Unpreparedness Drives Missed Targets from Carve-Out Acquisitions
While the market may be ripe for cash-rich buyers seeking shares or business units from distressed firms, real-life experience has proven difficult with one-third of such acquisitions failing to go according to plan.
Some 34 percent of senior private equity executives and 27 percent of corporations claimed that the most recent cross-border carve-out – acquisition of just shares or a business unit instead of a full company – failed to deliver on expectations, according to an independent survey commissioned by TMF Group.
This was most notably due to legal and regulatory issues as well as misalignment of operating models.
Deal Value Impact
Such hurdles have consequently derailed timelines and Asia Pacific was the leader of carve-out acquisition delays at 33 percent, well above the Americas (18 percent) and EMEA (16 percent). And naturally, this has caused overall costs to increase which was reflected via deal values.
In the event that a delay resulted in increased cost, 92 percent of private equity firms claimed that deal value increased by 10 percent. 30 percent claimed that deal value increased by over 16 percent. Sell-side corporates cited similar woes with 85 percent claiming that add-on costs increased by 10 percent or more.
This is all the more intensified by the fact that most carve-out deals were valued at over $50 million and some at more than $1 billion.
Poor Preparation
With regards to legal, regularly and operational misalignment hurdles, many claimed that part of the challenge was due to geographical complexities (such as separating businesses from parents in different jurisdictions) with nearly 60 percent claiming that the latest carve-out deal involved four or more countries.
But despite the issues, many respondents believe that overruns and added costs could be avoided if better preparation had been made, according to 64 percent of private equity and 78 percent of corporate respondents.
Short-Term Slowdown
According to the report, spin-off and carve-out volumes have increased by three-fold since 2016 and although the pandemic could slow activity in the immediate term, restructuring needs could create special situations for cash-rich buyers.
«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 Paolo Tavolato, TMF Group’s head of APAC.
«The unloading of business units and other assets is inevitable as management teams right across the globe look to simplify their business and de-risk their balance sheets as this human tragedy continues to unfold.»
