Local knowledge is the key in 2013’s increasingly tactical M&A world

June 2013 | SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Following a tough 2012 for mergers and acquisitions, hopes have been high that 2013 would see a noticeable pick-up in dealmaking activity.

Any company deciding to pursue an M&A strategy for growth in today’s volatile environment realises the importance of the critical fact-finding mission that is due diligence. A number of trends across global markets accentuate the importance of virtual data rooms in the ever-more fastidious due diligence process.

According to Merlin Piscitelli, a director at Merrill DataSite, this year generally looks to be mirroring 2012. “The beginning of the year has seen significant promise of growth in the dealmaking community. This has, perhaps, plateaued – and of course it only takes one significant setback to then make the market nervous again,” he says.

In terms of geography, certainly in Africa there has been a noticeable increase in activity. “This really seems like the time to be investing there,” says Mr Piscitelli. “Of course, with this increase in activity comes an increase in exposure. Dealmakers need to mitigate this exposure by conducting thorough due diligence – and this is where the security and accessibility of a virtual data room wins versus the traditional, limited paper data room.”

Mr Piscitelli also notes that the US market is quite buoyant at present. “There is something like 2.5 percent growth now, leading people there to look outside of the US for deals – which is of course good for the rest of the world.”

Of the developing countries, Brazil is interesting as it has traditionally been seen as one of the most important new markets. “We have seen a decline recently due to the weak economy and shaky business confidence but a wider economic recovery should provide better M&A numbers there this year,” says Mr Piscitelli. “Brazil’s antitrust agency, CADE, instituted new practices in 2012 and theoretically these new rules should start to make government approval of mergers and acquisitions more streamlined. We think mergers and acquisitions in this market in 2013 will likely target construction, consumer products and healthcare industries.”

In this more nuanced and regulated M&A world, the significance of a VDR becomes more pronounced. A VDR allows buyers to see what they are dealing with in terms of up to the minute facts and figures. They can also sort the wheat from the chaff – accessing only the most relevant information. “We have heard from dealmakers that the market generally has become more tactical – companies, both on the buy and sell side, want the pertinent information at their fingertips – which is of course where a VDR comes in,” says Mr Piscitelli. “The seller can use the VDR to upload all their data quickly and efficiently and then track which documentation has been accessed to glean if the potential buyer is serious or not. Likewise, the buyer can use this process to gain real-time access to any documentation needed to inform their bid.”

Ari Lee, a director at Merrill DataSite for the Asia-Pacific region, points out that industry professionals are talking about how sourcing deals – or perhaps more specifically good deals – is much more competitive in the Asia-Pacific M&A market than it was 5-10 years ago. “As the market initially opened up to foreign investment, there was an influx of money riding on the investment thesis of ‘the China dream’, however, the GFC, the associated slowdown of the Chinese economy and public accounting scandals have made investors much more wary when sourcing and closing deals,” he says. “Foreign investors are now also much more experienced in terms of negotiating and closing deals in the region; they are well aware that factors such as senior management relationships and lock-up periods might play a larger role in the long-lasting success of the process than in other regions.”

Current market uncertainty has only increased reliance on thorough due diligence. “We now see that firms are paying more attention to due diligence. We can infer this from the growing amount of data being requested by counterparties. Firms also look to get document review done in the quickest and most efficient manner so they can then turn their attention to other parts of the process,” says Mr Lee. He adds that local knowledge is incredibly important in facilitating the dealmaking process. “The Asia-Pacific region in particular is characterised by having fierce local and regional competition; while there are many large national and international brands, they compete on a provincial basis. This, combined with the large role the government plays in industry, makes local knowledge paramount to successful, long-lasting business.”

Chris Beckmann, a director at Merrill DataSite with a primary focus on the German, Swiss, Austrian and Polish markets, believes that one often overlooked aspect of managing risk in any transaction is the airtight documentation of attributable knowledge – knowing who knew what and then being able to prove it. “The importance of this is obviously reflected in the increased use of virtual data rooms that we are now seeing,” he says.

The value of this thorough, easily analysed due diligence cannot be understated. “It is all about giving a potential buyer the best possible means of accessing all relevant documentation – showing them what they need to see and helping keep the cost down by providing a potential acquirer with a well-structured data room. Buyers need to be managed actively and updated when any new information becomes available,” he adds.

In conclusion, clear signs seem to point towards M&A deals taking longer in the current, more tactical climate. The significance of local knowledge in this environment cannot be underestimated. Flexibility and the need to provide detailed and structured information to all participants in a deal seems to be of growing importance in a market searching for some certainty.

Tim Smith is an industry specialist at Merrill DataSite. He can be contacted on + 44 (0) 845 602 6916 or by email: info@datasite.com.

Tim Smith

Merrill DataSite