One-third of Global M&A Carve-outs Don’t Live up to Expectations, per TMF Group Study

Research underscores pitfalls as firms explore new investment opportunities in uncertain market conditions

LONDON--()--The number of carve-out acquisitions is expected to rise as businesses look to restructure because of the COVID-19 turmoil. Those that do should approach with a note of caution after research revealed that about one-fifth of carve-outs result in millions of dollars wasted because of inefficiencies.

While the deal economics of carve-outs can be very attractive, an independent survey, commissioned by TMF Group, found that 34% of senior executives from private equity firms with buy-side experience and 27% from corporations said their most recent cross-border carve-out failed to deliver on expectations, with 24% and 19%, respectively, saying costly overruns significantly impacted the deal.

Where a delay resulted in increased cost, a clear majority of those from private equity firms (92%) said it added to 10% or more to the original value of the deal, with 30% saying costs jumped by more than 16%. The figure for corporates was equally high, with 85% reporting that delays increased costs by 10% or more, and 38% at 16% or more – all considerable sums given that most of the carve-outs were valued at more than $50 million and some more than $1 billion.

The research comes at a time when the market has seen a three-fold increase in the annual volume of spin-offs and carve-outs since 2016. The onset of COVID-19 will dampen deal volumes in the immediate period but will create special situations for cash-rich buyers, as stressed companies look to restructure their businesses during a period of significant uncertainty.

We expect a significant reduction in transactions in the immediate term, but there are clearly going to be big opportunities for the cash-rich corporates and private equity firms, with the latter reported to be sitting on a record level of dry powder at the end of last year,” said Mark Weil, CEO of TMF Group. “The unloading of business units and other assets is inevitable as management teams across the globe look to simplify their businesses and de-risk their balance sheets as this human tragedy continues to unfold. But with uncertainly comes less financial flexibility and, consequently. added pressure to get any carve-out opportunity right.”

In terms of learning from experience, the biggest obstacles identified in the research to successfully executing cross-border carve-outs is dealing with legal and regulatory issues, cited by 52% of corporates and 48% of private equity firms. This was followed by misalignment of operating models, cited by 43% and 46%, respectively.

Part of those challenges came down to geographical complexities -- separating out a business from its parent when several jurisdictions are involved and not having sufficient local market experience. Nearly 60% of corporate respondents said their most recent carve-out involved operations in four or more countries (with 10% involving 10 to 19), while 42% of private equity respondents said their most recent deal also involved a business operating across four or more locales.

Those sponsors on both sides that had limited or no presence in any target’s local market were more likely to have disappointing outcomes. Indeed, 38% who fell into that scenario said their most recent carve-out had largely failed to meet their overall strategic goals, and 38% said it also took longer than expected to generate value.

When it comes to other success factors, the research indicates that the right expertise and resources need to be brought on board as early as possible. Of those who experienced delays in completion, 78% of corporate and 64% of private equity respondents said they believe they could have avoided the overrun and additional costs if they had been better prepared.

Untangling a business from its parent company across multiple jurisdictions to create a fully independent entity can be complex,” added Larry Harding, TMF Group’s head of North America. “Delays in completing a deal can be avoided with the right people and process in place and local knowledge and expertise.”

About TMF Group: TMF Group is the leading provider of administrative support services for international business expansion. With some 7,800 experts – in-house, on the ground in over 80 locations – and is the only company worldwide to provide the combination of fiduciary, company secretarial, accounting and tax and HR and payroll services essential to the success of businesses investing, operating and expanding across multiple jurisdictions. We know how to unlock access to some of the world’s most attractive markets – no matter how complex – swiftly, safely and efficiently. That’s why over 60% of the Fortune Global 500 and FTSE 100 and almost half of the top 300 private equity firms use us. www.tmf-group.com

About the research: In late 2019, TMF Group commissioned Mergermarket to survey 200 C-suite executives at corporate institutions and private equity firms based in 29 countries with buy-side experience of a cross-border carve-out over the past three years. The aim of the survey was to analyse the source of value creation and value destruction in these often highly complex transactions. Job titles included CEO, CFO, Director of M&A, Head of M&A, Managing Director and Partner.

Contacts

Sean Vichinsky
tmfgroup@finnpartners.com

Release Summary

Research underscores pitfalls as firms explore new investment opportunities in uncertain market conditions

Contacts

Sean Vichinsky
tmfgroup@finnpartners.com