The deal is dead. Long live the deal!
Updated: Wed, 25 Nov 2009 16:16:18 +0000 by Kinetic
Traditional ways of deal-making are fast disappearing to be replaced by a new breed of transaction.
The problems of the banking sector, which has all but strangled the mergers and acquisitions market of new cash, is chiefly responsible for this trend, say Coventry and Warwickshire lawyers Alsters Kelley but in the longer term, this may be no bad thing.
Partner Geoff Brooke-Taylor, who has been responsible for deals totalling many millions of pounds in the past decade, believes the traditional M&A deal, funded by the banks, will not return for many years, if at all.
“There is no doubt there has been a fundamental change in the attitudes of most funding institutions,” said Mr Brooke-Taylor. “They are more risk-averse than ever and the pendulum has swung completely.
“At one time, the acquiring company could fairly readily obtain enough borrowing simply to pay for the target business outright. Banks would come up with the cash as a matter of routine. From a lawyer’s perspective, this made it much easier.
“Now, faced with a similar potential acquisition, the buyer will need to look at different ways of funding the deal. Typically, this will involve a longer buy-out period, with the money perhaps being paid over many years. In the long run, this may be no bad thing. It probably incentivises both parties to ensure the takeover or merger goes smoothly and allows for a much greater sense of continuity.
“For sellers, there are also weighty implications. The business owner thinking of selling up to fund their pension will need to think long and hard about the nature and structure of the deal, bearing in mind the changed market conditions.
“This means a longer-term plan to realise the value of the business and an acceptance that the exit strategy may not give the clean break originally sought. Owners contemplating retiring in a few years’ time might want to start thinking about it now.
“Even if they are dealing with a cash buyer, a category that has never been in a stronger position to dictate terms, they will find the sums on offer lower than they might expect simply because the cash buyer is not in direct competition with a bank any more.”
Mr Brooke-Taylor added that pressure on banks from government to lend more was effectively being contradicted by the demand to increase liquidity through greater cash deposits.
“This means there is a squeeze on the old model of acquisition funding and our view is that it may never return. In turn, that means that the importance of taking professional advice in getting the structure of the deal correct has never been greater.”
The problems of the banking sector, which has all but strangled the mergers and acquisitions market of new cash, is chiefly responsible for this trend, say Coventry and Warwickshire lawyers Alsters Kelley but in the longer term, this may be no bad thing.
Partner Geoff Brooke-Taylor, who has been responsible for deals totalling many millions of pounds in the past decade, believes the traditional M&A deal, funded by the banks, will not return for many years, if at all.
“There is no doubt there has been a fundamental change in the attitudes of most funding institutions,” said Mr Brooke-Taylor. “They are more risk-averse than ever and the pendulum has swung completely.
“At one time, the acquiring company could fairly readily obtain enough borrowing simply to pay for the target business outright. Banks would come up with the cash as a matter of routine. From a lawyer’s perspective, this made it much easier.
“Now, faced with a similar potential acquisition, the buyer will need to look at different ways of funding the deal. Typically, this will involve a longer buy-out period, with the money perhaps being paid over many years. In the long run, this may be no bad thing. It probably incentivises both parties to ensure the takeover or merger goes smoothly and allows for a much greater sense of continuity.
“For sellers, there are also weighty implications. The business owner thinking of selling up to fund their pension will need to think long and hard about the nature and structure of the deal, bearing in mind the changed market conditions.
“This means a longer-term plan to realise the value of the business and an acceptance that the exit strategy may not give the clean break originally sought. Owners contemplating retiring in a few years’ time might want to start thinking about it now.
“Even if they are dealing with a cash buyer, a category that has never been in a stronger position to dictate terms, they will find the sums on offer lower than they might expect simply because the cash buyer is not in direct competition with a bank any more.”
Mr Brooke-Taylor added that pressure on banks from government to lend more was effectively being contradicted by the demand to increase liquidity through greater cash deposits.
“This means there is a squeeze on the old model of acquisition funding and our view is that it may never return. In turn, that means that the importance of taking professional advice in getting the structure of the deal correct has never been greater.”