To take advantage of various investment opportunities in India, several international corporates have established their presence by entering into M&A transactions with their Indian business partners. These corporates resort to inorganic routes for diverse reasons, ranging from expanding footprints to backward/forward integration. The basic tenet is the expectation of synergy gains by the merged entity, in the form of increased revenues, cost savings, debt restructuring, increased enterprise value, pre-empt competition, tax planning, etc.
During the Mergers and Acquisitions process, reaching a consensus among all the stakeholders can be arduous and is fraught with negotiations and managing expectations. This, alongside complying with all the applicable regulatory requirements, means that it often takes substantial time & resources from the initial discussions until the new enterprise structure is established. Thus, it is important that the investment in the process actually fructifies.
However, in reality, the anticipated synergy gains are seldom realized. Per a survey, in more than half the cases, combined enterprise value actually declines within a year of closing the transaction. A review of such transactions reveals certain factors that need to be kept in mind, some of which are:
- Entity structure: The buyer’s and the seller’s rights need to be in accordance with the extent of control over key decisions that they desire to have. It is also important to be assertive about the exercise of such rights. In particular, the entry strategy for international companies needs to be evaluated from this perspective to prevent any setbacks later on.
- Post integration path: A thorough plan for integrating the business of the seller with the buyer’s group structure is essential. This requires that the acquirers spend the necessary time to understand the business of the sellers, their vision, and how they are placed in the industry. However, in most cases, an investor-driven approach is followed without considering the dynamics of the inherent essentials of the acquired business. To avoid a showdown during the integration process, it is a must to capture the inherent commercial aspects, identify the gaps vis-à-vis expectations, and guide the process through to achieve desired results for increasing shareholder value. A seamless integration process is a must to keep the value of the business growing and have an eventual transfer of control to the buyer without any unwarranted situation with the sellers.
- Tracking performance: Many transactions are structured wherein the total consideration is divided into performance-linked tranches. This, in turn, relies on the reports/MIS submitted by the erstwhile management. The reliability of such reports needs to be established through meticulous supervision and observance. This is necessary particularly during the early stages of integration and in transactions where the buyer management is overseeing operations from distance or in the case of a cross-border transaction where the accounting practices are different.
- Actual performance: Conduct of due diligence does not mean that the acquirer can be assured of the future value that the seller business would generate. Typically, a mismatch of pre-deal and the post-deal value is observed, primarily due to variance in the actual results. Scenarios like unrealized targets, attrition of key staff, changed market scenario, diluted interest of erstwhile management, etc. are some of the key reasons for underperforming investment and need close supervision at each stage of the business, starting from the beginning before it gets too late.
Reviving stagnant investments
A situation may arise that either or both parties to a transaction become dissatisfied with the extant structure. This may be due to limited transparency, underperformance, process mismatches, limited operational control over the business, lack of growth, uncertainty regarding exit plans & valuations, etc.
To resolve these situations, it is usually very useful to have an independent, third-party perspective to define the way forward or to implement the defined strategies.
We at GM Corporate Solutions specialize in financially & strategically advising our clients in bridging the gap between the expectations and the results. Our rigorous and process-oriented approach helps determine a clear roadmap to accomplish the desired integration. We focus at turning around the business to realize the latent value, typically by supervising on reporting and as an expert board observer to achieve the intended outcomes.