FW speaks with Barry Ross, a partner at PwC, about Accelerated M&A.
FW: Could you explain the genesis of Accelerated M&A?
Ross: Accelerated M&A was developed by PwC’s Business Recovery team in the late 1990s as a method to maximise value from the rapidly increasing numbers of insolvencies of ‘new’ service based businesses, which had few hard, realisable assets, and from which very little value could be realised from a traditional insolvency. These ‘new people based’ businesses relied heavily on the intellectual property in the heads of those who walked out of the door at 5pm each day. Where there was no funding to continue trading, and meet wages costs, staff had to be made redundant with the obvious impact upon the level of recovery for creditors. As a consequence, we started to think through how we could better realise value for creditors and quickly worked out that running a traditional corporate finance style process in a truncated timescale invariably led to greater recoveries than the alternative of a traditional insolvency, together with certainty of outcome and saving more jobs. This often led into what is now termed a ‘pre-pack’ or pre packaged insolvency, but at the time we were simply using the process to market the business before insolvency, as opposed to marketing after the appointment of an insolvency practitioner.
FW: In what scenarios is Accelerated M&A the best option to pursue?
Ross: Quite simply, Accelerated M&A is the best option when the process provides better returns for creditors and shareholders compared to the alternatives, be it a traditional insolvency, a refinancing or a wind down. Increasingly, we have seen Accelerated M&A used in group scenarios where there is a troubled or non-core division or subsidiary. An Accelerated M&A process can mitigate the cash costs associated with ongoing trading and reduce the level of management time required to manage an underperforming business. This allows groups to realise value from underperforming subsidiaries to invest in growth opportunities.
FW: In many cases an Accelerated M&A can be extremely advantageous for all parties – but what are some of the potential disadvantages?
Ross: The key disadvantage is the well-publicised stigma around “phoenix pre-packs” – a sale via a pre-packaged insolvency to a connected party where the level of marketing of a business is not obvious or transparent. Clearly, a sale to a connected party, such as the directors or existing shareholders, could provide the best outcome, as existing management know the potential within a business. But equally, it might also be self serving. The important question is: has there been sufficient marketing of the business to give confidence that a market value has been established? It is important to note that Accelerated M&A does not always mean ‘insolvency’. A significant proportion of Accelerated M&A sales we complete are now share sales, while many insolvencies following an Accelerated M&A process are at Holdco levels with shares in the subsidiaries sold upon the appointment of an insolvency practitioner.
FW: What are some of the particular challenges that commonly arise during an Accelerated M&A transaction?
Ross: The challenges are broadly threefold. First, you need an experienced adviser. Time is invariably against you and knowing where time can be saved is key. Second, there is a challenge for directors in recognising the inflexion point between their duties to shareholders and creditors. This, coupled with directors concerns around ‘wrongful trading’, means that it is very important to have advisers who can help navigate these challenges and deliver often very difficult messages to boards. Finally, there are unique challenges in both owner managed and private equity backed businesses, albeit for differing reasons. Owner managed businesses typically view any sale as a last resort and often leave an Accelerated M&A process too late. By contrast, private equity backed businesses, where the equity is underwater, are arguably less inclined to commence a process on the basis that the equity house often perceives that its position cannot get any worse.
FW: What advice would you give in terms of managing the needs of multiple stakeholders in an Accelerated M&A transaction?
Ross: Managing multiple stakeholders is a key aspect to any successful Accelerated M&A process. In many instances there are a wide range of stakeholders – the directors, the shareholders, one or more banks, often one or more asset-based lender, the employees, potentially a private equity house – and that is before you get to situations where there are bondholders, junior debt providers or active credit insurers. The key is early engagement with all the key stakeholders and being able to recognise that a consensual solution is required. A good adviser needs to be able to get the message across to stakeholders that this may be ‘the least worst’ alternative.
FW: What steps should be taken to prepare information about the target to maximise the chances of concluding a successful sale?
Ross: The key when preparing information on the target is to quickly understand what the drivers of value are to each ‘buyer pool’ and ensure the information is cut to show those particular aspects of the business in the best possible light. In addition, it is vital that any ‘bad news’ or issues are communicated whilst bidders are in competition. Failure to do so will impact on value and/or successful completion.
FW: What strategies can be employed to drive maximum value from the sale?
Ross: Driving maximum value requires an understanding of what drives value for each of the buyer pools. However an ‘80:20’ approach is also often required. As time is often very limited, the process needs to be driven forward, and this may mean that some value is invariably lost. However, ensuring that potential purchasers ‘buy into’ the key selling points of the business means that the bulk of the value is secured. Finally, no two Accelerated M&A sales processes are the same. At the start of a sale process, there is always a broad plan and associated timetable, but each process is bespoke and evolves. For example, if there is one credible knockout bid, is there a way to tie in that party and cut the timeframe to completion? Equally, if the forecast cash position worsens, then elements of the process may need to be truncated further.
FW: What strategies and processes can companies utilise to dilute the residual impact of being involved in an Accelerated M&A process, such as the perceived stigma of insolvency?
Ross: Focus on the good news: the successful sale, the preservation of jobs and the future of the business. Having a well thought through press release and media strategy that explains why the transaction has taken place and the positives for various stakeholders often diffuses any perceived ‘bad news’. Finally, if the sale was completed via a pre-packaged insolvency, provide a very full and transparent SIP 16 report to creditors. The key negative in these situations is often around any sale to a connected party. Demonstrating that a full marketing process has been undertaken, and comparing the outcome to the alternatives, is vital.
FW: What differentiates an Accelerated M&A adviser from a traditional M&A adviser?
Ross: On the face of it, an Accelerated M&A process is simply a typical corporate finance process run over a three month period rather than a nine month period. However, the key difference is that the sale is often run against the backdrop of a ‘burning platform’ driven by cash requirements. The ability to actively drive a process to a constrained timescale is vital. But this needs to be coupled with the experience to know when a process needs to be truncated, extended or altered, and then how to do it, as well as the ability to influence multiple stakeholders to accept an outcome that is often not perfect from their individual perspectives.
FW: What do you anticipate happening in terms of developments and trends in the Accelerated M&A space?
Ross: We anticipate two key areas. The first is the increase in the number of scenarios where groups have an unloved business that is underperforming or consuming a great deal of management time. Management teams are increasingly aware that rather than focusing on trying to improve such a business it is often better to sell it quickly and reinvest the proceeds in a higher margin business or one with great growth potential. The other aspect, which is linked, is that as a consequence we envisage there being more opportunities for corporates to acquire underperforming competitors – however, the winners will be those who have ready access to cash and are prepared to accept that they need to move very quickly.
Barry Ross is a partner at PwC, where he leads the team focused on Accelerated M&A. For over 25 years, he has specialised in carrying out strategic and financial business reviews and then advising on any associated transactions, be that disposals, acquisitions or refinancing. Mr Ross has worked on several high profile transactions, including the sale of a Portuguese mortgage service company and associated portfolio of mortgages to Carval and the successful sale of the Coryton Oil refinery, and the $125m accelerated sales process of International Tubular Services. He can be contacted on +44 (0)20 7213 1040 or by email: firstname.lastname@example.org.
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