(Charlotte, NC – March 6, 2018)
In this five-part newsletter series, we highlight key practices that private equity investors put in place during the M&A process and address ways in which corporate acquirers can borrow and/or adapt these practices to compete for quality targets. This week we will look at the first key practice: understanding the need for research.
Private equity investors recognize that they are not immersed in daily industry operations and start from the ground up, performing much industry and competitor research before making an offer on a target. According to a 2017 survey of private equity executives performed by Mergermarket, one-quarter of respondents felt that sector-specific trends had the greatest influence on deal activity.(1)
When research proves a sector to be attractive, private equity investors use a disciplined approach to identifying companies that fit their acquisition criteria. This approach includes initial vetting, vigorous testing of the investment thesis, and continuous fleshing out of priority issues. Oftentimes, once trends are understood, a critical part of private equity’s targeting strategy includes identifying underperforming businesses within the sector that can be improved through better management and more robust investment in critical areas.(2)
Private equity investors’ intense diligence process yields a thorough and realistic value creation plan and identifies the major risks and further opportunities. Critical elements of this plan include external benchmarking for best practices and independent verification of key assumptions about the business, including industry outlook and competitive positioning.(3) Additionally, reviewing the value creation hypotheses against a robust scenario analysis helps ensure that the private equity investor is not taken by surprise, even if a less-than-favorable outcome occurs.(4)
Access to disciplined research is not limited to financial investors. Corporate acquirers can and should adapt part of this process in their own internal strategic planning and acquisition process. Making the assumption that you already know everything you need to know could be costly in the long-run or result in missed opportunities. Performing industry research and composing rigorous value creation plans can be time consuming. But, leveraging an outside advisor to guide the process while utilizing internal subject matter experts will make the efforts more efficient and allow you to put your company in the best position to acquire attractive targets.
(1) M&A Pulse: Private Equity Riding High (Mergermarket Limited)
(2) Top 5 Reasons Private Equity is So Successful at M&A (Woodruff-Sawyer & Co., Inc.)
(3) What Public Companies Can Learn from Private Equity (McKinsey & Company, Inc.)
(4) The New Rules of Private Equity Success (Forbes Media LLC)
“North Inlet Advisors, LLC” provides financial advice to companies on capital formation, mergers, acquisitions, divestitures, restructurings, and other complex corporate transactions. North Inlet Advisors is not a retail broker-dealer, does not conduct underwriting activities, provide research, analyst reports, or solicit or carry accounts, or offer or sell securities products to retail customers. North Inlet Advisors is registered as a broker-dealer with the U.S. Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority (“FINRA”) and Securities Investor Protection Corporation (“SIPC”). Please visit www.finra.org and www.sipc.org, or North Inlet’s regulatory webpage for more information.