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Page 1: Capital Insights...Capital Insights Helping businesses raise, invest, preserve and optimize capital H1 2016 Auto ambition Innovation in the automotive sector pushes M&A into a higher

Capital InsightsHelping businesses raise, invest, preserve and optimize capital

H1

2016

Auto ambition

Innovation in the automotive sector pushes M&A into a higher gear

Page 2: Capital Insights...Capital Insights Helping businesses raise, invest, preserve and optimize capital H1 2016 Auto ambition Innovation in the automotive sector pushes M&A into a higher

Helping businesses invest, optimize, preserve and raise capital

EY Capital Agenda

Leading businesses are adopting a range of disciplines in four key areas to build competitive advantage:

Where investing capital is on the agenda, detailed consideration should be given to the strategy behind this decision, the methods under review and the assets in focus. The EY Transaction Advisory Services team provides integrated, objective advice.

Capital Insights brings the Capital Agenda to life by investigating all four quadrants and providing expert advice from EY experts so you can evaluate opportunities, make transactions more efficient and achieve strategic goals.

Investingdriving cash and working capital, managing the portfolio of assets

Optimizingassessing future funding requirements and evaluating sources

Raisingstrengthening investment appraisal and transaction execution

Preserving reshaping the operational and capital base

For EYMarketing Directors: Antony Jones, Dawn QuinnProgram Directors: Jennifer Compton, Farhan HusainConsultant Sub-Editor: Luke Von Kotze Compliance Editor: Jwala Poovakatt Design Consultant: David Hale Digital Innovation Lead: Mark Skarratts Senior Digital Designer: Lynn Lorenc

For Remark Global Managing Editor: Nick Cheek Editor: Kate Jenkinson Head of Design: Jenisa Patel Designer: Vicky Carlin Production Manager: Justyna Szulczewska EMEIA Director: Simon Elliott

Capital Insights is published on behalf of EY by Remark, the publishing and events division of Mergermarket Ltd, 4th Floor, 10 Queen Street Place, London, EC4R 1BE.

www.mergermarketgroup.com/events-publications

EY | Assurance | Tax | Transactions | Advisory

About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

About EY’s Transaction Advisory Services How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you’re preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda.

© 2016 EYGM Limited.

All Rights Reserved.

EYG no. 01471-163GBL

ED 1016

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

The opinions of third parties set out in this publication are not necessarily the opinions of the global EY organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.

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Capital Insights from EY Transaction Advisory Services

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Allies for growth

Welcome note

For more insights, visit capitalinsights.ey.com, where you can find our latest thought leadership, including our market-leading Global Capital Confidence Barometer.

Steve Krouskos

Global Vice Chair Transaction Advisory Services, EY If you have any feedback or questions, please email [email protected]

Businesses around the globe maintain a strong acquisition appetite and a growing desire to forge new business alliances to foster innovation and talent.

Persistent low economic growth, digital disruption and increasing globalization are driving today’s investment decisions and acquisition strategies. Leading companies are combining dealmaking with new strategic alliances to help multiply their growth opportunities and generate higher-returns.

Within this complex environment, digital evolution continues to challenge current business models. The automotive sector is a good example, with technology giants and automakers converging around driverless car innovations. We also see automotive companies joining forces to buy the mapping technology central to that transformation in their industry. This issue of Capital Insights highlights both the impact of FinTech innovation on automotive insurance (p 26) as well as the disruptive power of the industrial Internet of Things (p 22).

Executives now need to plan for the possibility of multiple futures. M&A is part of that future-proofing story. It is a transformative option for re-shaping business, accelerating growth strategies and anticipating future market trends. Acquisitions offer the prospect of competitive advantage. Increasingly, we see more strategic acquisitions for talent (p 38) as companies seek to rapidly boost their skills and innovation to compete and get ahead of the game.

At the same time, alliances are attractive as companies look for new sources of revenue and earnings while carefully managing costs and risk. Alliances can monetize underutilized assets and provide access to capabilities that are better owned by others. More and more companies are taking this option to help navigate strategic direction and optimize capital allocation in an increasingly uncertain business landscape.

Those companies that best achieve commercial advantage through combining strategic M&A and cooperative responses to new challenges, will be best positioned to win in this disruptive new world. Buying and bonding is now a key feature of the corporate growth agenda.

© Karl Attard

capitalinsights.ey.com | Issue 16 | H1 2016 3

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ContentsRegulars

06 HeadlinesThe latest M&A news and trends.

11 EY on the USEY’s Richard Jeanneret on US M&A in 2016.

15 EY on EMEIAEY’s Andrea Guerzoni explores the new wave of digital disruption.

29 EY on Asia-PacificEY’s John Hope on the impact of China’s One Belt, One Road plans.

47 EY on PEEY’s Jeff Bunder on how PE is going mainstream.

50 The last wordMatthew Syed on the upside of making mistakes.

16Exclusive interview: driving growth Capital Insights talks to PSA Groupe Peugeot Citroën CFO Jean-Baptiste de Chatillon.

22Disruption

in sight How the

industrial Internet of

Things is set to revolutionize

business.

26Driven by data

FinTech is blurring the

lines between the insurance,

tech and car making industries.

08Transaction insightsLessons from private equity.

12Q&A: Trinity Consultants Discussing future growth and private equity partnerships.

6.4bConnected things will be in use worldwide in 2016, up 30% from 2015.Source: Gartner

Contributors: Steve Allan, Head of Human Capital, M&A, Willis Towers Watson; Andrew Brown-Allan, Marketing Director, Carrot; Jean-Baptiste de Chatillon, Chief Financial Officer and Executive Vice-President of Information Systems, PSA Groupe; John Drennan, Director of Corporate Development, Trinity Consultants; Bill Ford, CEO of General Atlantic; Charlotte Halkett, Group Marketing Actuary, InsureTheBox; Akil Hirani, Managing Partner, Majmudar & Partners; Jay Hofmann, CEO, Trinity Consultants; Leanne Kemp, CEO, Everledger; Brian Moriarty, Principal, Song Hill Capital; Lisa Moyle, Head of the Financial Services and Payments Program, techUK; Vaibhav Parikh, Partner at Nishith Desai Associates; Dan Preston, CEO at Metromile; Christopher Sullivan, Senior Associate, Clifford Chance; Matthew Syed, columnist and writer; Pavlo Tanasyuk, CEO, Blockverify; Simon Taylor, Co-Founder at 11FS; Mike Wall, Director of Automotive Analysis at IHS; Ian West, Acquisitions Director at Capita; Pete Wilson, Partner at 3i; Neil Wizel, MD First Reserve.

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6.4b

Shutterstock 124024819Image credits:

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40Selling off for valueEY Global Corporate Divestment Study.

48Mind the gapHow to navigate price expectations.

30Deal driversAs falling oil prices boost car sales, technology and consumer habits are set to push the accelerator on automotive M&A.

42Make in IndiaAt a time of weak global growth, India provides a shining light for investors.

34At the crossroads:energy and automotive.

38People powerWhy corporates are increasingly looking to M&A for quick talent recruitment.

deals, worth a total of US$46.2b were carried out in the global automotive sector in 2015.Source: Mergermarket

315

This issue’s theme: Automotive M&AHow the rapid pace of technology is disrupting every aspect of this sector.

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40%increase in black box

telematics car insurance policies

year-on-year

107mestimated global

insurance telematics subscriptions by

2018, an increase from 5.5m at the

end of 2013

40%drop in crash risk when a new driver has a telematics box

0.5mthe number of black box policies today, an increase from 12,000 in 2009

up to

25%the insurance savings

for drivers using usage-based

insurance (UBI) and black box policies

Oil price

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As businesses look for new sources of revenue and earnings amid today’s fast-changing industrial landscape, alliances are becoming more attractive as growth vehicles. These strategic partnerships are being used both in addition to, and in place of, traditional M&A.

Forty percent of executives in the most recent EY Global Capital Confidence Barometer are planning to enter alliances with other companies, including competitors, to help create value from underutilized assets and take advantage of the expertise and reach of others.

This is already being realized in the automotive industry, as carmakers battle rapid digital disruption and the changing demands of consumers for ever more tech-savvy and connected vehicles.

So far this year we have seen Alphabet Inc.’s Google team up with Fiat Chrysler Automobiles to develop a fleet of 100 self-driving minivans. And General Motors (GM) is joining forces with rideshare company Lyft in a test of self-driving Chevrolet Bolts later this year — after launching a collaborative short-term rental service Express Drive in March. Toyota has also found an alliance to help drive tech development, forging a new company in partnership with Microsoft. This off-shoot data analysis company, called Toyota Connect, will use Microsoft’s cloud computing platform Azure to help develop new technically-advanced products and services.

Kurt DelBene, Executive Vice President of Corporate Strategy and Planning at Microsoft,

Oil and gas deal spreeLow oil prices will spur more M&A deals in the oil and gas industry this year with some companies forced to sell to avoid bankruptcy. Just 14 M&A deals worth more than US$1b each were announced last year, vs. 46 in 2014. But as firms settle into this new low-price market, strategic deals are due to boom.

Back in actionPfizer has announced that it will buy Anacor Pharmaceuticals Inc. for US$5.2b, just a month after scrapping plans to acquire Allergan Plc. The Anacor deal will give Pfizer access to experimental treatments for the common skin condition, eczema, and shows a renewed focus on strengthening its drugs portfolio ahead of a decision on selling or spinning off its generic medicines business by late 2016.

Pharma in frontPharma, medical and biotech (PMB) was the most active sector in April 2016, with 81 deals worth US$40.7b, a value increase of 392.6% compared to April 2015. The biggest PMB deal was the acquisition of US-based medical device company St. Jude Medical Inc. by pharmaceutical company Abbott Laboratories for US$29.8b.

Resilient dealmakersA new research report from law firm Herbert Smith Freehills, Beyond Borders shows that companies are increasingly prioritizing capital for M&A. Some 39% of respondents in the initial 2015 survey were using their capital for acquisitions, with a rise to 45% after the updated 2016 survey round.

News in brief

M&A: partnerships prevailsaid the company will work with Toyota Connected “to make driving more personal, intuitive and safe.”

The company is exploring developments such as a steering wheel with in-built heart monitor, a seat that doubles as a scale, vehicle to vehicle communication and virtual driving assistants.

The automotive sector is not the only area in which collaboration and relationship opportunities between customers, suppliers — and even competitors are forming. Health care, industrials, construction and manufacturing sectors are all ripe for these strategic partnerships.

Headlines

Forty percent of executives are planning to enter alliances with other companies.

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For more partnerships forming in the automotive sector, see page 30.

Capital Insights from EY Transaction Advisory Services

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Move over megadealsWhile H1 saw the announcement of some huge deals — not least ChemChina’s US$43b takeover of Syngenta, and the Johnson Controls/TYCO and Shire/Baxalta deals — volumes of these megadeals that characterized 2015 deal activity are due to diminish. Deal focus is shifting to mid-size deals as businesses reshape portfolios and sell non-core assets. While falling oil prices, slower growth in China, the US Presidential election and Brexit talks have slowed activity, the fundamentals that saw strong dealmaking in 2015 remain. Low interest rates, high levels of corporate cash and access to finance continue. If current economic worries prove to be short-lived, we could see transactions, particularly in the mid-market, pick up toward the end of the year.

GE forms global allianceGE Digital and EY have joined forces to empower companies to provide expertise themselves. A strategic alliance between the companies will include collaborations on advanced industrial Internet of Things (IoT) solutions to increase performance and productivity for companies with underutilized industrial equipment. Using GE’s Digital Predix cloud platform, collaborative solutions will help businesses to reduce operating expenses and increase revenue by improving asset use and streamlining workflows.

EY Global Executive for the GE alliance and Global Sector Head Technology, Transaction Advisory Services, Jeff Liu says the alliance combines GE Digital’s industrial IoT technologies with EY’s IoT, data analytics and cloud capabilities to co-create solutions to help companies use their data to realize significant gains in workflows and productivity.

The changing face of auto

Disruption in the auto sector is rife. We look at how

disruptive technologies have altered the face

of the industry.

To read more about the automotive sector,

see page 30.

50k The new annual

sales record set by Tesla in 2015 of its

Model S car.

1bOn Christmas

Eve 2015, Uber completed its

one billionth ride.

40% The rate at which

Uber has been growing each

quarter.

250mForecasters predict that there will be 250m connected

vehicles on the road by 2020.

740kThe number of

registered electric vehicles, globally by

year end 2014. 12kThe number of cars

available to over 900,000 members of Car2Go, the world’s largest carsharing

network.

China investment set to soarChina outbound investment is pitted to reach new historical highs in 2016. Outward foreign direct investment (FDI) grew by 13.3% in China last year, reaching a historical high of US$139.5b. EY’s recent China Outbound Investment Outlook predicts outbound investment to grow by more than 10% and maintain high growth for the next five years. In 2015, China implemented the One Belt, One Road national strategy, stimulating overseas investment. China invested US$14.8b in countries along the Belt and Road in 2015, up 18.2% from 2014. Simultaneously,

outward FDI from the machinery manufacturing industry grew by 154.2% in the same period. This year has already seen large deals by Chinese enterprises including ChemChina’s acquisition of the Swiss giant Syngenta for more than US$43b and Tianjin Tianhai Investment (a subsidiary of HNA Group)’s acquisition of Ingram Micro, for US$6b. Mergermarket data values China’s Q1 deals at a total of US$81.7b.

(Sources: Tesla,

Fortune, Gartner,

Centre for Solar

Energy and Hydrogen Research, Car2Go.)

To read more about the impact of the industrial IoT on the future way of doing business, read page 22.

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PE exit strategies 2010- 2016 YTD by value

A lesson indealmakingFocus: private equity

Investor returns from private equity have never been healthier: what can businesses learn from these serial dealmakers?

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Keurig Green Mountain consortium to buy Keurig Green Mountain, Inc. for US$14.3b

A consortium led by Hunt Consolidated, Inc. has announced its intention to buy Energy Future Holdings Corporation for US$12.5b

Apollo Global Management, LLC to buy The ADT Corporation for US$12.3b

A consortium for Qihoo 360 Technology Co. Ltd. to buy Qihoo 360 Technology Co. Ltd. (76.6% stake) for US$7.5b

The Carlyle Group; GIC Special Investments Pte Ltd to buy Veritas Technologies Corporation for US$7.4b

Top five announced

buyouts 2015–Q1 2016

Buyouts 2010–Q1 2016

Exits 2010–Q1 2016

Top five buyout sectors by value 2010–Q1 2016

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TMT US$380.2b,2,434 deals

Consumer US$283.6b, 2,175 deals

Industrials and chemicals

US$281.0b, 3,124 deals

Business services

US$215.8b, 2,145 deals

Energy, mining and utilities US$200.9b,

856 deals

Capital Insights from EY Transaction Advisory Services

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PE exit strategies 2010- 2016 YTD by value

P rivate equity (PE) has been keeping its investors very happy over the past couple of years. Rising stock markets and deal-hungry corporates have

meant that firms have had no trouble selling assets, often at eye-watering multiples.

You only have to look at exit activity for evidence of PE’s recent ability to return cash. A total of US$438.8b was made from the sale of portfolio companies in 2015. In the last six years, this was only beaten by the US$521.1b earned from divestments in 2014, and puts last year more than US$100b ahead of any year between 2010—13 in terms of total exit value.

“PE has really been delivering for its investors,” says Julie Hood, Deputy Global Vice Chair, Transaction Advisory Services at EY. “We saw M&A markets come to life in 2014 and 2015, and financial sponsors have taken advantage of rising markets and the high price environment. Corporate megadeals took center stage in 2015 and, while this didn’t result in PE’s strongest year for exits, it’s clear that conditions had rarely been better for funds to sell down their assets.”

Exit strategiesA breakdown of exit strategies reveals how strong trade sales have been for PE firms, while initial public offerings (IPOs) have dwindled from the highs of 2014. In 2015, trade sales were 69% of total exit volumes (up one percent on 2014). Meanwhile, secondary buyouts slipped four points to 26% and IPOs were 4%. Conversely, high prices have made it a challenging market in which to seal new deals. In 2014 and 2015 combined, exits outstripped new money invested by US$507b as funds capitalized on the seller’s market. However, this trend appears to be reversing. A fall in valuations and greater risk-aversion in debt capital markets at the start of 2016 is expected to filter through to the PE market, resulting in fewer company sales but more investment. “There’s a general belief in the industry that there will be fewer exits over the coming years, both because the deployment pace has been relatively low over the past years due to how high the asset prices are, but also because valuations are going to come off a bit,” says Gordon Pan, President of Baird Capital, the PE arm of Baird investment bank.

Top five PE sectors by value 2010–Q1 2016

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Industrials and chemicals

US$655.8b, 5,349 deals

Consumer US$565.3b, 3,530 deals

Business services

US$477.9b, 3,665 deals

Pharma, medical and biotech US$444.2b, 2,425 deals ©

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5

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EY’s Julie Hood considers five tips for navigating the near future.

Move before the market does There are signs of a shift, but we’re still in a seller’s market for now. If there is anything in your portfolio due for realization or firms are coming to the end of a fund’s life cycle, now is the time to divest.

Understand what you do best Identify your competitive advantage. Some funds are sector focused, some buy smaller businesses, some do buy and build. Work out what sets you apart and then maintain discipline in executing that strategy.

Less debt, more value-add Debt will be harder to obtain if conditions continue. It will come at a higher cost and leverage levels will drop. This will mean genuinely adding value will be crucial to delivering returns, whether by breaking new geographies, building platform investments with add-ons or optimizing existing operations.

Double check capital structures Firms’ existing companies may be able to service current debt loads today, but could struggle in the event of cash flows dropping. With high macro and geopolitical uncertainty and market volatility, it’s necessary to check that capital is structured appropriately in portfolios. Board level contingency plans Use your board seat wisely to confirm that portfolio companies have contingency plans. Just because a business is thriving now, that does not mean it will fare well in a down-market.

PE lessons

EY’s Hood agrees. “At some point, the market has got to change because of the amount of capital that’s been raised over the past few years. There’s been really robust exit activity and that has translated into a record amount of dry powder. Over the next couple of years, we should see more invested capital vs. distributions back to limited partners.”

Sector split Between 2015—16 (year-to-date) the top five sectors for PE, in terms of value, were: technology, media and telecomms; industrials and chemicals; consumer; business services; and energy, mining and utilities.

Neil Wizel, Managing Director at PE firm First Reserve, believes that 2016 will be another challenging year. “Ultimately, our view is that the long-term average oil price will be somewhere around US$60 and US$70.” With the oil price still down, now is the opportunity to realize more invested capital.

“There wasn’t much pressure on corporates to sell assets to buy-out firms last year. But now, prices have been lower for longer, hedges are rolling off and capital markets are less cooperative, so there will be opportunities for asset sales.”

The other end of the scale is technology. Following Facebook’s IPO in 2012, technology stocks rallied and excitement spread to unicorns (private technology companies valued above US$1b). However, recent volatility has taken the froth out of technology stocks.

Bill Ford, CEO of General Atlantic, a global growth equity firm managing US$18b says: “Over the past six months we have seen a meaningful adjustment in private market values that reflect a lower outlook for global growth.”

Ford is also optimistic about emerging markets. “Of course, these markets have significant challenges. But growth companies with staying power in those geographies will present very attractive investment opportunities.”

And with a record US$1.3t in global dry powder at their disposal, funds will be grateful for the opportunity to invest.

PE exit strategies 2010–2016 (US$b) YTD

by value

Capital Insights from EY Transaction Advisory Services

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Strong and steady

The most recent EY Global Capital

Confidence Barometer

results show that US executives’

appetite for deals has continued into

2016, albeit at a steadier pace.

A fter a year that saw US M&A boom to record value, our 14th Global Capital Confidence

Barometer (CCB) shows that US executives are continuing to transact at a steady pace.

The previous CCB results saw the highest level of deal intentions, with nearly 75% of US executives saying that they were planning deals. While new Barometer results slipped to 57% — this is still the third-highest percentage in the survey’s history.

While trends suggest that after the highs of 2015 we are headed for a corresponding downturn, there are still signs of optimism as the first quarter of 2016 maintained the strong transaction pace of the previous year. Survey results show executives remain enthusiastic about M&A and are reshaping their growth strategies for a world of muted macro growth and competitive disruption.

Companies have accepted the reality of a prolonged low-growth environment, as reflected in our respondents’ expectations of only modest or stable economic growth.

But despite this, deal markets drive on as companies continue to

pursue innovation through acquisitions. Nearly two-thirds of US respondents say access to new technologies is driving acquisitions across sectors. Other deal drivers include the ongoing demand for market share to generate return; commodity volatility and a strengthening dollar; and a PE-driven wave of divestitures that is multiplying assets for sale.

Acquisition is not companies’ only means of acquiring innovation. They are also pursuing alliances to gain access to technologies. Almost 50% of US executives are forging such alliances.

These partnerships have not reduced the appetite for traditional M&A, however. Half of US respondents say acquisitions are a top boardroom priority, more than double the rate of their global counterparts. And while shareholder activism has eased as a major boardroom priority, it has not slipped from the agenda, as nearly 75% of US respondents expect hostile bids to become more prominent.

Several Barometers ago, we noted that the US was “ahead of the curve” with dealmaking. US companies emerged from the post-crisis M&A mindset sooner and began transacting earlier, ushering in this current global wave. In this Barometer, we find US boards and C-suites continuing this clairvoyant role and helping to forge a modern, two-track deal market. They are nimbly responding to the “digital-everything” wave by both forging alliances and making deals. And they are reimagining their capital agendas to anticipate a new competitive landscape.

Richard Jeanneret is the Americas Vice Chair of Transaction

Advisory Services, EY.

View from the US

© Matt Greenslade

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“Everything starts with a strategic plan.”Jay Hofmann and John Drennan discuss the unique ownership structure at Trinity Consultants and its future growth strategy.

In May, Dallas-based environmental consulting company Trinity Consultants celebrated 42 years of

business. Over four decades, the company has grown to almost 600 employees in 48 offices globally, helping organizations comply with environmental regulatory requirements and optimize environmental performance for long-term sustainability.

Trinity Consultants performs more than 2,000 environmental consulting projects every year, primarily focusing on

Jay Hofmann (JH) is President and CEO of Trinity Consultants, based in the firm’s Dallas office. Previously serving as the company’s COO, Hofmann has been with the company for more than 30 years.

John Drennan (JD) is Director of Corporate Development at Trinity Consultants, overseeing all M&A activity for the firm.

permitting and compliance, as well as broader sustainability goals. Trinity has a diverse client base in highly regulated industries, including chemicals, oil and gas, electricity, cement, forest products, and general manufacturing. These are based across a number of jurisdictions, including the US, the UK, Canada, China and the Middle East.

A lot has changed since the company’s founding in 1974, including its ownership structure: today, the firm has approximately 360 employee shareholders, who collectively own 44% of the company.

In 2007, Trinity first recapitalized with private equity (PE), a process that was repeated in 2011 and 2015. This process involves a PE firm buying a majority ownership stake in the company, along with the employees.

In August 2015, Trinity completed its third recapitalization, partnering with California-based PE firm, Levine Leichtman Capital Partners (LLCP). LLCP has managed about US$7b of institutional capital since its inception and invests widely in middle market companies in the US and Europe. The transaction saw LLCP purchase controlling interest from Gryphon Investors, who first partnered with Trinity Consultants in 2011.

“I’ve been in this business for almost 20 years and private equity, in my opinion, has become the preferred method of generating shareholder equity liquidity, at least for companies of our size. ”

© Courtesy of Trinity Consultants

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| Investing | Optim

izing | Preserving | R

aising |

Q: Why has Trinity chosen that ownership structure and does it give employees more impetus from that point of view?

JH: Ever since our founder started offering stock up for sale in 1990, I felt — certainly as one of those employees buying shares — that it was a strong motivator to weather the good times and the lean times. And it also helped motivate employees to do what we could to grow the company. However, I will say that it didn’t come easily. Not everyone is in a position to invest. And, after only a short period of time the stock was valued at a price that was not insignificant. But, we got enough folks who bought in and then people began to realize the value of the opportunity.

JD: The early investors bought in before they had any certainty of a liquidity event, based solely on their belief in the company. Since then, we’ve had two successful PE transactions and we’re hoping the third will be just as successful. It’s been a great story so far, one that has benefited the shareholders tremendously. I’ve been involved in M&A for almost 20 years and PE in my opinion, has become the preferred method of generating shareholder equity liquidity, at least for companies of our size. JH: It’s not easy in the early days, trying to convince people that it’s worth writing out a cheque. That was the hardest part of the whole

thing, I think. Like John said, once there were some success stories, you’re not just the founder making money, but others as well — then it became easier. Part and parcel of the success of this company is that employees are material owners, and they benefit from value creation.

Q: How does Trinity Consultants differ from its competitors?

JH: I think the differentiator has been that we have grown the business but largely maintained our scope. A majority of our business is in air quality, however, we are quite large now for such a company with a narrow scope. We have great brand name recognition in our vertical and

“Not everybody is mentally prepared to buy into a company ... but, we got enough folks who bought in and things started to snowball.”

600Over four decades, the company has grown to almost 600 employees in 48 offices globally.

© Courtesy of Trinity Consultants

© Courtesy of Trinity Consultants

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that sets us apart. Most target customers know us as a reliable “go to” resource if they have a Clean Air Act problem.

Once you’ve developed a brand that is known somewhat nationally, it’s relatively easy to put dots on the map. It’s important, because at the end of the day, the work is sold primarily on a local basis.

Q: How important do corporates consider sustainability, environmental and clean air issues?

JH: Certainly at the site level, there is enormous attention on compliance issues. Federal and state regulatory programs are complex and have significant enforcement implications, both for companies and their responsible officials.

It’s a monetary fine, it’s an inability to operate, or not getting your permits. From an operations standpoint, companies can’t afford noncompliance.

My general assessment would be that not all companies think about sustainability in the same way. Certainly there is a marketing component in sustainability. Companies that sell directly to the public are naturally more sensitive to public perception issues and you see that in their advertising. We see that a little bit in our business in terms of the kinds of assistance those companies need from us.

Q: How do you go about the dealmaking process? What is your acquisition strategy?

JD: Everything starts with a strategic plan. That strategic plan has three or four main elements:

First and foremost, we want to protect our home court — to continue to maintain market share and grow market share in our core business, which is air quality consulting. Four years ago, part of our strategic plan was to analyze where we were under-penetrated. We were under-penetrated in California, the ninth largest economy in the world, with revenues at 3%—4% of our total revenues. We strategically invested there and now, in the air market, California is about 15% of our revenue.

We also look for acquisitions that compete with one of our existing offices. We bought

great firms in Atlanta; Baton Rouge, LA; Irvine, CA; and in St. Louis.

We’re looking internationally as well and studying markets — in the UK, Germany, and South Africa, for example. We’re trying to find markets and companies with similarities to our US business.

There are other niches that we are looking into and have invested in. We acquired a firm in air quality and meteorological monitoring; an industrial hygiene and toxicology firm based in San Francisco, which was a very successful acquisition; and an aquatic science firm in Canada with two offices.

Q: What are the things you look for in terms of business partnerships and acquisitions?

JD: There’s got to be a highly technical component; either environmental or scientific. In conjunction with our PE sponsors, we’ve hired outside consulting

“... not all companies think about sustainability in the same way.”

firms to help us to fine-tune our strategic plan.

If you say, “I want to buy one of these five firms,” you may be waiting forever. You have to understand in general what you’re looking for, whether it be in our core business, or in adjacencies, and be willing to act if it comes across your desk. Many of our acquisitions are not represented by investment bankers or business brokers. We reach out to people directly or through our network of people. We have almost 600 employees who are telling me frequently about a firm they ran into that’s pretty good. Then we reach out to them. It may take three to five months, or it may take three to five years to get a transaction negotiated. It just depends where they are in the life cycle of their company.

For further insight, please email [email protected]

Trinity Consultants has approximately 360 employee shareholders, who collectively own about 44% of the company.

44%

© Courtesy of Trinity Consultants

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Introducing digital disruption 2.0

The newest wave of digital disruption

has the potential to revolutionize

business models across a range

of industries.

The fact that streaming has overtaken digital music downloads in the US should be no

surprise. Music was central in the initial wave of digital disruption. This was about the distribution of intangible digital assets. The old industry itself, the record labels and music publishers, have been dominated by companies like Apple and Spotify.

The latest wave of digital disruption is centered on connectivity of physical assets. Digital disruption 2.0 is about the Internet of Things (IoT) and has the potential to revolutionize business models across a wide range of industries that produce the underlying physical apparatus.

Non-tech companies acquired US$148b of technology and digital assets in 2015, more than the previous three years combined. There was also a 23% increase in the number of such deals. Major players include the industrials and automotive sectors, which account for nearly 20% of these deals.

Industrials are in the midst of a technological revolution. Accelerating industrial automation and robotics are combining with

sophisticated design software to disrupt the value chain and challenge the fundamental business model of many subsectors.

The automotive sector is also experiencing a shift. The smart or connected car is now with us, as many automotive companies strive to be at the heart of tech advances. They have been acquiring start-ups that augment the interaction between drivers and their increasingly software enabled cars. And they are not alone. We see major tech companies such as Alphabet eyeing the automotive sector as the next field for their own disruption.

One of the high profile deals in the auto-technology space was the acquisition of Nokia’s HERE digital mapping and location services business by a consortium of automotive leaders comprising AUDI AG, BMW Group and Daimler AG, for €2.8b (US$3.1b) in August 2015.

Most major auto companies learned the lesson from digital disruption 1.0. Companies must understand how digital changes the direction of their industry.

The next stage in the digital revolution will be driven by emerging technologies, including quantum computing, real time analytics, artificial intelligence and industrialized virtual reality. These will build on digital disruption 1.0 and 2.0 and manifest as the joining of the intangible and physical worlds. What sectors are most at risk of disruption? All of them. Companies should now be searching for the next wave of disrupters to secure their own future. Then plot their course accordingly.

Andrea Guerzoni Europe, Middle East,

India and Africa (EMEIA) Transaction

Advisory Services Leader, EY.

View from EMEIA

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ampb

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From sleeping giant to roaring lionIn 2012, PSA Groupe Peugeot Citroën was at its lowest ebb. But in the past four years, the company has turned its fortunes around. CFO Jean-Baptiste de Chatillon reveals how the French auto giant got back in the race, and outlines its plans for the future.

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The headquarters of PSA Groupe Peugeot Citroën, Europe’s second-largest carmaker, resides on the same tree-lined boulevard as the famed

Parisian landmark the Arc de Triomphe, an evocative symbol of victory over adversity.

The monument also provides a perfect metaphor for the fortunes of the French automobile giant. Over the past year, CFO Jean-Baptiste de Chatillon has engineered a spectacular turnaround, which saw the company move from posting a €555m (US$624.7m) loss in 2014 to a net profit of

€1.2b (US$1.35b) in 2015. The outlook for the future is just as positive: the company has targeted a 10% increase in revenue by 2018, with additional growth of 15% by 2021.

However, such optimism seemed little more than a pipe dream when de Chatillon became CFO in 2012. “I guess that nobody wanted the job when I took it,” he jokes. “We had accumulated losses for

2012—13 of €7b (US$7.8b). The priority at that time was to fix the holes in the boat and to keep it afloat, and to get some money inside the company as quickly as possible.”

In order to “fix the boat,” the company undertook a number of capital-raising measures, including selling real estate for approximately €1b (US$1.1b), and divesting its logistics unit for €900m (US$1b).

Driving changeHowever, the CFO says that even after raising this capital, the situation remained unsustainable. To improve its fortunes, the company had to take a more radical approach. Peugeot needed to regain the trust of its shareholders, suppliers and clients. “In this industry, you cannot exist if you don’t have enough cash on your balance sheet,” says de Chatillon. “The stakeholders and suppliers are the key to reducing costs in this industry.”

In 2014, the company built a new shareholder base as a way of moving forward.

The French Government and the Chinese carmaker Dongfeng each invested €800m (US$900m) in the then-ailing manufacturer, while a further €1.4b (US$1.58b) was raised from existing shareholders. “[With this investment], we would effectively be at the right side of cash on the balance sheet to be able to restructure the business and regain the trust of all the stakeholders.”

The company also de-risked its financing division by partnering with Banco Santander, allowing the Spanish banking group to provide car finance for the company in 11 European countries. “We had to cut the risk in our financing division to give comfort to the new shareholders. That was the trigger for the deal,” says de Chatillon. “In addition, it freed up a lot of capital to refinance the auto business. Santander is doing the financing and the risk analysis, and we are doing the business. So we have the best of both worlds. And this laid the groundwork for us to become competitive again in terms of financing.”

Back in the raceWith financing in place, Peugeot set about implementing a radical program of change, which would return the company to its position as one of Europe’s leading car manufacturers. “There was an understanding [among] all the teams, from upper management to the production line, that what we had been doing for years was not a solution anymore,” says the CFO. “We needed to start a new culture.” This was the Back in the Race initiative, which was built on three distinct pillars: an increased focus on cash management, the excising of loss-making divisions and a revision of pricing.

For years, Peugeot was driven by engineering and technical performance. But, according to the CFO, there was no real culture of cash management. De Chatillon sought to address this in 2014. “We set up Back in the Race to save €1b (US$1.1b) in working capital requirements in three years,” he says. “We managed to achieve €1.2b (US$1.36b) in one year, because we had extremely precise targets for each division.”

As part of the plan, the company targeted divisions that were losing money. “There is no [license] for any business in this company to be loss-making. Either you fix it, you sell it to someone who can fix it, or you shut it down.”

With this new laser-targeted approach to savings, the company sold its motorcycle division to Indian company Mahindra, and its football team FC Sochaux to Chinese investors Ledus.

The final piece of the puzzle was to change their pricing structure in line with those of their rivals. “We have cars that are as good as our competitors’,” says de Chatillon. “So we have to price them accordingly. You cannot survive in this industry if you are not effectively valuing your product. We increased our pricing power significantly across all three

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Peugeot employs over 184,000 people worldwide. Around 75% of them are based in Europe and 25% in the rest of the world.

1929Peugeot unveils its first mass-produced car — the 201.

1810Peugeot is founded as a manufacturer of coffee mills and bicycles.

Pre-1900

1890First petrol car is manufactured by Peugeot.

“There is no [license] for any business in this company to be loss-making. Either you fix it, you sell it to someone who can fix it, or you shut it down.”

1900

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brands [Peugeot, Citroën, and DS] in all the regions and that, of course, goes directly to the bottom line.”

And the Back in the Race initiative has paid off early. In February, the company announced that its auto division had hit its 2019–2023 target of 5% operating margin. Peugeot also reported free cash flows of €3.8b (US$4.3b) for 2015 and net cash of €4.6b (US$5.2b).

The company can now focus on the future with renewed vigor. “We are looking at a new profitable growth plan, which will capitalize on the efforts of Back in the Race to build the business,” says de Chatillon. “This will be a standalone plan, but we are open to any opportunity that would create value for the shareholders.”

A spin around the regions A major part of the future plan is to build on international growth in order to become less reliant on European sales, which accounted for around 60% of total sales in 2015. The company’s second-largest market is China, where sales were slightly down in 2015 (-0.9%) as a result of the country’s slowing growth.

Although fierce price competition means the market is challenging, Peugeot’s partnership

with Dongfeng has helped the company maintain a strong position in the country. “It’s quite a piece of luck for us to have two senior executives [from Dongfeng] on the board who are specialists in the Chinese car industry,” says de Chatillon. “They help us to find the right local suppliers with the right cost structure.”

The company’s third-largest market is the Middle East and Africa, where it saw a 6.4% increase in sales for 2014—15.

“We have a strong name and very good base in a number of countries in the region, and we are looking to develop further,” says de Chatillon. To that end, Peugeot is embarking on a new joint venture with Tehran-headquartered manufacturer Iran Khodro to produce vehicles in Iran.

“We are the first with this level of agreement [in Iran],” says de Chatillon. “The deal is important for us and for Iran.” Peugeot has been a leading auto brand in the country for many years. “In Iran, if you see your father driving a Peugeot, then the children also want to drive a Peugeot,” he says. “But they want a good one, and during the sanctions period, we were not able to produce them to the right level of quality.

“The investment that we are going to do together in the months to come is very promising because we have a very strong name, a lot of recognition in Iran, and we are looking to increase market share further.”

One particularly challenging region in the past few years is Latin America. To make efficiency savings, Peugeot

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Peugeot is the second-largest carmaker in Europe with 11.5% of the market.

Peugeot’s CFO explains how the drop in oil prices has affected the company

The oil question

1978Peugeot acquires Chrysler Europe.

1976The PSA Peugeot Citroën Group is created by the merger of Citroën and Peugeot.

1980Peugeot merges with UK car manufacturer Talbot.

1992Citroën sets up joint venture with Dongfeng Motors to assemble Citroën ZX models in China.

European car sales continue to grow in 2016, despite worries about slow economic growth and the potential of a UK exit from the EU. Improved sales in Europe and the US have coincided with record falls in oil prices. In the first quarter of 2016, car sales in Western Europe were up almost 8% from 2015, while the oil price was stuck at around US$40 a barrel. Tumbling oil prices are not the only cause of the surge

in sales. Pent-up demand and cheap financing are also a big part of the equation. But de Chatillon acknowledges that falling oil prices have played a key role in promoting sales and cutting costs for Peugeot.

“In Europe, the demand for cars is up. It is costing people less to drive, so we are seeing strong demand in Europe, which is not directly linked to the vitality of the region,” says the CFO. “And the fall has

promoted significant savings for companies like Peugeot, in terms of the costs of logistics and plastic. One barrel of petrol [is used in the making of] each car, so [the fall in oil prices] is directly linked to the cost of production. That improves our profit and loss significantly.”

However, the drop in oil prices can be something of a two-edged sword, because it adversely affects regions that are reliant on energy

production. “When the falls become too pronounced, it can trigger a series of incidents, which depress countries such as Algeria, which is a very big market for us,” says de Chatillon. “[Algeria is] closing its market, which has recently [introduced] quotas, and is not a free market anymore. This reduces our export capacity and distorts some exchange rates, which is not helpful for us.”

1950

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2000

Chief Financial Officer and Executive Vice-President of Information Systems, PSA Groupe

Age: 50

CFO since: January 2012

Educated: Université Paris-Dauphine and Lancaster University

Previous positions: De Chatillon first joined Peugeot in 1989 and has since held positions in management, finance, marketing and commercial management in France and abroad. His most recent positions at PSA Peugeot Citroën include Director of Warranties and Group Financial Controller — the latter post he held from May 2007 to January 2012. Since 2003, he has also served as Chief Executive of Citroën Belgium Luxemburg.

Jean-Baptiste de Chatillon’s CV

Peugeot CFO Jean-Baptiste de Chatillon explains how Peugeot is meeting the two fundamental challenges facing the industry

“The industry has a number of challenges, but the main ones are changing consumer needs and regulation. Mobility is a basic human need, and the industry is heavily impacted by changes in the way people live.

For example, we currently face the issue of how people are looking at mobility in terms of owning a car vs. using a car to be mobile. To ensure we are well positioned in this [new mobility] market, we signed a deal last year with the Bolloré Group [which runs the Autolib car-sharing scheme in Paris] to offer mobility solutions using electric cars.

We have also been heavily impacted by the regulations around the car industry — particularly in recent years, with the growing demand for security and for low-carbon cars.

In terms of reducing CO2 emissions, Peugeot is the leader in Europe. This is [thanks] to the high level of R&D that has been done on a range of engines. In addition, we are in a very good position on diesel, which is very much in the spotlight at the moment. Four years ago, we made the decision to move all diesel vehicles to selective catalytic reduction (SCR), which is the best technology for diesel, in terms of low emission of nitrogen oxides (NOx).”

The state of the market

“All the data [we have gathered] is a great way to transform the way we serve our clients. The industry is obviously obsessed with cars, but now we have a great opportunity to become obsessed with clients.”

1998Peugeot car parts subsidiary ECIA completes a friendly acquisition of

equipment manufacturer Bertrand Faure. The new company is named Faurecia.

1998Peugeot acquires car manufacturer Sevel Argentina.

2002Joint-venture Dongfeng Peugeot Citroën Automobile (DPCA) created with Dongfeng Motors to expand cooperative production of Peugeot and Citroën models in China.

2005Joint PSA Peugeot Citroën - Toyota production plant inaugurated in Kolín, Czech Republic.

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implemented its Back in the Race program in the region. “There was a large factory with a lot of fixed costs and very few sales,” says de Chatillon. “That’s a recipe for disaster. So the first thing we did was to manage the region with its own break-even point, because we can’t have a loss-making region.

“We divided the fixed-cost base in half. It was then that people discovered that they could do just as well with half of the resources they had before, because decision-making is quicker and more efficient. Once you’ve taken out hundreds of millions in costs, then you see that you can reinvest differently, with maximum frugality and a very high rate of localization. You need to have local suppliers [to] build a business that is effectively protected from the exchange rate’s erratic movements.”

A regional recession saw 2015 sales in Latin America drop 21% compared with 2014. However, the CFO is bullish about facing the challenges. “The region is in bad shape economically,” he says. “Markets are down, and this doesn’t make things easy for us. But it’s very stimulating to look for solutions and to work on new efficiency measures. The investments that we are preparing in these regions will be profitable.”

It was also revealed in April that Peugeot anticipates a return to the US market after more than two decades’ absence. Peugeot’s 10-year plan to re-enter the world’s largest car market will begin in 2017, with a car-sharing scheme. If this proves successful, the company will look to relaunch its retail operations in the country.

Deals on wheelsThe dramatic turnaround in Peugeot’s fortunes has led to

speculation about acquisitions. “We are open to more M&A now that we have a very strong balance sheet again,” says de Chatillon.

In 2015, the company acquired Mister Auto, an e-merchant that deals in spare parts. Peugeot has chosen to keep the company completely autonomous. But the CFO says that it nonetheless is “a very good enabler of profitable growth” because it enlarges the automaker’s client base.

De Chatillon is also keen to talk to other auto giants, including Fiat Chrysler, General Motors and Toyota, about potential collaboration. “These partnerships stimulate us to improve the way we do things,” he says. “However, the main criteria for these partnerships is whether they improve [our] profitability or not. Of course, you have to have the vision to see how these partnerships will work out over time, because they are long lasting. But globally, the way we allocate cash is strictly on the criteria of value creation. Our collaborations save us money and create value for our shareholders.”

Full speed aheadThe Back in the Race plan has enabled the company to drive itself forward with renewed optimism. And for Peugeot, that future will be built around cutting-edge technology, stringent cost control and a focus on customer needs.

The company looks to review the future needs of drivers and to anticipate changes in car usage patterns. “All the data [we have gathered] is a great way to transform the way we serve our clients,” says de Chatillon. “The automobile industry is obviously obsessed with cars but now we have a great opportunity to become obsessed with clients.

“I see a bright future if we manage this properly. We have millions of people using our cars and going through our websites. We don’t currently use as much of the data we receive as we should and we need to make the most of it. The future of this industry will be centered on giving clients much more than just a car.”

This focus on the changing needs of customers and advanced technology is all part of the company’s new Push to Pass plan, announced at the start of April. This project for the 2016–2021 period is set to build on the efficiency and agility that characterized the Back in the Race era. At the same time, the new plan will also differentiate the company’s brands and ensure profitable growth in all operating regions.

The CFO is excited by the prospect of entering a new era. “Push to Pass is our future. It is named after a small button in competition cars that releases a reserve of power to [help you] overtake your competitors,” he says. “We think that with the culture we are developing in terms of overall performance and financial management, we have this reserve of power. The team spirit is there [for us] to push and get this extra boost to develop more performance for our shareholders.”

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2010

The role of the CFOPSA Peugeot Citroën Groupe CFO Jean-Baptiste de Chatillon shares his top four fundamental traits for C-suite success.

Be individual. “I think what makes a CFO is the person. If it were just a role based on standard criteria, then it wouldn’t be fun. You make the role with your input into the team.”

Be an enabler. “The CFO today is there, first, to enable things, not to prevent them. That’s a big challenge, because you need to evolve how you control the company every month. You need a deep understanding of the business to be an enabler, not a blocker.”

Be a protector. “Of course, you need to protect the company financially. You need to make sure that there is enough cash in the company to protect it from the ups and downs. And then, depending on the capacity of the incumbent, you can also participate in the strategy of the company.”

Serve the company. “A CFO needs to be transparent and needs to serve the company. We are there to serve, rather than to try to be the main protagonist.”

2016Peugeot introduces new "Push to Pass"

strategic plan for the 2016—21 period.

2010Peugeot marks its bicentenary with a new, more dynamic logo.

2011BMW and PSA Peugeot Citroën invest €100m euros in a new hybrid technologies joint venture.

2014Final agreements are signed

between PSA Peugeot Citroën, Dongfeng Motor Group and the

French State.

2012PSA Peugeot Citroën and General Motors create a long-term global strategic alliance.

2013PSA Peugeot Citroën inaugurates new plant in Shenzhen (China) in joint venture with China Changan Automobile Group.

2014 CEO Carlos Tavares introduces "Back in the Race"; the PSA Peugeot Citroën strategic plan for 2014— 18.

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Disruptionin sightThe industrial Internet of Things is on course to revolutionize the way the world does business.

What do a bulldozer and a hospital MRI scanner have in common? Both are high-value assets and both are utilized to a fraction of

their potential. But that is about to change. The rise of the industrial Internet of Things (IoT) — technology that allows objects to send and receive data — promises to increase hugely the shareability of such assets, triggering a surge in utilization rates.

The idea of connecting industrial assets to digital networks is not new, but according to Paul Brody, EY Technology Sector Strategy Leader: ”We’re now shifting from older, proprietary models of interconnection that tend to be limited to a factory or occasionally an enterprise toward more of a standardized, internet-accessible mode of connectivity and collaboration.”

The GE Foundation predicts that the collision of machines, data and analytics will become a US$200b global industry from 2015—17. And Research firm Gartner predicts that 6.4 billion connected things will be in use worldwide in 2016, up 30% from 2015.

This explosion of all-pervasive connectivity is set to boost shareability, making it easier to generate new revenue streams from industrial assets that have traditionally lain idle between jobs. This paves the way for industrial-sharing apps built along similar lines to consumer offerings such as those of transport network company Uber and accommodation-sharing site Airbnb. It allows companies to provide access to assets without needing to own them.

6.4bconnected things will be in use worldwide in 2016, up 30% from 2015. Source: Gartner

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| Investing | Optim

izing | Preserving | Disruption

in sight“Our research shows that a lot of industrial

assets are very lightly used,” says Brody. “For example, a lot of high-value enterprise assets such CT scanners, MRI machines and office space, have fairly low utilization rates. Industries that depend on assets of this sort are likely to face the biggest levels of disruption.”

Taking up the slackSo how will the rise of the industrial IoT transform asset utilization rates? “The first step is instrumentation,” says Brody. “Very quickly, we’re going to see that many industrial assets are not very busy. So we move to the second stage: optimization.” Not knowing what assets you have got or who is using them is a widespread problem. A study of US hospitals by GE Healthcare found that the average utilization rate of hospital medical devices was just 42%.

Brody says that the third stage is when an organization takes potentially shareable assets and puts them into real-time digital marketplaces. “This is where the industrial IoT becomes the ‘economy of things’,” he says. “Imagine if you took every MRI machine that was running at 25% capacity and put it in a digital marketplace ... prices for MRIs would plunge.”

One of the reasons for Uber’s swift and disruptive success is its ability to leverage two vast and lightly used assets: private motor vehicles and people prepared to drive them. Utilization is staggeringly low: cars are the second-most valuable possession most people own, yet are only used 4% of the time.

Few industrial assets are as lightly used as this, however, the rise of the industrial sharing economy is still expected to have profound consequences. “Asset-intensive industries where assets are not highly utilized will experience supply shocks,” predicts Brody.

Industrial evolutionFor established businesses, getting an early foothold in the sharing economy is not only a chance to tap into new markets, but also insurance against the threat of future disruption. This is fueling an uptick in dealmaking. “Right now, we’re seeing people preparing for this wave,” says Brody. “You see companies with assets buying companies with technology capability and market-maker experience.”

Construction and mining equipment manufacturer Caterpillar’s investment in US start-up Yard Club, a company that has developed an online peer-to-peer equipment rental platform, hints at the kind of partnerships that are likely to become widespread. Yard Club allows contractors to rent machinery to each other between

“Right now, we’re seeing people preparing for this wave. You see companies with assets buying companies with technology capability and market-maker experience.”

jobs, converting slack periods into cash. “Idle time is hard to swallow,” Yard Club’s founder and CEO, Colin Evran, told CNBC.

Business-to-business sharing platforms work by creating a user-friendly marketplace for resources that were previously only accessible through ownership or via long leases. And it is not just idle construction equipment that is finding new outlets. US logistics startup Cargomatic connects shippers with licensed carriers through the web and mobile apps. Cargomatic’s backers include Volvo Group Venture Capital AB, the corporate investment arm of the Swedish vehicle manufacturer.

Under-used commercial real estate is also ripe for sharing. Seattle-based start-up Flexe is a cloud-based warehousing marketplace that connects organizations that need space with companies that have storage capacity to spare. Office space is also utilized in the sharing economy. Players like ShareDesk and LiquidSpace, allow users to rent office space on New York’s 5th Avenue from US$10 per hour.

New value creationSharing underused assets is the most common way that value is being created at the intersection of technology and assets. But it is just the start. “I think we’re going to see more and more cross- ©

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enterprise digital integration,” says Brody.Digital integration is not only about making better use of existing capacity, but also about building entirely new capabilities. Application programming interfaces (APIs) hold the key. These are digital bridgeheads for accessing software applications and tools. APIs make it possible to build hybrid business models easily, using information and services provided by others to create new value.

“Logistics is an example,” says Brody. “With a company like Uber, you can access its services via an API, so I can arrange a pickup from other apps communicating directly through Uber. Imagine a mash-up of two different companies — a short-distance transport company and a long-distance transport firm — all through APIs. You can assemble a national point-to-point delivery network that’s digitally integrated, without having to build a national delivery network.”

Mash-ups are likely to be one of the main drivers in the next wave of innovation. “We coined the term ‘industrial mash-ups’ to describe this new form of dynamic and often automated partnering,” says Jeff Liu, EY Global Technology Industry Leader, Transaction Advisory Services. “Mash-ups will enable important benefits within the digital economy.”

Industrial mash-ups accelerate innovation by reducing dealmaking friction, so collaborative participants can build scale and capabilities quickly. “The result is that organizations are able to migrate more rapidly to comprehensive, end-to-end solutions,” says Liu. “It’s tempting to see these emerging types of deals merely as alliances or JVs, but this is too narrow. Over time, we expect these relationships to become increasingly automated. Driving business friction down should in turn, drive innovation up.”

Examples of industrial mash-ups are already appearing. IBM has partnered with fellow US tech giant Apple, multinational medical devices and pharmaceutical manufacturer Johnson & Johnson and medical devices company Medtronic to optimize consumer and medical devices for data collection, analysis and feedback. “Industrial mash-ups are very flexible,” says Liu. “Partners can bring specific portions of their broader value propositions to the deal, and then narrowly define deal parameters in a way that insulates other areas of the business.” The need for collaboration has

never been greater. Industrial ecosystems depend not only on domain knowledge and customer relationships, but also on expertise in fields such as analytics, cloud services, wireless connectivity, software and security. Few organizations possess all of this on their own.

The automotive sector is a focal point for all of these strands. Carmakers need to respond to the shift toward driverless vehicles while adapting to a world in which car sharing threatens to dent demand. GM’s response has been to form a strategic alliance with ride-sharing service Lyft. The Detroit-based car giant is sinking US$500m into Lyft to help it expand and is working on the development of a network of on-demand autonomous vehicles. The alliance taps into GM’s expertise in driverless technology and Lyft’s capabilities in providing a variety of ride-sharing services.

Building bridges with blockchainWith disruptive collaboration becoming the norm, businesses need tools to establish trust quickly and reduce the costs and delays associated with traditional transactions. Blockchain, a distributed database that maintains an ever-growing list of data records, is one such tool.

“Ecosystems depend on managing transactions, payments and receipts,” says Brody. “Blockchain has a couple of amazing features. First, it’s distributed among all participants, so all have a shared copy of the same data. Second, it’s almost impossible to commit fraud or collude with another because the audit trail is so good.”

Blockchain is best known as the technology underpinning bitcoin, the peer-to-peer digital

The collision of machines, data and analytics will become a US$200b global industry over the three years from 2015 to 2017.Source: GE Foundation

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The simplest way to explain blockchain is as a decentralized database with identical time-stamped copies of

data held on multiple computers. This is why people call it a distributed ledger. This provides consensus and security — to hack a blockchain, requires attacking hundreds of computers at once.

Finance firms are interested in blockchain for two reasons. First, it has the potential to improve the customer experience, because transactions are quicker and easier. With this technology, transfers are instantaneous and secure, which is incredibly powerful. Second, it reduces manual processing and paperwork, and could therefore also reduce its cost. Everybody assumes blockchain is about currency, but there’s more to it than that. It’s just as applicable to transport, energy and agriculture as it is to banking. The really interesting thing about blockchain is that it gives you proof-of-state at a point in time. One of the problems in computer science is that we don’t know if something we have received is the same thing that was sent. Blockchain overcomes this.

If you’re using a handheld device to check assets in the field, your data goes to a central server. But there is no certainty that the data received hasn’t been hacked, or even if it was you who sent it. But if you have hundreds of handheld devices on the same network testifying to the location of the device you’re using, you can be confident that the data came from that specific device at that specific time. This capacity for ambient accountability — the blockchain being the digital auditor — is often missed.

This technology has the potential to affect all industrial sectors. The wild card here is: what are the companies that can be invented due to blockchain technology? That is likely the most interesting question of all. Simon Taylor is Co-Founder of 11:FS and former VP Entrepreneurial Partnerships at Barclays.

ViewpointFinTech expert Simon Taylor on the rise of blockchain.

currency. But cash transactions are just one of blockchain’s possible applications. The same underlying principle — known as ”distributed ledger” — can be used to combat counterfeiting and fraud. As an adjunct to this, distributed ledger systems provide an execution environment for ”smart contracts.” These are computerized contracts that can be verified and enforced automatically.

Blockverify is one of a number of start-ups using blockchain to build trust, promote transparency and enable transactions within complex supply chains for products such as pharma and electronics. “We create digital assets that correspond with digital or physical goods,” explains Pavlo Tanasyuk, CEO of Blockverify. “These are validated at each point along the supply chain, from the blueprint owner to the end customer. And, as everything is managed on a distributed ledger, it enables participants not only to trust the provenance of physical goods, but also to verify all the documentation that goes with them. The same technology also lets us use smart contracts as enablers for deals within the supply chain.”

The need for transparency in supply chains has never been greater. According to one estimate, counterfeiting and piracy cost the global economy about US$1.7t annually.

One place where the need for transparency is especially high is the world of diamonds. The pipeline from mine to marketplace is highly complex and fraught with issues such as recent tightening of finance terms and fraud.

“We’re using the emerging technology of blockchain and smart contracts as a way to assist in the reduction of fraud,” says Leanne Kemp, CEO of Everledger, a Barclays Accelerator startup. The company provides a permanent ledger for diamond certification and transaction history. Launched last year, Everledger has registered close to 1 million stones.

Diamonds highlight one of the key challenges at the heart of the IoT: the question of identity. Even the most robust certification systems are only as good as their ability to match the right data with the right asset. The problem with diamonds — as with many other objects — is they cannot be ”connected” in the conventional sense: you can’t wirelessly enable a diamond and serial numbers on stones can be ground off.

Everledger’s solution to this problem draws on the world of forensic science. “We create a digital thumbprint of the diamond,” explains Kemp. “Not only do we take the serial number, we also gather 40 metadata points of that diamond and we create a 3D map of that as a thumbprint, and put it into the blockchain.”

This ability to bridge the gulf between digital data and physical assets has the potential to transform not only the diamond pipeline, but also supply chains right across industry. “It’s about capturing uniqueness,” says Kemp. “Industrial supply chains have been blind up until now. What we are learning from this technology is that they don’t have to be.”

For further insight, please email [email protected]

“What’s different now is that we’re shifting from older, proprietary models of interconnection toward more of a standardized, internet-accessible mode of connectivity and collaboration.”

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Driven by dataFinTech is blurring lines between the insurance, tech and car-making industries, and changing the way consumers interact.

There’s nothing new about “spy-in-the-cab” systems in commercial transport. The UK parliament first

debated compulsory tachographs (a vehicle speed and distance recording device) for trucks in 1968; which were then made mandatory in 1970.

Forty-five years later, and the “spy in the cab” is a telematics black box — a device that records information about your vehicle and transmits it to a data center in real time. And the purpose is not to prevent too many hours spent behind the wheel, but a promise of a lower insurance premium.

That is the pitch from a new generation of firms offering usage-based insurance (UBI). UBI allows those facing large premiums to prove that they are safer drivers and earn rewards.

“Our CEO Mike Brockman realized [car insurance] was a broken industry for young people. Not just in terms of premiums, but also because [young drivers] were least likely to have modern safety features,” says Charlotte Halkett, Group Marketing Actuary at InsureTheBox.

The fix turned out to be a combination of sensor technology, always-on communications and a culture shift. “People have become used to sharing their data online,” she continues. Few youths will happily accept being watched.

But the economic incentive of a drastically reduced premium (or voucher offers) is compelling. And if your black box says you are driving smoothly, staying within speed limits, clocking up fewer miles or avoiding late-night trips, why shouldn’t you be rewarded?

Insurance breakdownFor new players, such as InsureTheBox, the objective is simple: gather the data from insured cars; design analytics to produce useful insights; and sell the idea to consumers. But the story of Carrot, which offers a similar black box for young drivers, tells us something about how the insurance industry is handling the FinTech revolution.

“It started as Track Global, whose founders saw telematics as a way of recovering vehicles, such as overdue hire cars,” explains Andrew Brown-Allan, Marketing Director at Carrot. “They realized the data could be useful in establishing the circumstances of an accident. But they found that promoting this idea of usage-based insurance was hard work. And so they launched an insurer to promote it in 2012.”

That was the same year the UK-based Aviva Drive smartphone app was launched, which logs driver behavior, albeit on a voluntary basis. Many established insurers see the need for this

change. “The insurance industry has got a growth conundrum,” says Nadine Mirchandani, Americas Financial Services Leader, Transaction Advisory Services, at EY. “The millennial generation doesn’t want to go into a brokerage and have a conversation with an executive who looks like their parents. So the challenge is really the distribution model and how technology will solve that demand gap.”

The question is whether established industry players can do that. Lisa Moyle is Head of the Financial Services and Payments program at techUK. She believes the reason we are yet to see decisive moves into FinTech by traditional industries like insurance, is because existing technology is holding them back.

“Simplifying overly complex and outdated systems that were not designed for the online, multichannel, 24/7 market that we have today is an important step in the right direction,” she says. “The impact of new entrants and innovative technologies will drive change.

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40%increase in black box

telematics car insurance policies

year-on-year

107mestimated global

insurance telematics subscriptions by

2018, an increase from 5.5m at the

end of 2013

40%drop in crash risk when a new driver has a telematics box

0.5mthe number of black box policies today, an increase from 12,000 in 2009

up to

25%the insurance savings

for drivers using usage-based

insurance (UBI) and black box policies

© Kapreski/Shutterstock.com

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aising |

Insurance companies will need to respond to changing customer demand, in the way that banks are now [beginning to].”

Customer valuesThe insurance industry, in general, could improve consumer engagement. But the picture is particularly bleak for auto insurers. This is an industry that interacts with consumers only at renewal time once a year, and when their consumers are facing a traumatic episode.

As EY Transaction Advisory Services Insurance Leader David Lambert says: “the real challenges are: having a smart customer interface; understanding your customer’s buying behavior; and using clever analytics and customer journeys to retain your customers and to cross-sell.”

Although he is optimistic about the strength of insurance companies’ tech — arguing that the short-term nature of the cover minimizes insurers’ lock-in to legacy business models — he

argues that ramping up customer interactivity is vital.

“Technology can stitch together a lot of the complex back-office plumbing and present to customers a simple, modern interface,” says Lambert. “If you make a claim, the software can access your records for a different part of the system, where you might have a health insurance policy, say, and pull up relevant information to make the whole experience seamless.”

“Our claims reports are objective, which is a big change for the traditional claims management department. And it takes time to adapt in order to make best use of the data we can now provide,” says Brown-Allan. Having speed, location, local traffic and weather reports — even collision images automatically generated moments after an impact is a huge leap forward.

“Our black box can detect collisions and then alert a call center, passing on telemetry of

exactly what has happened,” says Halkett. “But developing the protocols for handling that data — whether an operator should check in with the driver, do we need to alert the emergency services and so on — is a learning process.” And the real question is how

you create a smoother driving experience for the customer. “We could help diagnose mechanical problems, pinpoint ways to save drivers money, and take the mystery out of the process,” says Dan Preston, CEO at Metromile, one of the first UBI players to launch in the US. “We found we could expand it even further to help customers avoid parking tickets, remind them where they parked their car, and more.”

Metromile also offers a special deal for Uber drivers: different cover (and premiums) for the parts of the day when they are ridesharing compared with that for their personal driving. “We’ll continue to see changing needs,” says Preston. “The insurance industry certainly won’t be eliminated. But the risks associated with car ownership and driving may change, and we’ve already created hypothetical pricing models around that.”

The data dictatesFinTech is not just about customer engagement, and Preston is clear that it is the availability of rich real-time data about drivers that has been the game-changer. The entire insurance supply chain is working out how best to use the flood of data being generated by successive new generations of vehicles — including the much vaunted connected car standards — to become smarter, more responsive and more efficient.

“All of a sudden, traditional markers around underwriting and risk might be better informed by new data about behaviors, lifestyle, environment — things that allow us to make better risk decisions,” says Mirchandani. “But does that information reside currently in the insurance company, with the customer or

“One big M&A theme is technological transformation, but we haven’t seen that translate into big-scale deals in insurance yet.”

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40%increase in black box

telematics car insurance policies

year-on-year

107mestimated global

insurance telematics subscriptions by

2018, an increase from 5.5m at the

end of 2013

40%drop in crash risk when a new driver has a telematics box

0.5mthe number of black box policies today, an increase from 12,000 in 2009

up to

25%the insurance savings

for drivers using usage-based

insurance (UBI) and black box policies

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even with the carmaker? And how is it accessed?”

For firms such as Carrot and InsureTheBox, which install their own black box units to capture data, that is less of an issue. But as UBI grows beyond the high-premium young-drivers market, insurers are going to rely increasingly on user-generated data or streams from the modern car’s scores of sensors.

“Technology isn’t the important bit: it’s what it enables,” says Brown-Allan. “Data is relatively valueless unless it translates into better experiences for the customer and underwriter. Our book has 42% fewer accidents compared with a similar book without the telematics. So it’s partly about the insurer keeping more of the premium they earned. But a huge part of it is that people’s lives are saved.”

How that data should be analyzed and evaluated is also a puzzle. “It’s that old saying: if you torture the statistics, they’ll confess to anything,” says Mirchandani. “The question is: what is the right information to drive the decisions? And I think there is potentially big confusion with all this new telematics data, around causation and correlation.”

Running for coverOne common characteristic of these disruptive forces in auto insurance is that they all bring elements from outside of the sector. Customer interaction and user experience is a retail and digital-design play. The in-car sensors are the province of the automakers. While the insurance industry is no stranger to algorithms, the volume and variety of data in auto insurance is similar to that in high-frequency trading or machine learning. When sectors collide — deals cannot be far behind.

“One big M&A theme is technological transformation, but we haven’t seen that translate into big-scale deals in insurance yet,” says Lambert. “We have seen quite a lot of VC-type activity from insurers looking to place bets on emerging tech. And we could easily see alternatives to M&A.”

Insurance is highly regulated and rests on specialist skills that will never be entirely disrupted away, and this will make new entrants hesitate, Lambert says. Even tech giant Alphabet was defeated by the industry, closing its Compare insurance portal in the UK and the

US after one year. But businesses with a good understanding of customer and claim-type activity are venturing into the insurance space. InsureTheBox was bought last year by Aioi Nissay Dowa Insurance — part of Japanese insurance giant MS&AD Insurance Group, which has close ties to Toyota. And that model looks like it might be replicated: big established insurer teams up with an auto original equipment manufacturer (OEM) whose product generates all the data, and an upstart FinTech business with the IP to crunch the data to shape customer engagement.

“There are going to be winners and losers among insurers at every level. And a key factor

is: who actually translates the technology the fastest into a really effective customer proposition,” says Lambert. “Businesses that lead the way may themselves become acquisition targets for other groups that were trying to leapfrog and gain access to that knowledge. We’re certainly seeing that broader definition of FinTech as potentially one of the most important drivers of M&A activity over the next few years.”

“This is about doing things in a completely different way,” Halkett concludes. “Telematics doesn’t work if you just take traditional insurance and bolt it on. You have to bring together new approaches from actuaries, marketing, technology and customer relationship management in a new value chain. The customer, ultimately, owns the data. They have the key.”

For further insight, please email [email protected]

“There are going to be winners and losers among insurers at every level.”

Global insurance telematics subscriptions could exceed 107 million in 2018 and UBI could represent more than 100 million telematics policies and generate in excess of US$56b in premiums by 2020. Source: ABI Research

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New roads to investment

The Asia-Pacific region has enjoyed a stellar

year of transactions, and developments in China’s

One Belt, One Road initiative is likely to

spur more.

The implementation of China’s One Belt, One Road (OBOR) initiative last year was the realization of a major milestone for the Asia-Pacific

region and the catalyst for a new wave of overseas investment.

China invested US$14.8b in countries along the Belt and Road in 2015, up 18.2% from the previous year. Meanwhile, outward FDI from the machinery manufacturing industry grew by 154.2% during the same period.

OBOR will expedite the build-up of urban infrastructure areas to help open up markets and facilitate trade, capital flows and economic integration. The growing infrastructure needs of the OBOR areas will boost deal volumes and product innovation within Asia-Pacific capital markets.

The OBOR promises to transform the political and economic landscapes of Eurasia and Africa over the coming decades via a network of infrastructure partnerships across the energy, telecommunications, logistics, law, IT and transportation sectors. We see five emerging trends spurred by this increased investment: Sustainable high growth: China’s outbound investment is expected to grow by more than 10%, and maintain a sustainable high growth for the next five years. Wider investment: Chinese investors will find more investment opportunities along the Belt and Road, focusing on economic and capacity cooperation with developing countries. They will also increase their investment in developed

countries such as the UK, Germany and the US. High-end diversified investments: Chinese enterprises are expected to enter into more acquisitions in sectors such as consumer products, technology and the services industry. Infrastructure goes global: High-speed rail (HSR) and nuclear power are likely to receive increased investment, thanks to the OBOR. There are 24 nuclear power units under construction in China, ranking them first in the world; it is also planning to build 30 units in countries along the Belt and Road by 2030. New image: Facing the urgent need of transformation, China is committed to reshape the global manufacturing value chains and brand image. China is taking intelligent and service-oriented manufacturing as the priority to enter high-end sectors and overseas markets, accompanied by the new international image of “China service,” “China brand” and “Made in China.”

It is estimated that the infrastructure construction investment of the OBOR initiative will total US$6t to 2020.

John Hope is Asia-Pacific

Transaction Advisory Services Leader, EY.

View from Asia-Pacific

© Kenneth Lim

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Deal driversWhile falling oil prices and stable economies are driving car sales, technology and changing customer habits are set to push the accelerator on automotive M&A in 2016.

The world’s leading automotive companies have come to depend on the annual calendar of global motor shows to unveil their latest models

and innovations. But in February, executives from Ford, Volvo Cars and Mercedes-Benz, among others, traveled to Barcelona to attend the Mobile World Congress — one of the technology sector’s most important get-togethers. This shift speaks volumes about the changing priorities of the motor industry.

According to data from JPMorgan Chase, global automotive sales hit an all-time high last year thanks to the strength of the US and European car markets. And the US bank predicts a further 2.7% sales increase in 2016.

Three-way splitDespite this position of strength, the industry is under mounting pressure to reinvent itself. New technologies offer huge opportunities in areas such as autonomous vehicles, safety and

mobile connectivity. But these technologies also bring the threat of disruption from new players, including the likes of US technology giants Alphabet and Apple.

Alphabet, the parent company of Google is at the forefront of self-driving tech, with its autonomous vehicles being tested in California and Texas. Meanwhile, Apple is working on CarPlay, a dashboard system to allow drivers to control their car’s information and entertainment systems via an iPhone. Rumors that the company is working on an electric car to rival US electric automaker Tesla Motors, have been neither confirmed nor denied.

Customer demands are also changing.For example, the electric and hybrid car markets continue to grow, although more slowly since oil prices fell. Meanwhile, more stringent regulations continue to bite. And the emissions scandal involving German automaker Volkswagen underlines the high stakes for automotive companies as they strive

2.7%US bank JPMorgan Chase predicts further growth in 2016, forecasting a 2.7% sales increase.

315deals, worth a total of US$46.2b, in the global automotive sector in 2015.Source: Mergermarket

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environmental requirements.“What we are seeing today

is the convergence of three sectors — automotive, technology and energy — into what we might describe as a single mobility sector,” says Mark Short, Global Transaction Advisory Services Leader for the Automotive and Transportation Industry at EY. “The big question out there is, who is going to own all of this? The manufacturers want to own it because these are their vehicles. The suppliers want to own it because they have the components. And the technology companies want to own it because it’s their technology.”

M&A maneuversThis convergence has been an important driver in the recently buoyant M&A market. Mergermarket data reveals that 2015 saw 315 deals, worth US$46.2b, in the global automotive sector. Although these figures were marginally down on 2014 figures — 340 deals worth US$51b — the number of deals in 2015 was still up 57% on 2013.

And more dealmaking is on the agenda. The latest EY Global Capital Confidence Barometer revealed that 49% of auto executives expect the M&A market to improve over the next year. Equally, 49% expect it to stay the same. More than half (52%) expect to pursue acquisitions.

Cars and convergenceEY research also found that 57% of automotive companies are planning cross-sector deals. Short sees this as part of a broader trend in which automotive players are determined to capture new tools and technologies. “You’ll see acquisitions,” he says. “But there

will also be partnerships and joint ventures (JVs), licensing deals and investments.”

One example of how convergence is driving M&A can be seen in the German transmission specialist ZF Group’s US$12.6b acquisition of US automotive technology company TRW in 2015. The company bought TRW for its radar and vision systems and advanced electronic control units — hoping to become a leader in autonomous vehicle equipment.

Also last year, German automakers BMW, Audi and Daimler joined to buy Finnish telecoms company Nokia’s HERE map business. The deal gives the trio an alternative to forming an alliance with Alphabet or Apple — which are allied with Volvo Cars, General Motors and others.

Complications of convergenceForging these cross-sector deals is not straightforward. Automotive companies fear being denied access to a technology that a rival has secured exclusive rights to through alliances or acquisitions. But predicting which technologies customers will want in three or four years is difficult. “You have to get it right, because if you offer the wrong car with the wrong

features, you will see your market share decline very quickly,” warns Short.

Nevertheless, leading car companies are placing their bets. “We are transitioning from an auto company to an auto and mobility company,” said Ford CEO Mark Field during an interview at the Mobile World Congress in Barcelona. He has ordered a tripling of the company’s investment in semi-autonomous car technologies. And the company’s new Kuga SUV, which was unveiled at the show, is full of new innovations. “The Kuga reflects our core business — designing and developing great [sports utility vehicles] — but it’s also packed with new technologies that will help you stay safe as a driver and keep you connected,” says Field.

Ford is not alone in such ventures. Volvo Cars was in Barcelona showing off its new keyless car technology. And Mercedes-Benz Formula 1 driver Lewis Hamilton participated in a panel discussion with the president of Qualcomm.

During the previous month, General Motors was at the Las Vegas Consumer Electronics Show to unveil its new Chevrolet Bolt electric car — a week before the vehicle made its debut at the Detroit Motor Show.

“What we are seeing today is the convergence of three sectors — automotive, technology and energy — into what we might describe as a single mobility sector.”

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Tech takes to the roadTechnology is at the forefront of almost every recent advance in the automotive industry. On safety, high-end systems such as cyclist detection, automatic braking and blind-spot cameras are no longer the preserve of luxury manufacturers, such as Jaguar and BMW, the early adopters, but are becoming mass market.

Autonomous and semi-autonomous driving is already a reality — Mercedes-Benz sells models that will not only parallel park themselves, but also take over the driving in slow-moving traffic. And Alphabet’s vehicles have self-driven more than 1.5 million miles.

As for connectivity, by 2022, 345 million vehicles worldwide will be connected to the internet, according to analyst IHS Automotive — four times as many as today. IHS predicts that, within six years, 98% of new cars will be connected, compared with 30% now.

Major advances are also being made on emissions, as automotive companies respond to consumer demand for cleaner cars and tighter regulation, such as the tougher Corporate Average Fuel Economy regulations recently introduced in the US.

Ford, for example, has invested heavily in materials technologies to reduce the weight of its F-150 pickup truck, the best-selling vehicle in the US, by around 700lb (more than 300kg). And Tesla’s electric cars, which have a range of up to 300 miles when charged, have captured the public’s imagination.

Chevrolet has high hopes that its electric Bolt can become a mass-market product. And Toyota, buoyed by its success with the Prius — which established hybrid technologies in the mainstream — hopes it can do the same with fuel-cell powered cars. It has launches planned for the US, Japan and Germany.

Increased emissions scrutiny and regulation are causing all manufacturers to rethink their next steps, according to EY’s Short. “In the US, for example, manufacturers had been thinking about offering their European diesel engines in more of their vehicles, but those plans have slowed,” he says. “First, they want to see if a diesel buyer before the Volkswagen scandal is still a diesel buyer. But they also want to be sure that they’re not exposed to a similar problem, that what they’re selling today meets all the standards for today and for many years to come.”

Automotive sector M&A 2010—16 Q1

Automotive in numbers

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7.6bFiat Chrysler Automobiles N.V. (Shareholders) bought Ferrari S.p.A.Source: Mergermarket

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19%of global vehicle production was in Europe in 2014Source: European Automobile Manufacturers Association (ACEA)

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Delivering for driversChanging customer behavior is also a consideration, Short says: “The industry has to think about how car sharing, for example, will affect future vehicle production.”

The market research group Gartner predicts that by 2025, 20% of the vehicles in urban centers will be dedicated to shared use. This increase in shared vehicles reflects an increasing consumer trend not to own cars, an asset that they use for only an hour or two each day.

New technology has not only helped to create shared-mobility services such as Uber and Lyft, but has also given rise to platforms such as Turo (formerly RelayRides) and GetAround, allowing cars to be rented out when not being used.

The future of widespread shared mobility will see vehicle sales fall, and the industry needs to consider its response. Ford and General Motors have already launched car-sharing programs and apps.

Future dealsThese trends will continue to drive deals in the sector, argues Short, as tier one suppliers compete in a rush to position themselves as a technology provider of choice.

“The CEOs of these businesses are happy with how they’re doing in 2016, but worried about whether they’ll have the right collection of parts for the car of the future in 2020 and beyond,” he says. “They’re buying other suppliers, often smaller or medium-sized companies further down the supply chain, in order to close the gaps they perceive in their product portfolios.”

BorgWarner’s US$951m purchase of Remy International, a business highly rated for its expertise in electrification technologies, is one example. The acquirer’s CEO James Verrier was clear about the deal’s rationale: “When we look into the future, we see an increased

transition toward increased electrification in the vehicle,” he said.

Look out for more of these transactions, says Short: “We are going to see an uptick in deals, both in numbers and size, as companies look to horse-trade assets.

“I believe there are too many carmakers with too many brands of vehicles,” he says. “And sooner or later something has to give.”

Technology can be a driver at this level, too. Since China’s Geely bought Volvo Cars in 2011, the two companies have worked together on innovation — including an engineering and development JV.

“You will never see a co-branded Geely and Volvo car,” said Volvo Cars CFO Hans Oscarsson in a recent cover interview with Capital Insights. “But there will definitely be collaboration.”

Buoyed by strong recent sales, now is the time for the automotive sector to accelerate. Companies must secure the right deals and partnerships to capitalize on the trends driving the industry. Those that fail to do so risk getting stuck in the slow lane. For further insight, please email [email protected]

of auto executives expect the M&A market to improve over the next 12 months, while 59% expect their company to pursue acquisitions.

85%

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At the crossroads: energy and automotiveThe oil and gas and automotive sectors are fundamentally intertwined. Without oil, cars can’t function; and without cars, the oil industry won’t flourish.

Over the years, the oil and gas and automotive industries have been close bedfellows. Fluctuating prices at the gas pumps are a regular

consumer talking point. Moreover, fuel prices can affect manufacturer strategy and consumer behavior. During the past 18 months, crude oil prices tumbled from more than US$110 per barrel to US$30 per barrel. Oil companies are still coming to terms with this environment. And while proces have risen early in 2016, it’s unlikely that these increases will be drastic. Record car salesWhat does this mean for the automotive sector? Figures for 2015 show that the fall in

oil prices coincided with a rise in car sales — particularly in North America — helped along by a more buoyant economy and years of lower-than-expected sales. Last year, US full-year sales stood at a record of around 17.5 million vehicles, beating the previous record of 17.3 million set in 2000. Miles driven also rose 4% above the 2007 peak, although fuel demand failed to breach its record due to more fuel-efficient cars.

And the surge is likely to continue, according to Kelley Blue Book. The automotive research

and valuation firm stated that new vehicle sales in the US were up 9% year-on-year in February — and it estimated that 17.9 million would be sold this year.

“Q1 2016 numbers have revealed solid growth and continued momentum in the auto industry,” said Alec Gutierrez, Senior Analyst at Kelley Blue Book. “Economic indicators remain positive for the industry, with the unemployment rate down below 5%, average home prices on the rise and gas prices averaging under US$2 per gallon.”©

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The upward trend is not limited to numbers. With more money in their pockets, consumers are also buying bigger, more expensive cars, according to Mike Wall, Director of Automotive Analysis at research firm IHS. And big vehicles mean big profits. However, GM and Ford, both of which had record profits and sales in 2015, said fuel prices were only one factor. Other contributing factors to their strong performance include easy credit, strong job growth, and pent-up demand from years of depressed sales.

The drop in oil prices also appears to have increased consumer demand for lower fuel economy vehicles, rather than more expensive greener ones, while at the same time encouraging manufacturers to move away from investing in the development of more efficient models. However, while the effects have been felt, they have been mitigated by increasingly heavy regulation in developed economies and continued cushioning of crude price moves for consumers in key developing countries. A new mix“[The fall] in oil prices does alter the mix of models sold,” says Wall. “However, while there may have been more SUVs sold, they are more efficient than ever, and manufacturers are not about to switch back to producing gas-guzzlers. Whether or not prices recover, automakers must meet US CAFE [Corporate Average Fuel Economy] and EU CO2 emissions standards.”

The CAFE standards define the fuel economy levels that a manufacturer’s fleet is required to meet in the US. If standards fall below a mandatory level, a manufacturer must pay a penalty (currently US$5.50 per 0.1 miles per gallon) or offset with CAFE credits.

“So it’s almost moot what oil prices are at any given time,” says Wall. “This is different from the pre-crash [2008] situation, when there was a more marked switch to less efficient vehicles when fuel prices fell. Now automakers don’t have that luxury, because fleets must meet CAFE standards.”

Deborah Byers, Energy Leader for EY in the US agrees. “The issue is what our new administration will do post-election to fuel standards, rather than what happens to crude prices. The impact in the EU is muted because of the high level of fuel taxes, and while the US

has seen a surge in SUV sales — which happens every time gas is US$2 per gallon or below — I think this is also not sustainable in the long run.”

Even if consumers are tempted toward bigger vehicles, manufacturers are moving in line with tougher emissions standards.

“Right now, manufacturers have the 2025 CAFE standards in mind, and they know they have to hit those numbers,” says Wall. For example, Volkswagen’s SUV models will offer a new combined engine, which includes a petrol/electric hybrid installation driving the front wheels and an electric motor that can power the rear axle — and that’s not going to change because of cheap fuel. Electric bluesHowever, that said, tumbling oil prices have hit the electric car and plug-in hybrid business. “[The electric car] industry as a whole, I think, will definitely suffer from

lower oil prices,” Elon Musk, Founder and CEO of Tesla Motors told CNN in late January. “It just makes economic sense.”

Sales of hybrid cars fell 15% in 2015 according to the Electric Drive Transportation Association. Cheaper fuel has made greener vehicles relatively more expensive for consumers. The sharp gasoline and diesel price falls have also had other impacts. “More disposable

“[The electric car] industry as a whole, I think, will definitely suffer from lower oil prices.”

deals, worth a total of US$46.2b, in the global automotive sector in 2015.

Source: Mergermarket

315income for the [US] motorist … has led to the purchase of better quality vehicles,” says Wall. “Today, that tends to mean more technology, which also means better fuel economy.”

Standards have advanced the technology discussion throughout the automotive industry supply chain, according to Wall. “The switch to aluminum vehicles, for example, is driven by standards, allowing higher efficiency and lighter weight. Before CAFE ratcheted up, manufacturers wouldn’t have been motivated to address those issues.”

So when oil prices go up, automakers will still have the “technology tool box to address efficiency challenges.” And there is always the risk of a sharp crude price rebound — although with crude supply holding up despite lower prices, most people in the auto sector now expect a “lower for longer” price scenario. Emerging impactUnlike in the West, fuel economy and emissions regulations are having little impact on auto buying patterns or manufacturing strategies in major developing economies such as China and India. So says Hong Kong-based Adi Karev, Global Sector Leader, Oil and Gas at EY: “Regulation has had an impact on industrial sectors in parts of Asia, but not on vehicle-buying patterns.”

He notes that the crude price falls are having a limited impact, as most Asian consumers are cushioned from international crude price swings by subsidies and price control. As a result there has been no sign of any switch to bigger or less fuel-efficient vehicles as crude has fallen. “Very few places in Asia have allowed consumers to

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feel the full impact of crude price moves. China is allowing the fuel price band to be wider, but it still has a band. So fuel prices have fallen, but not as much as crude,” says Karev.

In addition, Asian motorists drive fewer miles per car than their US or European counterparts, contributing to the lesser-impact of fuel price on car choice in Asia. “[Asian consumers] are more focused on car prices than fuel costs,” says Karev.

While lower crude influences buying patterns (particularly in

developed markets) the sharp drop in oil prices hit some corporations hard, destabilizing global equity markets. Oil-services giant Schlumberger recorded its first quarterly loss for 12 years in Q4 2015. After taking into account US$2.14b in restructuring and impairment costs, it posted a net loss of US$1.02b. Meanwhile rig owners Paragon Offshore, Vantage Drilling and Hercules all filed for bankruptcy in 2015. The rig market slump is putting shipyards at risk, as well as affecting other related sectors,

Last year saw a slump in oil prices, and, consequently, a fall in the levels of M&A in the sector. However, 2016 could be very different.

Despite the record levels of dealmaking in 2015, one sector that did not follow the trend was the oil and gas industry. M&A in the sector fell to just

US$403b in 2015, according to Mergermarket — 8% lower than 2014. Volume fell even more drastically, from 736 deals in 2014 to only 442 deals last year. The US$82b Shell-BG deal in Q2 2015 helped to bring the value total at least close to previous highs. However, we could see a different story in 2016. While the spike in deals has yet to appear at the start of the year, many observers anticipate a sharp rise later in the year now that the oil market appears to have established that a “lower for longer” price scenario is highly likely.

“Transactions are picking up as assets valuations and the reality of longer-term low oil prices set in. I anticipate a high level of transactions prompted by necessary restructuring and bankruptcy. Private capital is getting ready by funding well-heeled management teams in the upstream and OFS [oil-field services] sector,” says Deborah Byers, Energy Leader for EY in the US.

Lower valuations, higher debt-ratios, and reduced oil price expectations are all encouraging M&A. Market

M&A in the pipeline

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valuations relative to reserves peaked in early 2014, but valuation multiples have continued to fall since, with levels down from 1.6 in Q3 2013 to just 1 in Q3 2015. Independents’ debt-ratios have increased by 22% in the two years to Q3 2015, and crude market expectations are down, with 2020 futures prices at US$55 per barrel in December 2015, down from US$70 per barrel in December 2014.

Among the top 50 US shale-focused independents are many examples of attractive M&A opportunities, including Anadarko Petroleum Corp, which withdrew an offer to buy Apache Corp in November and, according to oil analyst John Kilduf, now finds itself a potential takeover target.

A month later, Devon Energy said it and its joint partnership EnLink Midstream Partners would buy US$4.05b in oil assets from EnCap Investments.

Hercules Offshore, a jack-up rig contractor with most of its fleet in the Gulf of Mexico, went into Chapter 11 bankruptcy in August, but after securing a US$450m loan, re-emerged in November, to become one of the first oil and gas industry players to restructure successfully in the energy downturn.

Opportunities among non-shale producers are also growing with companies such as Tullow scoring highly on valuation and portfolio attractiveness. Tullow is expected to sell assets and offer farm-ins to deal with heavy debt.

The price per barrel in US$ that oil has fallen to, from more than US$110 per barrel, in just 18 months.

$30including steel. The slump has also caused deep recessions in oil-dependent countries, adding to the destabilizing impact on the global economy. Venezuela’s economy, for example, shrank by 10% in 2015. This has reduced vehicle sales in big developing countries such as Russia and Brazil — where monthly sales sat at 132,032 in April. Before the oil price slump in 2014, average monthly sales were around 210,000 per month, according to Banco Central do Brazil. This could threaten sales worldwide.

“In the long term, the macro destabilization [resulting from such a sharp crude price fall] may impact consumer confidence more generally. It’s not happened yet [in the US] but this is making it more uncertain when vehicle

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sales will peak,” says Wall. “There has already been a localized economic downturn in [US] oil and gas producing areas, although nationwide this has so far been more than offset by lower fuel prices.”

Diverging developing powerhousesMeanwhile, in the two powerhouse emerging economies, India and China, there is a split in the way that falling prices are affecting the automotive industries. In India, which is a net importer of oil, there is huge potential in the vehicle market. Indeed, in 2015, car sales in India crossed the two million mark for the very first time, according to the Society of Indian Automobile Manufacturers Association. At the same time, car sales are weaker in China. This is related to the slowdown in its economic growth rate, which has been exacerbated by the crude price fall according to Karev, despite being the biggest oil importer in the world.

“Car purchases are weaker in China, but this is related to the economic situation, not fuel prices,” says Karev. “You might have thought, being so dependent on crude imports and with relatively high energy intensity, that the crude price fall would have benefited China’s economy, but this is not the case.”

Nevertheless, falling oil prices have undoubtedly had a global impact on the automotive industry. Surges in sales in some countries, a move away from hybrids and electric cars, localized falls in oil-dependent regions and a split between developed and developing markets have all ensued since crude began to tumble. But these factors add up to a complicated overall picture, with other key variables, such as fuel regulation and economic growth, being at least as important.

While low fuel prices are expected to boost sales in some markets, and sales of relatively inefficient vehicles across the board, there is a risk that the longer-term global impact could be overstated. In developing markets, where price control and lower average distances traveled makes fuel economy less important, regulation could have a far more profound impact as Tesla’s Musk noted: “I think there is an understanding by the Chinese government that [electric vehicles] are important to the future … In order to have clean air in cities, you have to go electric.”

Looking to the future, there are three key points that motor manufacturers will have to take into account:

Low for longer In developed markets, especially the US, low oil prices are likely to keep automotive sales figures rising. As noted by Kelley Blue Book, sales could potentially reach record levels again in 2016 and automakers need to act accordingly. Consumer trends are also prone to change, as drivers look for cheaper and less fuel-efficient vehicles. Not the whole story While falling prices are affecting the industry, there is a risk that the effect could be overstated. German manufacturer Volkswagen has said that it does not take

account of short-term changes in fuel pricing to predict trends in vehicle sales. “Our focus is longer term, with more significant factors being legislation, taxation and actual changes in customer buying trends,” explains a VW spokesperson.

Regional focus Despite the rise in sales, the automotive industry needs to look carefully at regional data and not just focus on the big picture. Oil-dependent areas, such as Texas or Alaska, could see falling sales, and countries such as Venezuela may also be negatively affected. Manufacturers need to take this into account when planning their growth strategies.

For further insight, please email [email protected]

“Economic indicators remain positive for the industry, with the unemployment rate down below 5%, average home prices on the rise and gas prices averaging under US$2 per gallon.”

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People powerIn an environment of fast-paced technological change and shareholder scrutiny, corporates are looking to M&A for quick talent recruitment.

In this age of rapid tech advancement and innovation, companies are turning ever more to M&A strategies to fill product or service gaps. With the total value of M&A

in 2015 reaching nearly US$5t, according to Thomson Reuters, and 50% of executives in EY latest Global Capital Confidence Barometer saying they are actively seeking acquisitions over the next 12 months, the stage is set for continued activity. Beyond megadealsWhile megadeals such as the US$78b Charter and Time Warner Cable transaction, and the US$67b EMC-Dell deal, have dominated headlines, there have also been many smaller M&A deals struck by corporate giants. These include Amazon’s acquisition of Indian e-commerce start-up Emvantage. While the logic behind many of these smaller deals is arguably access to innovative new technologies, corporates are also

seeking to buy in talent that can be hard to grow and develop or attract in-house.

“There has been, and will always be, a place for M&A driven by a need to bring in people with new skills,” says Liz Bingham, EY Partner – People Advisory Services. “This is especially the case where there is a scarcity of talent — such as engineers in the tech industry, or other areas of innovation. Often, it’s quicker to buy in this kind of innovation than it is to invest in the research and development needed to grow it.”

Quicker it may be, but it is not without risk, Bingham adds: “This is not a foolproof strategy.

Workforces are mobile and if the transition isn’t

handled well, people will vote with their feet.”

The issue of retaining talent affects all companies in M&A, but it’s particularly difficult to manage when a large corporate acquires a smaller entrepreneurial outfit.

“The smaller the company is, the more important the individuals are to the success of the deal post-transaction,” says Brian Moriarty, Principal at Song Hill Capital, former head of M&A HR at Hewlett Packard and former M&A VP at Sun Microsystems. “When Oracle bought Sun Microsystems, there was no single person in the organization who could have broken the deal, but when you have a start-up of up to 100 people, there are certain individuals who can have a

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When it comes to M&A, technology companies are often good at thinking through how

to retain staff after the deal has completed — there are often incentive plans based on milestones. However, where many companies (in all sectors) don’t do so well is in winning the hearts and minds of the people in the acquired business.

One-to-one communication with people, especially the leadership team, to explain what their role will be in the company is very important. There also needs to be a series of communications with all staff to explain the strategy behind the acquisition and how they can contribute. Consistency and feedback are often lacking here. I’d also suggest quick integration — buyers usually acquire for synergies, access to products, etc., so there has to be some level of integration. If you try and do this piecemeal, it can fail to achieve the intended result. Align new people with the organization quickly — it’s very hard to do this further down the line.

That said, it can be difficult with entrepreneurial businesses. One deal I worked on involved a small business that wasn’t going to be fully integrated. We identified a few milestones for the business to reach and, rather than compensating a few individuals when these were hit, we compensated the whole team. That helped everyone pull together to achieve what we, as the buyer, needed.

The other consideration is that some people don’t want to work in a corporate environment. Acquirers need to recognize this and where that’s the case, hold mature conversations with people about succession planning. There’s no point trying to chase someone who doesn’t want to be there in the long term. Brian Moriarty is Principal at Song Hill Capital and former Head of M&A HR at Hewlett-Packard.

ViewpointBrian Moriarty explains how best to manage people during a deal.

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huge impact on how successful the deal will be.”

Identify dealmakersThe key to managing this situation is to identify who these people will be early in the deal process and work to win their engagement. “You need to understand first of all what you mean by talent,” explains Steve Allan, Head of Human Capital, M&A, at Willis Towers Watson. “Which functions and individuals have the potential to make or break the deal? Reach out to them and see what they do well. If you make it clear that you, as a larger organization, are listening and learning from them, that’s a powerful message.”

Larger acquirers also need to make their reasons for buying clear to employees. “If it’s entrepreneurial spirit you want, perhaps keep the new business at arm’s length,” says Allan. “Explain that you want to put your balance sheet behind them to grow the business or bring their product or service to a much larger customer base, but make it clear that you don’t want to squash people with corporate processes. For entrepreneurs who have a strong belief in their product, showing how you can help them grow can be a compelling story.”

Regardless of size, retaining talent post-acquisition is vital to achieving the deal strategy. A 2011 Aon Hewitt study found that 50% of M&A transactions failed to achieve their objectives, with over 50% also saying they lost key talent following the deal at the same or higher rate than non-critical talent.

There is a clear link between the two, says Allan. “In most businesses, people are fundamental to the economic value of the deal. Yet we still

see many cases where M&A is led by the dealmakers and HR only comes in later,” he says.

Bingham agrees: “Often, the main reason for M&A not going well is that talent is the last item to be considered,” she says. “The sooner you start thinking about talent in deals the better. That means communicating to all staff the deal rationale and what it means for them as early as market sensitivity allows. If handled well, people will respect that; if there is an information vacuum, unhelpful rumors are likely to start, and that can be demoralizing.”

Increased focusYet companies are starting to look closely at people issues in M&A. A recent Mercer Global Talent Trends study found that 64% of global executives said talent was the most significant part of deal due diligence. However, the survey also found that 35% do not conduct talent assessments, suggesting that a large proportion are not spending time working out which skills and experience reside in the target company.

And without this kind of preparatory work, acquirers may struggle with integration. “The people aspects of M&A should be planned with as much thought as synergies,” says Bingham. If correct communication to staff before the deal happens — identifying the individuals key to success early on and putting them in the right positions to bridge any potential culture gaps — companies are in a much better position to highlight their intentions during integration.

First, they can promote people with potential. “If you find great people in the target company, you can offer them bigger roles in your organization — that can be very motivational,” says Moriarty.

And second, they can use tie-in periods to show the benefits of being part of a larger entity. “If designed well, retention agreements are great at maintaining presence,” says Allan. “Acquirers should view these as a way of buying time to engage talent, articulate what you are going to do and really live it so that people are deeply ingrained in the organization and want to stay beyond the agreed time.”

For further insight, please email [email protected]

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Selling to growStrategic sales do not only drive growth, but also create long-term value, the EY Global Corporate Divestment Study shows.

The past year’s divestiture climate can be summed up in a single word: “robust.” That is according to Paul Hammes, Global Divestiture Advisory Services Leader for Transaction Advisory Services at EY.

Last year was the highest on record for M&A, with deal values totaling almost US$5t, and divestments played a significant part of that success story. Furthermore, 70% of the corporates surveyed for the latest EY Global Corporate Divestment Study are using divestments to fund growth.

“We expect [this trend] to continue in financial year (FY) 2016,” Hammes continues. “A couple of things that support this outlook are the fact that 60% of our survey respondents say that they expect an increase in strategic sellers in FY16, and an even more impressive 49% of our respondents are looking to divest assets within the next two years.”

Hammes expects no lull in this divestment activity. “We see corporate conglomerates continuing to go through a ‘starburst’ phenomenon — they’re breaking up these corporate conglomerates and seeing that some of the pieces really are worth more than the whole.”

Among the drivers of this activity burst is changing technology and a corresponding change in consumer tastes.

“Consumers [today] are much more geared toward what they want and they are very specific about it, ”Hammes explains. “And in turn this is gearing consumer companies to trade brands and increase their portfolios. We are seeing very robust activity for FY16, as we did in FY15, across all of our regions and in multiple sectors.” Prioritizing portfolio managementCompanies are adjusting to a “new normal” as we continue in a period of low to no growth. “We’ve got a strong US dollar, and companies are searching for growth,” Hammes says. “One of the ways they are driving that growth is by practicing aggressive portfolio management.”

In 2009, survey results indicated that portfolio management was often considered as an afterthought for many companies. These recent survey results, however, indicate a significant uptick in corporate focus on portfolio management and defining the business core.

70%of the corporates surveyed are using divestments to fund growth.

84%believe their divestment created long-term value in the remaining business.

49%say access to meaningful data is the biggest portfolio review challenge.

56%of companies’ portfolio review processes have resulted in unsuccessful divestments.

75%more companies generate a sale price above expectations when they focus on creating value pre-sale.

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But while 56% of survey respondents said that they carried out regular portfolio reviews, this has still resulted in unsuccessful divestments. So, while corporates are taking on this step with increased vigor, there is still room for improvement.

“We’re seeing very aggressive portfolio management in companies across all sectors,” Hammes says. Once corporates have defined their cores, they are divesting those assets that are non-core and using the proceeds for growth. Seventy percent of survey respondents are using divestments to fund growth by re-investing in acquisitions, products, markets, R&D and the wider organization.

“Also, interestingly — and this is definitely a paradigm shift — 84% of our respondents said that they believe that their divestments created long-term value for the remaining business.”

Learning from private equityPE funds are serial buyers and sellers, experts at locating hidden benefits in companies. They often

What did you do with the funds raised from your last major divestment?

Invest in core business

Invest in new products/markets/geographies

Make an acquisition

Return funds to shareholders

Pay down debt

23%17%

34%

12%

14%

20%

11%

39%

13%

17%

2016 results: 70% divested to fund growth

2015 results

Percentage of high-performing deals for each use of divestment funds (measured by impact on valuation multiple of remaining business post-sale)

47%Made an acquisition

42%Returned funds to shareholders

40%Invested in new products/markets/geographies

36%Invested in core business

29%Paid down debt

What did you do with the funds raised from your last major divestment?

Invest in core business

Invest in new products/markets/geographies

Make an acquisition

Return funds to shareholders

Pay down debt

23%17%

34%

12%

14%

20%

11%

39%

13%

17%

2016 results: 70% divested to fund growth

2015 results

Percentage of high-performing deals for each use of divestment funds (measured by impact on valuation multiple of remaining business post-sale)

47%Made an acquisition

42%Returned funds to shareholders

40%Invested in new products/markets/geographies

36%Invested in core business

29%Paid down debt

Use divestment proceeds for an acquisition

Consider value vs. speed. The previous Global Corporate Divestment Study saw respondents give a 50/50 split on speed vs. value. This year has seen a paradigm shift, in that two-thirds of respondents are now focused on value. High performers exceed timelines, enjoy higher sales prices and experience a higher valuation multiple for the remaining business post-close. Only 19% of respondents were considered to be high performers. When you look at the percentage of high–performing deals, those focusing on value over speed did far better. That’s because those companies were prepared and they had managed their stakeholders well. As a result they reaped the rewards.

Don’t ignore the business until it’s sold. When companies focus on creating value when divesting a particular part of a business, 75% of our respondents generated a sales price above expectations. Furthermore, 33% of respondents generated a sales price above expectation when they created an operational separation plan. Most of our divestments are carve-outs. Because of the functional complexities caused by certain areas, having a clear operational separation plan is absolutely critical for the buying side.

Portfolio reviews. The survey shows a clear link between frequent portfolio reviews and the amount of success experienced in a divestment. If you look at respondents who are high performers, 48% carry out reviews quarterly and only 37% annually.

PE top threeEY’s Paul Hammes defines top lessons that corporates can learn from PE divestments.

exit at multiples many times the original purchase prices. As key board members, they have an innate understanding of the inherent value of the companies in their portfolio — and whether they should continue to invest or if it is time to divest.

While corporations have a different core mission from PE firms, they can learn lessons from PE on how to maximize shareholder value.

Maximizing divestment value can be challenging for corporates who are opportunistic, reacting to an interested buyer, rather than thinking strategically about who might be the best acquirer.

Many are also reluctant to invest management time in an asset they plan to sell, or they may be unwilling to allocate capital to such businesses. Yet, by failing to properly prepare assets for sale, companies only make them less appealing to the next owner, diminishing the potential value of the divestment.

For further insight, please email [email protected]

“We are seeing very robust activity for FY16, as we did in FY15, across all of our regions and in multiple sectors.”

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India will be the most attractive investment destination for the next three years, with the World Bank predicting growth of 7.8% in 2016, outpacing China and the US.

According to the EY Ready, Set, Grow: India Attractiveness Survey 2015, 32% of business leaders from global corporations identify India as the top investment draw.

The country’s foreign direct investment (FDI) capital inflows of US$63b in 2015 marked a milestone year for India — shifting it from fifth spot in 2014 to the world’s top FDI destination.

“India has now become the go-to market, not just the go-to emerging market,” says Farokh Balsara, Partner and Markets Leader-India, EY.

India’s appeal to foreign investors is not hard to fathom. Economic fundamentals are robust, while Prime Minister Narendra Modi’s government has repeatedly proved its pro-business credentials.

“The previous government was stymied, but this one has a full majority in the lower

house and has shown [it has the] gumption to push critical legislation through,” says Akil Hirani, Managing Partner at law firm Majmudar & Partners.

The scale down in oil and commodity prices has helped fuel import-dependent India by controlling inflation. The country has been able to continue as the world’s fastest-growing large economy, with real GDP officially rising 7.3% in the final quarter of 2015. This outpaced China’s 6.9% final quarter growth.

Robust economic growth has given a near-term push, but advisors point to the long-term drivers to shaping India’s attractiveness to foreign investors. Having favorable demographics is just one example.

“India has the largest number of people of working age in the world, so there is an opportunity there, especially in growth areas like technology, software and services,” says Vaibhav Parikh, a Partner at law firm Nishith Desai Associates.

India’s technology sector is particularly attractive due to a strong culture of innovation, a growing middle class and a proliferation of IT outsourcing service centers.

Technology has been a standout sector for activity, with financial technology (FinTech) growing as the Government focuses on promoting financial inclusion.

Recent deals have demonstrated India’s appeal as a high-tech manufacturing hub. The

At a time of weak global economic growth, India provides a shining light for investors, with strong domestic growth and a new government pushing reform.

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February 2016 Make in India expo in Mumbai saw 400 foreign CEOs make investment commitments of around US$200b. In one large deal, London-based Vedanta Group’s owner Anil Agarwal announced that his firm Twinstar Display Technologies will pledge US$10b to set up India’s first LCD manufacturing plant in the western state of Maharashtra.

M&A driversAs elsewhere, M&A has been driven by companies seeking to strenghten their core business or divest non-core assets, eliminate competition and further consolidate their market. But India has its own dynamic for building deal flow.

Digital disruption is a big driver. “The IT services companies have become global players and they are in the process of transforming themselves into digital organizations. That is also spurring M&A activity, both in India as well as Indian companies acquiring global players,” says Balsara.

Acquisitions made by Indian IT companies, include Infosys — which in October 2015 picked up Noah Consulting, a provider of advanced information management consulting services for the oil and gas industry.

Government reforms have had a major effect in improving the business climate. Investment ceilings for non-Indians have been raised in key sectors, such as insurance, where the limit has been increased from 26% to 49%.

“For the insurance sector, it has increased the limit for foreign investments to 49% and for sectors like defence, construction, civil aviation and railways, the FDI limits have been increased up to 100% with certain conditions,” says Balsara.

Previously, FDI approvals required Foreign Investment Promotion Board (FIPB) approval. But the Government removed the need for FIPB approval in many sectors, creating an automatic investment route.

Equally positive is the more investor-friendly attitude of state governments. According to Hirani, states are competing for land use and flexible employment policies. “Certain states are much more flexible in terms of land allocation than they used to be,” he says.

Improvements in the ease of doing business are also tangible. The landmark Bankruptcy

Code passed by the Indian Parliament in May 2016 is a vital reform that will provide an incentive to businesses by ensuring time-bound insolvency settlement and help to enabling faster company turnarounds. Reductions in the time it takes to set up a business is another example. “I incorporated a company in just three-and-a-half hours, when it used to take about a month,” says Parikh. “That [makes] us comparable to anywhere in the world.” Deal activity More work is needed to underpin dealmaker confidence, given a slight weakening of M&A deal activity last year, at least for domestic, in-country deals. While FDI figures have grown, actual M&A deal activity has been

softer, falling to a two-year low, according to a Thomson Reuters report. The value of M&A deals involving Indian companies stood at US$35.1b in 2015, a 4.8% fall compared to 2014. Even the average M&A deal size saw a drop during the 2015 financial year. The average M&A transaction size in 2015 was US$70m, compared with US$77.6m in 2014.

In 2015, there were only four M&A deals involving Indian companies — worth more than US$1b — compared to six deals in 2014. In 2015, domestic M&A stood at US$9.7b, down 46.4% compared to 2014 and the lowest since 2013, when deal value dropped to US$5.1b.

The industrials sector accounted for 15.9% of India’s domestic M&A, while energy and power, financials and retail sectors comprised 12.3%, 11.7% and 11.6% of India’s domestic M&A activity respectively.

According to the VCCEdge report, M&A deal value declined 31.5% to US$22.9b in 2015, compared to US$33.5b in 2014. The drop was largely due to the decline in domestic M&A deals by 58.5% to US$8b during

“India has now become the go-to market, not just the go-to emerging market.”

of business leaders from global corporations polled, identify India as the top investment draw.

32%

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the year. This could be indicative of Indian corporates deciding to play it safe and waiting for the right time to use their cash reserves to strike new deals.

In contrast, total cross-border M&A increased 73.1% to US$23.2b compared to 2014. Outbound M&A activity grew even more rapidly, with a 112.3% rise in value from the comparative period in 2014. Inbound M&A activity increased by 63.8% from the same period in 2014.

Technology and e-commerce are booming sectors. The acquisition last year of a 25% stake in One97 Communications for US$575m by China’s Alibaba Group was one of India’s biggest inbound investments. Some companies are using funds to further consolidate their position and increase their market share. Alibaba also invested in Indian payments technology start-up Paytm, which in September 2015 completed a second round of funding, bringing total Chinese funding to US$680m. Paytm is now planning an Rs50b (US$764m) expansion.

“Now Paytm is setting up a payments bank and looking at acquiring other similar mobile wallet companies,” says Balsara. “We are seeing huge investments, and we are talking about investments upwards of US$500m in many of these e-commerce or mobile technology enabled companies, and those companies are in turn acquiring other similar players from a consolidation standpoint, or from a standpoint of acquiring some technology that they don’t have the time to build. They would rather acquire the technology and the talent.”

Another e-commerce play has seen Softbank and Tiger Global investing into OlaCabs, an app-based taxi-hailing firm. In November 2015, OlaCabs raised more than US$500m, including foreign investors such as Baillie Gifford, Falcon Edge Capital and China’s Didi Kuaidi to fund its expansion. Private equityData shows Indian PE-backed M&A in the country rose by 129% in 2015 — the highest since 2007. Buy-side financial sponsor M&A activity targeting Indian companies totaled US$6.8b in 2015, a 129% rise in deal value.

PE-backed M&A in India’s high technology sector accounted for 32.7% of the market

share, with US$2.2b worth of transactions last year. As PE investments hit an all-time high of US$21b in 2015, expectations are rising for an equally active 2016. There was almost twice as much PE funding in India in 2015 compared to 2014. The fact that venture capital financing has largely dried up, making it harder for companies to raise funds, is also driving deals. “They will need to consolidate and merge so we may see consolidation as a stronger driver into 2016,” says Parikh.

For distressed banks, converting these loans into equity and then having an asset sale would also drive M&A. This can be a major source of new M&A business and activity. Already, we have seen this illustrated by large diversified conglomerates and other companies focused on strong assets, while non-core assets are sold off, driven by the company’s debt situation.

Sector focus Health care, financial services, telecommunications, IT and materials were among the top five sectors for M&A activity in terms of value during 2015. Big-ticket deals (US$100m and above) constituted about 63% of the total PE capital invested in India in 2015. There were 53 big-ticket deals, with a total value of US$13.2b, compared to 24 deals worth US$5.8b in 2014, while angel and seed investments grew 64%, rising to US$327m from US$200m in 2014.

“We are seeing some of the largest Fortune 500 companies setting up their shared service centers in India.”

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More recently, the emergence of cloud computing has become an attractive bet, with investments in cloud infrastructure nearing the US$1b mark. India’s technology industry has become a global digital skills hub, with around 7,000 firms focused on digital technologies. Nearly 150,000 employees are believed to have social, mobility, analytics and cloud skills.

Acquirer interest in India comes from a diverse geographic base, though recent years have seen more deal flow from Asia. Japan has emerged as a big player, with at least 40 inbound deals in 2014, worth US$1.7b in total. Major Japanese automotive groups, such as Suzuki Motor Corporation, have developed supply chains in India. Shiroki Corporation of Japan entered a joint venture (JV) with Technico India Private Limited to manufacture seats and window regulators. Meanwhile, Hitachi Metals Ltd acquired a majority stake in two Indian companies, RPS Vikas Castings Private Ltd and Garima Vikas Metals Private Ltd, focused on automotive casting.

“We are seeing a surge in Japanese investment,” says Balsara. “With Japan, the more interesting thing is there’s more government-to-government dialogue, particularly in the infrastructure projects. And many of the Japanese investors, are tying up with particular states in India, and working jointly with those state governments to further improve the infrastructure in that state.”

Investments from US and Germany have also increased. These have not only gone into creating new companies but into existing businesses, setting up new factories, expanding branch networks, or into new JVs.

The new kid on the block is China. “Until very recently, investments from China were looked at suspiciously,” says Balsara. “But now we have significant Chinese investments into mobile phone manufacture; for instance, Alibaba invested significantly into Paytm, and we are seeing signs of a global alliance emerging between OlaCabs and Grab Taxi in Southeast Asia, and Didi Kuaidi, the taxi operator in China.”

ChallengesDespite its burgeoning M&A market, India has challenges to overcome if it is to stay ahead of its competitors. Red tape is an issue. ©

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“Central government is pushing hard, but local municipal levels aren’t working as dynamically,” says Hirani.

India’s exchange control regulations are a real bugbear. Regulations determine pricing, and that can create unnecessary issues in executing M&A.

“If you have a subsidiary in India and that company is buying shares from Indian shareholders, they have to pay minimum price, but if they are buying shares from a non-Indian shareholder, then they cannot have more than the ceiling,” says Parikh.

In the public M&A domain, lack of financing and the takeover code can pose challenges for doing M&A in India. Any deal activity requires an open offer — from buying a company shareholding, to offering an exit to minority shareholders.

Land laws can be prohibitive. Buyers must compensate owners by four times the independently determined land value in rural areas, and twice the value in urban areas. In addition, 70% of landowners must give consent before land can be acquired.

Outlook for the futureIndia’s economy is on a sharp upward trajectory, which should underpin confidence in the market. Change is headed in the right direction. Even until January 2016, a stock-swap deal in an Indian company was impossible, but now it can be done without Government pre-approval. Since February, it has been possible to register online, which makes filing a simpler process. All this helps potential buyers to view Indian M&A in a more favorable light.

Valuations may or may not be attractive, but investors are seeing the potential in the Indian market

considering India is a domestic consumption-led market, rather than export-led like China.

India is emerging as a regional or global hub for operations. “We are seeing some of the largest Fortune 500 companies setting up their shared service centers in India. And, most particularly in the area of accounting and finance. [Around] 70%–90% of their global accounting is happening out of India,” says Balsara.

Other opportunities will arise from the Government’s spending on large infrastructure projects, both physical and social, with growth in the industrials and industrial machinery sectors.

Automotive and components are also growing. Technology and financial services remain favorites with investors, but renewable energy, aerospace and defense have also gained popularity. Manufacturing is a clear focus, with the Government looking for India to become one of the world’s top three destinations for manufacturing, playing on the skilled labor force. Consumer goods, retail and e-commerce will continue to be prominent as more people enter the middle class. As the Indian population becomes more educated and prosperous, so the spending power of this middle class also increases. Companies with tailor-made products that are at the right price for this new class will discover many opportunities.

The challenge for the next year is to push ahead with reforms, and ensure that M&A activity gets back its former brio, while also pulling in the high volumes of FDI that has helped to transform India into one of the 21st century’s most dynamic economies.

For further insight, please email [email protected]

Top five considerations for companies doing business in India

Identify risks up front. Do the research and ensure you know what you are getting into. “India ranks low on global transparency indices, so it makes sense to do more work before you get too far down the road in terms of investments,” says Akil Hirani of Majmudar.

Ensure proper commercial alignment. “It is important to ensure all parties and messaging are aligned throughout the M&A process,” says Farokh Balsara Partner and Markets Leader—India, EY.

Be aware of the legal parameters. “There are many laws and regulations to be considered when looking to acquire in India. Ensure you are aware of these before you agree a deal,” says Balsara.

Think about the post-M&A period. “Post M&A integration and how you structure is very important. Once the acquisition is complete, the people involved in the integration of operations must ensure that it adequately captures the value sought by those acquiring the companies,” says Vaibhav Parikh of Nishith Desai.

Understand the multifaceted nature of Indian M&A. “To many [the Indian market] may look like one single market, but it’s not. It is many markets rolled into one,” says Balsara. “For anything that is consumer-facing, you need to understand the layers within layers, the multiple markets that make up India. Things are not homogenous the way they are in the West.”

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In the early months of 2016,

economic and political volatility

have led to a slowdown in

corporate M&A activity, but

private equity firms could

see this as an opportunity to

switch from exits to buyouts.

The opening months of 2016 were marked by volatility, with uncertainty in China

spreading to developed stock markets. The US Federal Reserve’s interest rate rise in December also gave investors reason for caution.

At first glance, these signs of bearishness might seem like bad news for private equity (PE). It’s likely that, if this environment persists, corporate activity in the deal market will begin to slow. However, PE is smart capital that optimizes market dislocations.

Globally, there is US$1.3t of dry powder for PE firms to invest. This has ensured fierce deal competition, pushing prices to record levels and making it difficult for firms to deploy their funds.

Another driver of high valuations has been the five-year bull run in stocks. PE firms mark their assets to public market comparables. So while the rising tide has seen firms sell portfolio companies for attractive multiples and return cash to their investors, investing capital has been tough.

We are now beginning to see signs that prices are resetting. If this continues through 2016, PE

will have the chance to put its capital to work, as firms refocus from exits to investments. Make no mistake, challenges remain. Buyer and seller expectations need to reach equilibrium for deal volumes to increase. And this may take time.

Financing has also become less readily available and more expensive. In recent months, we have seen investors in the high-yield bond and leveraged loan markets exercising caution. And this has meant some deals have had to be renegotiated with lower portions of debt.

There is still liquidity out there for deals, but it is coming at a higher cost, and leverage levels are looking less aggressive so far this year. Any further rate rises by the Fed will push financing costs higher and may cause further market instability, something PE funds will have to bear in mind throughout 2016.

The US election and UK Brexit referendum are adding to the uncertainty, while questions remain about how investors will react to the ongoing normalization of China’s economy.

However, PE has the capital to invest and is well placed to make the best of this situation.

We saw a near-record level of M&A in 2015, with activity skewed toward mega-cap deals. Given the size of these transactions and the pressure on corporates to sell to meet antitrust obligations, there is likely to be numerous carve-outs coming to market for PE to buy.

At EY, we expect to see an increase in deal activity in the months ahead. Now is the time for PE to put those immense stores of dry powder to work.

Jeff Bunder is the EY Global Private Equity Leader, Transaction Advisory Services.

Global Private Equity

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Last year’s global total deal value of almost US$5t, surpassed former 2007 record highs. However, deal volumes did not follow suit, with a decrease to

around 40,000 globally for 2015.This value/volume trend mismatch attests

in part to the rise of the mega-merger such as the US$117b Anheuser Busch-InBev/SABMiller deal, and the US$81.5b BG/Royal Dutch Shell deal. Yet it’s also down to the increased price tags.

Thomson Reuters put the average valuation of a US deal at 16 times earnings before interest, tax, depreciation and amortization (EBITDA). This is far higher than the record average multiple of 14.3 in 2007.

“We’ve seen a 40% increase in corporate M&A globally,” says Pete Wilson, Partner in private equity at 3i. “Trade buyers have higher ratings now and, in some cases, a lower cost of capital. We have seen them more willing to pay higher prices to achieve synergies.”

Technology deals, in particular, have been struck at high multiples. Avago’s US$36.4b acquisition of Broadcom was agreed at 20 times EBITDA. Yet some infrastructure deals are fetching even higher prices. The potential US$2.88b sale of London’s City Airport by Global Infrastructure Partners values the business at 22 times EBITDA.

Favorable credit markets fuel high valuations in PE. “The availability of debt in 2015 has been used by some houses to underpin the prices they are paying,” says Wilson.

Debt, plus ample capital, has led to higher price tags. “We have seen valuations of around 10 times EBITDA in many PE deals,” says Christopher Sullivan, Senior Associate at Clifford Chance. “These are record highs.”

The end of an era?However, the early 2016 stock market volatility, increased signs of a slowdown in growth in China, and oil and commodity price falls, suggest that valuations may have peaked. US high-yield bond issuance dropped

How do you navigate price expectations in a market full of soaring valuations?

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izing | Raising |

We have made £1.85b (US$2.63b) of acquisitions over the past five years and continue

to seek opportunities to grow through M&A. It’s certainly true that some sectors have seen high M&A valuations, but I’d argue that there are plenty of attractive businesses around that can be bought for a more modest price. If you’re looking at companies with 10%–15% annual growth, strong management teams and enterprise values (EVs) of over £200m (US$284.6m), there will be a lot of competition from PE houses. If you’re prepared to do the legwork of uncovering companies with more moderate growth, which may need further capital or development, EVs of less than £100m (US$142.3m) and where, for example, there may be succession issues, there’s a lot of opportunity for acquirers.

Earn-outs can make sense where there is an owner-manager who deeply believes there is significant growth to come over a two- or three-year horizon — that situation that can leave buyers and sellers happy. However, the measures used need to be simply constructed and easily understood by both sides. The corporate also needs to be aware that there will be a dotted line around the business through the earn-out period and so any synergies will take longer to achieve. One route we have taken in the past is to be patient — we identified a business, tracked it over three or so years and kept in touch with the owners. We then bought when we were confident that it was worth the value being asked.

In today’s market, the virtues of patience, discipline and simplicity should be more highly rated. Buying at inflated prices rarely results in a good outcome, whatever mechanisms are put in place to defer payments. Ian West is Acquisitions Director at Capita.

ViewpointIan West discusses bridging the gap between price expectations.

by 72% to early March in the same period in 2015. Leveraged loan issuance also reduced. “Leveraged loan transactions are down this year and there are signs that credit is tightening,” says Jim Carter, President and CEO of Ernst & Young Capital Advisors, LLC. “If buyers are having to put more equity into deals, either returns will be lower or buyers will reduce the price they are prepared to pay.”

With corporate cash and private funds’ dry powder high, an appetite for M&A will remain. The results of EY Global Capital Confidence Barometer found that 59% of executives are pursuing acquisitions, with 73% abandoning a deal in the last year, citing competition (33%) and/or high valuations (21%). “With debt tighter and the stock exchange and the IPO market having come off the boil this year, we may well see more attractive times ahead for acquisitions,” says Wilson.

Building a bridgeThe problem will be the gap between sellers’ and buyers’ price expectations. “If there is a presumption that valuations will come off, the expectations gap will widen,” says Carter. “Sellers will take some time to adjust their expectations and that means we may well see more mechanisms to bridge the gap, such as earn-outs where the risk is shifted to the seller through a deferred purchase price.”

The uncertainty around the direction of M&A values may prompt more buyers to negotiate this deferred payment. “There are a number of benefits for both buyers and sellers with earn-outs,” says Adrian Nicholls, UK Valuation and Business Modeling Leader at EY. “For buyers, it gives them the confidence that the amount they are paying is linked to performance and it allows them to spread the cost. For vendors, earn-outs can help them achieve a higher valuation and de-risk the sales process.”

Earn-outs are commonly used in R&D-intensive industries, where payments can be linked to milestones. While these may be easy to measure, the triggers for earn-outs in other sectors may be harder to agree. “These can be very complicated arrangements to draft,” says Sullivan. “Both sides need to be clear on what will be measured and how.”

Part of the problem is that some measures can distort behavior. “Earn-outs can be

attractive, but they can take a long time to negotiate,” says Wilson. “You have to make sure there isn’t a misalignment between the buyer and seller.”

If profitability is the metric, seller protection is needed so that the new owner can’t manipulate the cost base to undermine profits. “Ultimately, buyers will be looking to generate cash from the acquisition, so a measure that gets close to cash flow tends to be a good option,” says Nicholls.

Earn-out alternativesOther mechanisms to consider include vendor financing, where the seller agrees to keep a stake in the business post-deal. There is one other means of bridging the gap — share deals. Last year, CVC sold payments business Skrill to Paysafe in a US$1.2b transaction, of which US$135m was paid via Optimal shares. However, this payment type may not appeal, given recent stock market turbulence. “At times of equity market and economic volatility, shares become far less attractive currency to sellers,” says Carter.

Looking aheadWith slower growth and recent stock market falls, M&A valuations will likely plateau if not fall, over the next 12-18 months. Yet with many companies and investors seeking ways to deploy cash and find growth opportunities, the brisk pace of M&A looks set to continue. “Most are expecting a good 2016, despite the headwinds we’ve seen so far this year,” says Carter. “It may well be that despite peaking valuations, we continue to see both high values and volumes for the balance of the year.”

For further insight, please email [email protected]

“Sellers will take some time to adjust their expectations and that means we may well see more mechanisms to bridge the gap.”

capitalinsights.ey.com | Issue 16 | H1 2016 49

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Learn from your mistakesIn the last word, we invite professionals from the world of business, finance and beyond to discuss issues affecting corporates. This issue: learning from mistakes.

I f you are anything like me, you probably attribute your successes to skill and your failures to bad luck. If a deal

works out well, you are a genius. If it turns into a nightmare, then that’s just one of those things that can happen in a complex world.

This common bias may sound trifling, almost benign. On the surface, it has the effect of protecting the ego from disappointing news by implying that something was really unforeseeable. And yet, the consequences can be devastating. After all, if we do not honestly confront our mistakes, how can we learn from them?

Take the case of doctors. They have extensive training, but even this is not enough to make

perfect judgments every time. When doctors make mistakes in diagnosis or surgery, this is a precious opportunity to learn. But too often, these mistakes are rationalized away by: “It’s just one of those things; it was the patient’s unusual symptoms; we did everything we could.”

These formulations, which have been well studied, take the sting out of the error. Doctors can carry

on under the comforting illusion that they are clinically competent — after all, it was all just an unforeseeable “complication.” But this means that the underlying reason for the mistake is not identified, and the doctor is liable to make the same mistake again.

This is why preventable medical errors are such a big killer. In the US, around 400,000 people die every year as a result of avoidable mistakes. Clinicians are not learning from their errors.

In aviation, there is a very different system for responding to mistakes: one based on intellectual honesty and continuous improvement. Those famous black boxes, which enable investigators to learn from every accident, have transformed system safety. In 1912, 8 out of 14 US Army pilots died in peacetime crashes. In 2014, the accident rate for major airlines had dropped to one crash for every 8.3 million takeoffs.

Inventor James Dyson has a similar approach to learning. His dual-cyclone vacuum cleaner emerged through trial and error. Each time a prototype fell short, he learned more about issues such as airflow and “separation efficiency.” In all, he worked through 5,126 prototypes, before finalizing the design that changed the world of household cleaning.

Could this kind of culture transform outcomes in health care? The answer is “yes.” When Gary Kaplan, Chief Executive of Virginia Mason Hospital in Seattle, introduced an aviation-style system of learning and adapting in

Matthew Syed is a columnist and feature writer for The Times. His latest book, Black Box Thinking, explores how success can come from exploiting marginal gains and rapid adaptation.

The last word

“The best forecasters and economists are those who learn from mistakes ... they are prepared to adapt.”

2004, it became one of the safest hospitals in the world. Insurance liability premiums fell by 74%.

In the business world, the same principle should apply. Studies by researcher Philip Tetlock have found that the best forecasters and economists are those who learn from mistakes. Instead of sticking to their initial predictions when new data emerges, they are prepared to adapt. This explains the paradox of why high-reputation social scientists, particularly those who tour television studios, make the worst predictions. It is because they are publicly associated with their predictions that they don’t like to admit they are wrong — and repeat the same mistakes. As Tetlock put it: “Ironically, the more famous the expert, the less accurate his or her predictions tended to be.’’

Too often, we operate with a ballistic model of success. We try to hit the bullseye, however defined, with our strategies and procedures. Great institutions, and by extension, the best dealmakers, have a different, “precision-guided” conception of success. While they aim for the bullseye, they also have the mechanisms and mindset to adjust their trajectory in the light of new information, thus systematically honing in on the target, and ultimately hitting it.

As the philosopher Karl Popper said: “True ignorance is not the absence of knowledge, but the refusal to acquire it.”

For further insight, please email [email protected]

Capital Insights from EY Transaction Advisory Services

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Capital Insights on the move

Welcome to the websiteFind every article from every issue of Capital Insights at the click of a mouse, plus regular news updates, EY publications and thought leadership.

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Exclusive videosAt capitalinsights.ey.com, you’ll find exclusive video content from EY partners and experts covering all aspects of the capital agenda.

EY Global Corporate Divestment StudyThe 2016 edition of this study reveals how corporates are learning from private equity and extracting hidden value in divestments. Read the latest Global Corporate Divestment Study at ey.com/divest.

EY Global Capital Confidence Barometer Learning to thrive in a record setting year in M&A, corporates are taking a pragmatic view, balancing risks and returns. Read the latest Global Capital Confidence Barometer sector reports at ey.com/ccb.

Further insights

Thought leadership and capital agenda-focused reports are available at capitalinsights.ey.com

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Buying and bonding: Alliances join M&A as engines of growth

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Take your tablets For insights on raising, investing, optimizing and preserving capital, download the Capital Insights app for tablets and phones. Apps feature exclusive articles and video, as well as the latest transactions news.

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and con dence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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About EY’s Transaction Advisory ServicesHow you manage your capital agenda today will de ne your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you’re preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for speci c advice.

The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member rms. Moreover, they should be seen in the context of the time they were made.

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Global Corporate Divestment StudyLearning from private equity: experts at extracting hidden value

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