PRINT THIS PAGE European CDO study03/08/2005. Source: Ernst & Young.
European companies must think and act like private equity houses or will lose out in emerging markets mergers and acquisitions scramble, says this new Ernst & Young survey. Research amongst major European companies shows that they are increasingly concerned about the competition they face for deals from private equity funds. Companies see them becoming more aggressive, more determined, more streetwise and are concerned about their impact on deal valuations.
If corporates are to be successful in making the strategic acquisitions that they need to fulfill their business objectives, they are increasingly going to have to behave like these deal specialist competitors.
This is the conclusion of the Ernst & Young Corporate Development Officer European Study, based on a series of 92 in-depth interviews with the people responsible for creating and executing their company’s corporate transaction strategy.
The research was undertaken by Ernst & Young’s Transaction Advisory Services group over the last six months.
61 of the respondents worked for businesses that had sales in excess of $5 billion (€4.15 billion) and a further 25 for business with sales of between $1 billion (€0.83 billion) and $5 billion. [The survey sample reflected the views of senior dealmakers in companies with total sales exceeding $375 billion (€310.98)]
Dave Read, Global Vice Chair, Transaction Advisory Services at Ernst & Young, said “Private equity groups are growing in number and in size. And as they start to hunt in packs they are even more formidable competition. They have access to large quantities of reasonably priced capital, can move quickly and don’t generally have to worry about the difficulties of integrating businesses. Transactions are their core skills.”
But this doesn’t mean that private equity firms are going to have it all their own way. Read added “In corporations the transaction discipline is becoming a core capability and a source of competitive advantage for their businesses.”
The research made clear that both growth and divestment transactions are an essential part of the corporate landscape.
Read said “M&A is not an occasional feature for major companies. It’s an essential and ever increasing part of corporate life as they react and adapt to changing circumstances.”
But there is increasing pressure from investors and markets to improve on the estimated 70% of transactions which fail to live up to expectations.
Read added “Badly targeted and badly executed transactions can have a dramatic effect on corporate performance and to address this Corporate Development Officers are taking greater end-to-end responsibility for transactions and their outcomes. Not only are CDOs today responsible for originating, assessing and managing deals, they are also becoming more involved in integration, corporate strategy and risk management. In effect CDOs are the new CEOs of transactions.”
More than half of all respondents said that they saw China as a core market of interest in the next 12 to 24 months, as well as Eastern Europe and North America. Over 60% expected to be interested in doing deals in Western Europe itself. And divesting non-core assets in Western Europe was planned by more than 50% of study participants.
Africa and Australia were seen to have the least interesting potential with interest from only 13% and 16% of respondents respectively.
Read commented: “People see enormous potential in the emerging markets, including China and Eastern Europe. But they’re clear that there are real challenges in getting it right. They know that they need to invest time to build relationships and to really understand their potential business partners before doing deals with them. So, the use of third party advisers with specialist knowledge is increasingly common.”
Read said “Everybody knows that an emerging market transaction can be difficult, however investors see it as a legitimate business risk. CDOs are addressing the risk/reward challenge of both domestic and emerging market deals by enhancing the tools, techniques and approvals they employ for risk identification, assumption, management and mitigation.”
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