processes. Pre-merger due diligence needs to be put in place to identify where complex issues exist surrounding areas such as structures or the revenue recognition agreement. This can then be analysed and evaluated to avoid the potential of issues arising or a deal failing.
Chris Biggs, CEO & founder of Theta Global Advisors, who have conducted M&As for some of the world’s largest companies, suggests once the preparation has been done, businesses must focus on the narrative behind their numbers.With external factors such as rising inflation rates and supply chain issues severely affecting the business world, many firms will have negative figures. Therefore, the importance should not be on ‘what the numbers are’ but rather ‘what the numbers are showing’.
Financial advisors are able to gleam invaluable information from historic results that can often turn what appears to be a wholly negative situation, into a positive and forward-looking projection that shows potential. For potential buyers this information is crucial – assessing aspects such as revenue, profitability and working capital needs. However, this data cannot be pulled together quickly and requires planning long in advance.
Other information, such as a company’s environmental, social and governance (ESG) level is becoming increasingly critical, meaning companies need to assess where they are, what they are currently doing which is positive, and what can be done to improve their ESG impact. This importance is reflected by the fact that global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the projected total assets under management worldwide.
Chris Biggs, Founder of Theta Global Advisors discusses how businesses should prepare their business optics for a potential deal:
“The first thing that companies must consider in a potential M&A deal is to ensure their financial information is accurate, reliable and most importantly the process in which they gain this information is subject to robust governance processes. Historical information which companies collect must be compliant with accounting rules and they must have an accurate understanding of what the numbers are and why. Rather than simply presenting the figures, management will need to be able to explain the powerful narrative that lies behind them.
“From a buyers perspective, revenue and profitability projections will be critical. Businesses will not be able to gain this information quickly, so sufficient time is needed to prepare and this must be considered. Companies will need to support this information and ensure it has been properly compiled and subjected to several internal reviews.
“Something which has recently become more prominent in any potential deal is a company’s ESG level. Businesses across all sectors must consider and implement plans to improve their environment, social and governance levels and, if done correctly, this can aid in getting a successful M&A deal over the line.”