Significant changes happening in the way M&A deals are done
May, 31st 2007
One of the greatest shifts in the market environment has been the "hugely increased" role of PE firms in global M&A.
MR GOPAL RAMANATHAN, Global Chairman of KPMG's Transaction Services Practice.
The Coke acquisition of Glaceau and the much-publicised Suzlon-Areva battle for acquiring REpower have ensured that the issue of mergers and acquisitions (M&A) remains in the spotlight. Alongside these mega deals, pitchforked into centrestage are issues such as corporate culture conflict, destruction of brand value and industry consolidation.
Speaking to Business Line on these issues and other aspects of the spiralling trend of such mega deals, Mr Gopal Ramanathan, Global Chairman of KPMG's Transaction Services Practice, said that culture issues come into the picture in most trans-national transactions.
"It is certainly one that needs a lot of attention, otherwise the company ends up with a host of problems. Sensitivities to cultural differences tend to get a lot more priority these days because there is increased awareness of the pitfalls of ignoring them."
From a consumer perspective, he said that often there is the possibility of customers getting upset when well-known companies and brands disappear or get swallowed up and familiar ways of getting a product or service suddenly change.
"It is one of the areas where value can be lost in the post-transaction phase if not enough attention is paid to sensitivity of customers, who will abandon the newly acquired company if they perceive that they are not getting the same value as before."
He added that in today's wired world, customers enjoy the freedom and ability to access a myriad of products and services through an increasing number of channels, particularly the Internet.
On integrating brands with those of the parent company, he said that this is a key issue confronting acquiring companies.
"In the Dutch market, just this past week we have had the case of ING, which bought a local bank called Postbank many years ago, announcing that the name is going to be replaced. Postbank had been around for decades and was one of the most well-known brand names in Holland. Many Postbank customers are very upset indeed!"
He added that some reports have suggested that the brand names of both KLM and Air France (which merged three years ago) may go, due to cost of maintenance of names.
"Such cases arise quite often when familiar brand names disappear following an acquisition it is clear that there are no clear answers or quick fixes to this issue."
On fears that such mega acquisitions could lead to industry consolidation and consequently stifle emergence of new players and entrepreneurship, Mr Ramanathan said: "There is always a fear that increasing consolidation in certain sectors will suppress the small man. The various controlling authorities do keep a keen watch to ensure that not too much domination takes place."
However, he added, this would not hurt the entrepreneur as "so much capital available these days and access to it is getting increasingly easier. Anyone with a good idea, concept or product has the ability to establish and grow."
He believes that the trend of consolidation will not have much influence: "These are cycles that each industry goes through. After a period, we will almost inevitably arrive at a phase of de-consolidating!"
Tata Tea has emerged a major gainer from the Glaceau acquisition, having agreed to sell its 30 per cent stake to Coke for upwards of $1 billion.
In the light of the company having acquired the stake just nine months ago, it signifies enormous return on investment in a remarkably short span.
But Mr Ramanathan said that companies generally do not like to try or play "this kind of arbitrage, as it can be dangerous should the transaction go sour. It is not often in my experience that corporates acquire a company with the clear intention of selling it after a period."
On the contrary, it is the very playing field for private equity (PE) players, "where huge sums of money have been made in recent decades. Corporates may feel tempted to get involved in the same game, but caution should be the order of the day."
According to him, PE players have the mindset, clear strategy and an exit plan. "They normally go into the acquired company to take the hard decisions to create value when they do exit after 3-6 years."
Mr Ramanathan started KPMG's Transaction Services practice in Holland in 1995 and helped kickstart such services across the company in 1996. The practice currently has 3,200 professionals across 60 countries and recorded revenues of $1 billion in 2006.
"Given the frenzied M&A market and the need for both corporates and PE players to have first-class professional help in winning and closing deals, ours is the fastest growing part of the firm."
It is one of the reasons why he believes the most exciting time in M&A is now.
"Deal volumes have returned to the heady heights seen at the turn of the millennium. Now investors are far more savvy in terms of kinds of deals they are doing, and the way they are doing them."
He said that the environment is ripe for consolidation in the financial services sector, as companies move focus away from cost-cutting and capital management to actively seeking expansion opportunities.
"The banking sector is seeing continued consolidation and the mega deals look set to continue. There are plenty of acquisition opportunities, but the competition is greater."
He added that while markets such as China and India currently have some protection from the "gales emanating from global capital flows, once these barriers come down similar major transactions are probably inevitable."
Mr Ramanathan pointed out that one of the greatest shifts in the market environment has been the "hugely increased" role of PE firms in global M&A.
"Not only has the amount of available PE funds reached gigantic proportions, there are several alternative investors, such as hedge funds and real estate funds, all competing for the same targets."
And this increased competition is pushing prices ever higher. The industry is also seeing significant changes in the way deals are done. "These changes have been brought partly by the PE players who have shown themselves to be more aggressive and professional in building post-merger benefits into the purchase price."