netjets europe doing the deal 2012 report

Doing the Deal

2012A NetJets Europe study of European M&A

A NEtJEts EuropE study of EuropEAN M&A

contentsforeword 3

Methodology 4

Executive summary 5

Chapter 1: Global M&A outlook 7

Chapter 2: Cross-border M&A 17

Chapter 3: M&A success factors 22

outLooK 27

interview: david Giampaolo 28

3A NEtJEts EuropE study of EuropEAN M&A

To gauge sentiment of those people, like our own clients, that need to be one step ahead of the markets, we spoke to 150 of the continent’s leading corporate deal makers, private equity practitioners, financial and legal advisors, who collectively worked on deals worth nearly 10% of the global M&A market over the past year – €158 billion.

Since the publication of our last report, the pace of the global economic recovery has slowed and its foundations have been shaken by multiple global crises, from the eurozone issues to political unrest in North Africa and the Middle East. It is against this backdrop that our study commenced, a particularly opportune time to investigate deal maker attitudes as they take a fresh look at the M&A market.

The results have been fascinating. Our deal makers have confidence in the health of M&A next year, with over a third of the survey pool expressing a strong degree of optimism and nearly half holding a moderately positive outlook for deal making in the year ahead. Nonetheless, many still sound a note of caution in their feedback amid heightened uncertainty and historic volatility. Indeed, eurozone concerns have taken centre stage and the shape and structure of the financial world seems in a constant state of flux.

But instead of shying away from M&A expansion, our respondents show a strong appetite for deals. More than half expect global M&A activity to increase in 2012, with an especially pronounced uptick in cross-border transactions in this period. A closer look at respondent feedback shows a multi-dimensional picture of the cross-border landscape: emerging market acquirers are widely expected to become increasingly aggressive, but European acquirers are just as likely to look overseas as to stay close to home. After China, respondents say Germany and the US will be their principal M&A markets due largely to these markets’ size and maturity.

At the same time, even as deal makers look further afield in search of new business opportunities, respondents continue to regard personal relationships as paramount to successful deal making at every stage of the transaction process, from deal origination to post-merger integration. This is something we see reflected in our own customer base, with our corporate clients needing to fly at short notice to keep up with the pace of the markets, capture opportunities, steer business change and facilitate deals of their own.

The founder of our biggest financial backer, Warren Buffett, is attributed with having said: “In the business world, the rearview mirror is always clearer than the windshield.” This report won’t give you a crystal ball view of the future, but may provide some distilled insights into how Europe’s most active deal makers see the markets shifting as we stand at another turning point in the world’s economic history.

forewordnetJets europe is pleased to present the second edition of Doing the Deal, our annual survey of european M&a. this study seeks to understand how deal makers view the market during these uniquely challenging times, their outlook for the future and what they believe the key success factors are for completing a deal in today’s market.

eric ConnorChairman and CEO, NetJets Europe

eric ConnorChairman and CEO, NetJets Europe

4 A NEtJEts EuropE study of EuropEAN M&A

MethodologyIn the third quarter of 2011, mergermarket interviewed 150 European deal makers, including C-suite level and high-ranking corporate executives, investment bankers and private equity practitioners, based in the UK, France, Germany, Russia, Switzerland, Czech Republic and Poland. Respondent firms include UBS, Allen & Overy, Heineken International, Ericsson and Simmons & Simmons, among others. Respondents offered keen insight into

the global M&A landscape and shared detailed feedback on the core challenges and opportunities they expect to face in the next 12 month period. All respondents surveyed had personal involvement in an M&A transaction over the past year. Disclosed deal values for these transactions amounted to €158bn, nearly 10% of all M&A activity over the period. All respondents are anonymous and the results are presented in aggregate.

With an increased sample size and broader geographic reach, this second edition of Doing the Deal offers valuable points of comparison against the first edition of this report, which drew from interviews with 100 European deal makers based in the UK, France, Germany and Switzerland.

23%

23%30%

23%

Legal AdviserPrivate Equity PractitionerCorporate ExecutiveFinancial Adviser

17%

17%

17%17%

17%

17% GermanyThe UKSwitzerlandFranceCentral & Eastern EuropeRussia

respondent inforMation

respondent type respondent split by country


executive suMMary

17%

17%

17%17%

17%

17% GermanyThe UKSwitzerlandFranceCentral & Eastern EuropeRussia

Survey results show that deal makers are largely optimistic in their outlook for the coming year. Sharp variations in country-specific attitudes are made clear throughout this report but on the whole, respondents are confident that a strong appetite for growth, consolidation in key industry sectors and a backlog of private equity exits will fuel M&a activity through 2012.

• More than half of those surveyed (53%) foresee an increase in global M&A activity in 2012. Respondents based in Germany are the most bullish with 72% of this group predicting an uptick in global M&A this year, and 60% of this group identify private equity exit activity as the foremost sell-side deal driver.

• A potent mix of buy-side and sell-side deal drivers is expected to boost M&A in the next 12 months. During this period respondents see consolidating industries, cash-rich corporate buyers and strong private equity deal flow as the top three buy-side drivers, and these will be matched with ample opportunities on the sell-side as attractive valuations, private equity exits and non-core asset sales come to the fore in 2012.

• UK respondents are noticeably more bearish than their European peers, being least likely to expect an increase in global M&A and also least likely to be extremely confident in their outlook for deal making this year. This tempered stance is not necessarily surprising given the perfect storm of new pressures facing UK deal makers in 2012, when changes to the UK Takeover Code will be added to new regulatory frameworks under Basel III and Solvency II.

• Cross-border activity will be a key component of the M&A market this year, underpinned by acquirers’ need to enter rapid growth markets and increase their market share or geographic footprint. China, Germany, the US and India emerge as the top four markets where respondents expect to conduct cross-border M&A in 2012, and in the next five years.

• As was the case last year, the energy & resources sector – which from Q3 2010 to Q4 2011 represented nearly a quarter of global M&A deal value – is expected to dominate the M&A landscape in 2012, followed by industrials & chemicals and TMT.

• Sector-specific trends will change according to country: for UK respondents, the most significant M&A activity is expected to occur in financial services; CEE respondents, on the other hand, expect M&A to be strongest in the consumer sector.

• Financing difficulties remain a top concern for 55% of deal makers, but the weight of financing struggles are especially apparent in the UK where 72% of respondents identify financing as the primary constraint to M&A. By contrast, less than half of German and Russian respondents identify financing difficulties as the primary obstacle to deal making.

• Relationships and face-to-face engagement are consistently ranked among the top factors for deal success. Respondents say building relationships with stakeholders is critical, as is face-to-face engagement with transaction partners. This aligns with the findings of last year’s study, when relationships were cited as a top success factor. Post-deal success depends just as heavily on personal interaction: respondents believe successful integrations hinge on clear planning and strong relationships with management.

This second annual ‘Doing the Deal’ study provides a unique glimpse into the prevailing mindset of European deal makers. Survey results suggest the M&A market will be resilient in the face of lingering economic weakness, even under new regulatory pressures and a still-uncertain road to recovery.

“ uK respondents are noticeably more bearish than their european peers, being least likely to expect an increase in global M&a and also least likely to be extremely confident in their outlook for deal making this year.”

6 DOING THE DEAL 2012


ChAptEr 1: global M&a outlooK

2012 outlooK

Deal maker confidence remains resilient, although respondents express concern about the global economic outlook.

Three years after the acute onset of the financial crisis, the global economic recovery has not yet gained a firm foothold. Sovereign debt worries, fiscal belt-tightening, jittery equity markets and persistently weak economic indicators in the world’s largest economies continue to cast a shadow over the global growth outlook. Yet, even in the face of these economic headwinds, respondents to our study continue to have faith in the global M&A market’s resilience.

Roughly one half describe themselves as moderately confident about future deal making, while close to one-third describe themselves as extremely confident.

Confidence remains strong, but survey respondents remain acutely aware of the market uncertainty surrounding them and the potential challenges on the horizon for tomorrow. Many respondents expect 2012 to be a down market, others are somewhat less bearish, and still others insist that the downturn will spell new deal opportunities. Here, and elsewhere, attitudes vary widely across different countries and professional backgrounds.

In Europe, respondent confidence is appreciably more measured in markets where economic performance has been more lacklustre. Compared to their Western European peers, German respondents stand out as remarkably bullish with this group being particularly likely to express a very confident stance. One optimistic Frankfurt-based legal advisor tells us, “I see more deals in the pipeline coming across my desk and deal announcements are much stronger than in previous years.” In France and the UK, however, where business activity has recovered comparatively slowly, the majority of respondents hold only a moderately optimistic view of the deal making environment in 2012.

Over half of respondents foresee an uptick in global M&A in 2012.

0

20

40

60

80

100

OverallFranceThe UKSwitzerlandCEERussiaGermany

Extremely confidentVery confident

Moderately confidentNot very confident

Not at all confident

16%

48%

28%

4%

4%

36%

40%

20%

4%

32%

60%

4%

4%

32%

48%

16%

4%

20%

60%

16%

4%

24%

60%

12%

5%

32%

49%

12%

4%

Per

cen

tage

of

resp

ond

ents

(%

)

1%

0

20

40

60

80

100

OverallThe UKSwitzerlandRussiaFranceCEEGermany

Yes No

72%

Per

cen

tage

of

resp

ond

ents

28%

40%

60%

52%

48%

52%

48%

52%

48%

60%

40%

47%

53%

how confident are you about the outlook for deal making over the coming year?

looking forward to 2012, do you expect the level of global M&a activity to increase?

8 doiNG thE dEAL 2012

For many in the survey pool, confidence about future deal making does not correspond to confidence about the global economy. For instance, a number of private equity respondents believe tough market conditions will in fact create fresh deal opportunities. “Due to the financial crisis companies still aren’t getting enough funding,” says one German respondent who believes private equity could help to fill the funding gap. In a similar vein, a Polish turnaround investor bluntly explains, “We buy troubled companies, and they are going to increase in number in the next 12 months.”

proJectionsStepping back from their own positions to take a broader look at the market, the bulls slightly outweigh the bears: over half expect global M&A to increase in 2012, but slightly fewer expect either flat or falling levels of global deal making.

Forecasts, like confidence, show sizeable variations across countries. UK respondents have the most conservative outlook for 2012, while Germans once again emerge as the most optimistic group. “I expect activity to pick up. There’s a boom in Asian markets and particularly in private equity deals and leveraged buyouts,” says a private equity investor from Germany. The majority of Central & Eastern European survey participants also expect buoyant activity in 2012, while respondents from France, Russia and Switzerland are noticeably more divided on the question.

The respondents who expect an upturn in worldwide M&A activity next year forecast global deal volume to swell by an average of 13.5% over 2011 levels – above the flat year-on-year deal announcements witnessed over the first three quarters of 2011.


0

20

40

60

80

100

Deal value (€m)Deal volume

8%

19%

14%

44%

13%

12%

22%

17%

31%

16%

1%3%

Per

cen

tage

of

resp

ond

ents

By > 25%By 25%

By 20%By 15%

By 10%By 5%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Q311

Q211

Q111

Q410

Q310

Q210

Q110

Q409

Q309

Q209

Q109

Q408

Q308

Q208

Q108

Q407

Q307

Q207

Q107

Q406

Q306

Q206

Q106

Q405

Q305

Q205

Q105

Volu

me

of d

eals

Value of deals (€m)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Number of deals Deal value (€m)

if yes, by how much do you expect M&a will increase?

global M&a trends

Global deal value expected to increase by €251bn in 2012.

Over one half of respondents say difficult financing conditions and lingering economic weakness will be the main constraints for deal making.

“ i think M&a will grow by at least a quarter of what it is now. companies are very rich in cash right now, ready to provide equity for deals, and M&a activity will reflect this.” financial advisor, france

9doiNG thE dEAL 2012


0 5 10 15 20 25 30 35 40 45 50

Better quality targets coming to market

Distressed-driven M&A

Non-core asset disposals

Private equity portfolio company exits

Attractive valuations

Improved credit access

Opportunistic M&A

Private equity buyout activity

Cash-rich corporate buyers

Consolidation 45%

41%

41%

28%

17%

39%

39%

38%

30%

23%

Percentage of respondents

Sel

l-si

de

Bu

y-si

de

what do you expect will be the main driver(s) of M&a over the coming year?

In terms of deal value, respondents expect it will swell by 14.5% on average. In absolute figures, the projected increase will add €251bn to the €1.7 trillion in disclosed global deal value for the Q4 2010 to Q3 2011 period. Here, respondent forecasts are more in line with the 23% year-on-year rise in global transaction value witnessed over the first nine months of 2011. One corporate deal maker from a UK-listed technology group tells us that M&A activity will quicken as bear market M&A – i.e. defensive and distressed deal making – drives businesses to sell up or merge with rivals. She comments, “The macroeconomic environment is deteriorating and in this type of business climate you get troubled companies that need to consolidate to survive.”

deal driversBusiness activity is slowing and the base-line outlook in many advanced economies is for prolonged stagnation or, in a worst-case scenario, a double-dip recession. The situation in the eurozone is particularly worrying with growth forecast to decelerate to an anaemic 1.1% next year from 1.6% in 2011. These problems in Europe recently prompted the IMF to revise down its projections for global GDP growth to 4% in both 2011 and 2012.

It is therefore telling that 45% of respondents expect consolidation to be one of the largest deal drivers in 2012, while 28% foresee more opportunistic deal making and 30% expect a rise in distressed sales. Non-core disposals are also cited as a major sell-side driver, which fits into the predicted increase in consolidation. One Swiss private equity partner says, “I think lots of companies will be in distress, and you normally sell off non-core assets to get cash in this situation.”

Clearly, the subdued growth outlook will create fertile conditions for consolidation with strong strategic investors moving to overtake weaker rivals, while other companies merge to ride out leaner times.

Well-capitalised acquirers look set to be the main consolidators according to respondents. Forty-one percent say cash-rich corporates and private equity buyers will be two of the principal buy-side forces in 2012. Cost-cutting in the post-crisis period helped many corporates build up cash reserves, which they are now well-placed to deploy toward attractive acquisition targets. Private equity funds also have ample firepower which they are coming under increasing pressure to deploy as funds raised in recent years begin to approach the end of their investment horizons.

But private equity funds have also been under pressure to exit portfolio companies and redistribute capital to investors. Survey results show that over a third of respondents expect exit activity to continue as a top sell-side driver next year, following on an already-strong 2011: this year witnessed a rally in exits with the number of portfolio sales up by more than 20% and aggregate deal value up more than one-third year-on-year at €152.9bn.

The outlook for asset valuations may come under pressure in the face of another looming crisis, but overall deal values have witnessed a big rebound in the past two years: the average deal size for global transactions with a disclosed value stood at US$335m in 2011, up from US$295m in the prior year.

Consolidation to be the top buy-side deal driver of M&A in 2012, while attractive valuations take lead as a sell-side driver

“ i think timing is pretty much the definition of opportunity, with regards to opportunistic M&a. it’s very important.” Legal advisor, uK



deal constraintsWhile favourable valuations will in some cases play a role in driving activity from the sell-side, there is still some misalignment in price expectations between buyers and sellers. More than one third of respondents believe vendor price expectations will be an obstacle in 2012. “Vendors are overly optimistic about the valuation of their companies,” says a French private equity practitioner.

Overall, the majority of respondents tell us that more serious M&A constraints will be the still difficult financing environment and lingering economic weakness. UK-based respondents are the most likely to deem financing difficulties as a principal obstacle with nearly three quarters (72%) flagging the issue. A British-based financial advisor believes that financing will remain difficult due to “the recent developments in the eurozone and [the] approaching crisis.”

Elsewhere, Russia has the highest proportion of respondents expecting lingering economic weakness to be a primary M&A obstacle in 2012. One Russian Director of Corporate Development at a private equity backed business points to external economic factors, stating, “There are doubts raised by Greece, Spain and elsewhere in the EU as well as the US, where there has been a little bit of trouble in the market.” But for its part, Russia’s economy is fairly strong. Its rate of output growth is forecast to surpass global GDP at 4.8% and 4.5% for 2011 and 2012, respectively. And Russian respondents are, after Germans, the most optimistic group within our respondent pool about future M&A prospects for 2012. This may well reflect the importance of energy & resources to the Russian economy and overall M&A market – it is the market’s leading sector by value and third most active sector by volume.

sector outlooKThe energy & resources sector is tipped to be the most active space for M&A next year. Respondent expectations for sector activity are also broadly aligned with the mergermarket Heat Chart, which shows prospective M&A activity by sector and geography.

Energy & resources has in fact been one of the top global sectors for assets coming to market over the past six months. And while the sector has only accounted for around 10% of total announced deal volume, in terms of deal value the sector dwarfs all others, accounting for nearly one quarter of global M&A – industrials & chemicals ranks a distant second with a 16% share.

what do you believe will be the main constraint(s) to M&a activity over the coming year?

Energy & resources tipped to be most active space for global M&A


0 10 20 30 40 50 60

Regulatory hurdles

The scarcity ofquality targets

Political uncertainty

Vendor priceexpectations

Lingering economicweakness

The still difficultfinancing environment 55%

52%

36%

31%

31%

13%

“ uncertainty in the bond market. we are watching government-backed bond markets, seeing how much of our disposable assets we’ll be able to invest.” Corporate executive, switzerland

11A NETJETS EUROPE STUDY OF EUROPEAN M&A


According to mergermarket intelligence, capital availability and attractive valuations have acted as a spur to deal activity in 2011. For the energy sector in particular, there are a number of drivers that should sustain buoyant deal flow. The upstream segment will see M&A driven by energy security issues with national oil companies from resource-hungry countries such as China’s CNOOC and Sinopec, among others, on the buy-side.

Together with high commodity prices, this may well spur acquirers to buy assets in frontier oil production areas such as deepwater and offshore drilling. Consolidation is also expected in the oilfield services segment, which will see buy-side activity from both strategic and private equity buyers ready to deploy capital in pursuit of quality assets and new technologies. Recent large scale consolidation in this particular space – including the €9bn merger of Schlumberger Limited and Smith International in 2010 and the €6.4bn merger of Pride International and ENSCO International in 2011 – promises to make oilfield services assets even more lucrative.

which sector(s) do you expect will witness the greatest level of M&a activity in the year ahead? and over the next five years?

“ Mining M&a will continue, and for it i can see a bubble.” Legal advisor, uK


heat chart

sector total

TMT 2,498

Industrials& Chemicals 2,185

Energy & Resources 2,146

Consumer 1,656

Pharma, Medical & Biotech 1,408

Financial Services 1,384

Business Services 1,074

Leisure 703

Transportation 465

Construction 411

Real Estate 394

Agriculture 167

Defence 155

Government 45

Other 27

total 14,718

the mergermarket heat Chart shows ‘company for sale’ stories tracked by mergermarket over 01/04/2011 to 30/09/2011. deal opportunities are tracked by the dominant sector and geography of the target company.

hot warm cold

1,400 875 350

1,225 700 175

1,050 525 0


0 10 20 30 40 50

Leisure

Agriculture

Construction

Business Services

Transportation

Real Estate

Industrials & Chemicals

Consumer

Pharma, Medical & Biotech

TMT

Financial Services

Energy & Resources 44%42%

37%39%

30%25%

29%27%

27%24%25%27%

11%12%

11%8%11%7%

9%10%

7%7%7%6%

Over the next five years2012


“ in past years during the crisis, private equity had to stick with portfolio companies for longer than they wanted. they somehow need to make disposals after holding these companies for so long.”

Legal advisor, Germany


24%

16%

14%

14%

9%

8%

4%

3%3% 2%2%

1%

Energy & ResourcesIndustrials & ChemicalsFinancial ServicesTMTPharma, Medical & BiotechConsumerBusiness ServicesReal EstateTransportationConstructionLeisureOther

20%

15%

13%12%

10%

9%

8%

4%3%

3% 2% 1%Industrials & ChemicalsTMTConsumerBusiness ServicesEnergy & ResourcesFinancial ServicesPharma, Medical & BiotechConstructionLeisureTransportationReal EstateOther

global M&a sector split by value, Q4 2010 - Q3 2011

global M&a sector split by volume, Q4 2010 - Q3 2011

Elsewhere, over one third of respondents expect financial services to see a wave of M&A sweep across the sector. A Swiss corporate M&A Director explains, “With the unresolved issues we had in 2008 there is still so much going on. Given these problems with the banks there should be a lot of opportunistic deals that will be rolled out.”

The sector also has exposure to the sovereign debt crisis and there are concerns about how potential restructurings of sovereign debt could affect the solvency of banks. Such a scenario could create the conditions for another round of state-backed bank bailouts or a flurry of merger activity in the sector – here such worries are more pronounced in France where exposure to Greek debt is higher.

While high-profile debates over eurozone stability unfold in the foreground, European banks continue to grapple with long-term pressures like increased capital adequacy requirements under Basel III. This will undoubtedly fuel further consolidation as banks struggle to bolster their reserves.

regional outlooKAgainst this backdrop in Europe, it is not surprising that respondents expect M&A activity to be strongest in overseas markets next year. In fact, the UK, which placed fourth in respondent expectations in last year’s survey, has dropped out of the top five behind all of the BRICs as well as the US, Germany and France.

One UK-based legal advisor forecasting increased M&A in the BRIC markets comments, “They are the most attractive target markets from my perspective; when I work on the buy side for European companies these are the main countries our clients are looking at for the deals.”

China will lead global deal making next year according to nearly half of those polled, while a slightly higher proportion believe the country will remain the most active in five years time. This is not surprising: the country is the world’s second largest economy and the rate of Chinese economic growth is far surpassing that of advanced economies, with forecast increases of 9.5% and 9.0% over 2011 and 2012 respectively, according to the IMF.



which country(ies)/region(s) do you expect will be the most active M&a target markets in the year ahead? and over the next five years?


0 10 20 30 40 50 60

The Baltic states

Nordic

North Africa

United Kingdom

France

Russia

Germany

Brazil

USA

India

China 48%51%

39%39%

35%35%

29%31%

23%24%

22%23%

13%14%

12%13%

11%11%

4%3%4%2%


Emerging markets are tipped to be among the most active M&A geographies looking ahead; the UK drops out of the top five

Nonetheless, for a market of its size the level of M&A activity is comparatively low. True, in absolute terms the Chinese market is large with 505 announced deals worth a combined value of €56.9bn over the first three quarters of 2011, but given the size of the economy as a whole it is relatively insignificant. For example, the UK, which is around 40% the size of the Chinese economy, had a total of 729 transactions collectively valued at €165.6bn in the same period, while the USA had over 6,000 deals come to market valued at over €1 trillion.

A partner at a French law firm observes, “I think Chinese and South Asian businesses need to make changes to get more activity in the market. Even in the next five years it will be difficult. I would say it will be US and Western European players that will see the most activity.”

optiMisM in contextThe bear market drivers and constraints that respondents foresee for 2012 are most pronounced in the world’s advanced economies. This is reflected not just in the feedback of European respondents, but also in their expectations that overseas markets will be the hot spots for global M&A. And that fast-growth emerging markets stand out as the main hubs for expected deal activity next year is particularly telling. Other than the US and Germany, which are also expected to be active areas for M&A, respondents seem to underweight the significance of traditional M&A hubs, such as the UK, and emphasize that of emerging overseas markets such as China.

The well-known growth story of the BRICs is an incredible one, and any well-planned M&A strategy has to account for this. Indeed, these markets’ insatiable appetite for raw materials remains a key deal driver in the global energy & resources space. Financial services is also poised for significant M&A activity, but here many respondents believe distressed opportunities will be found closer to home. Such pessimism may be well founded. The sovereign debt situation in Europe remains unresolved, and financial reforms could tighten lending activity as banks struggle to meet stricter capital adequacy requirements.

“ i am working primarily on the russian market, and i am confident about what we are observing, which is western, chinese and Middle eastern companies looking for growth.”

Corporate executive, russia


37%

15%

5%

5%4%4%

3%3%

3%

3%

3%

3%

2%2%2%

2%

1%

USAUnited KingdomChinaRussiaBrazilGermanyItalyFranceIberiaNordicBeneluxSwitzerlandJapanEurope (Other)South KoreaIndiaCEEAfricaSEERest-of-World

28%

15%

8%

5%5% 5%

6%4%

3%

3%

3%

3%

2%2%

2%2%

2%

1%

USAUnited KingdomNordicGermanyChinaFranceBeneluxEurope (Other)JapanItalyIberiaBrazilSouth KoreaIndiaRussiaCEEAfricaSwitzerlandSEERest-of-World

global M&a sector split by value, Q4 2010 - Q3 2011global M&a sector split by volume, Q4 2010 - Q3 2011


But in spite of this, deal makers are confident that the market is stronger than it was a few short years ago. This confidence is grounded in experience, as many of our respondents brokered

some of the world’s biggest transactions in historically trying times. This perhaps explains why their confidence in the face of adversity remains so resilient.

heat chart

sector total

USA 4,455

China 1,400

United Kingdom 647

India 551

CEE 388

Germany 376

France 290

Nordic 279

Brazil 266

Russia 260

Switzerland 129

The Baltic states 62

North Africa 44

RoW 5,571

total 14,718

the mergermarket heat Chart shows ‘company for sale’ stories tracked by mergermarket over 01/04/2011 to 30/09/2011. deal opportunities are tracked by the dominant sector and geography of the target company.

hot warm cold

1,400 875 350

1,225 700 175

1,050 525 0


ChAptEr 2: cross-border M&across-border M&a proJectionsRespondents are largely optimistic in their outlook for the global M&A market this year, with more than half expecting activity levels to increase and an even greater 74% predicting an upturn in cross-border deals specifically. Of the respondents expecting an upturn in cross-border M&A, around three in four project an increase of at least 10%, mirroring the 9.7% rate of growth in cross-border M&A witnessed over the first nine months of 2011. This group expects an even greater 14.5% increase in deal values this year, or a €101bn in additional cross-border deal value on top of the €694bn registered over Q4 2010 to Q3 2011.

Increasingly aggressive Asian buyers are repeatedly cited as critical players in the cross-border marketplace. Their role is summed up by one deal maker who says: “We now have more Asian buyers with money to spend, and they are increasingly reaching out to targets in Europe in the US.” This Asian appetite for Western targets is indeed a common thread across respondent commentary.

Not everyone expresses such high hopes for cross-border deal flow, however. Just over one-quarter of respondents say they do not expect cross-border activity levels to rise this year, and the prevailing logic of

this group centres on economic uncertainty and market volatility as two main barriers to international transactions. Indeed, with the eurozone crisis reaching a fever pitch at the end of 2011, deal makers are facing a largely uncertain near-term future, particularly with regards to valuations and financing availability.

Still, external forces will not bring growth initiatives to a halt. In fact, cross-border M&A has grown nearly twice as fast as overall global M&A over the first three quarters of 2011 at a rate of 20.6%, meaning the pace of cross-border M&A is surpassing that of the overall M&A market.

Three quarters of respondents are bullish on cross-border M&A outlook

do you anticipate an upturn in the level of cross-border dealmaking in the year ahead?

0

20

40

60

80

100

Overall M&ACross-border M&A

74%

26%

53%

47%

Per

cen

tage

of

resp

ond

ents

Yes No

“ i can comment on my experience over the past 12-18 months which is increasingly cross-border. in one recent deal an american company sold a business in france. currently we are working on a german company buying a french business owned by a swedish shareholder, so that is more and more cross- border work.”

Legal advisor, france


cross-border deal driversTo put these figures in perspective, respondents describe the perfect storm of factors making today’s market ripe for cross-border activity.

More than half of the respondents predict increased cross-border M&A to stem from acquirers’ need to enter fast-growing markets, increase market share or expand into new regions.

Growth in emerging markets is a widely accepted deal driver for most respondents, but this trend may also work in reverse as companies in these growing markets seek to acquire innovation and technology from their larger, developed peers. Indeed, developing businesses will need M&A to stay ahead, says one respondent: “Many Asian companies are looking to cross-border M&A for new technologies not available in their home countries.” Another respondent seconds this point in explaining: “Strategic buyers will come from India and China to acquire innovation, which will give them the tools needed to compete in Asia.”

This recurring theme of Asian growth appears again in respondents’ analysis of individual markets. When asked to identify countries that they believe will become their principal M&A partners in the future, the largest percentage of respondents (37%) identify China for 2012 and an even greater 48% say China will remain on the horizon for the next five year period. Clearly, this is not surprising given results that respondents expect China to be the most active M&A market globally going forward.

Echoing comments made elsewhere in this survey, a UK-based M&A lawyer simply says, “It is going to be more about buying into growth markets, so we will see more deals with BRIC countries.”

There is little doubt that China will become an ever more important cross-border M&A market. But it is important to note that cross-border M&A will also hinge largely on deals struck among European players.

ChAptEr 2: cross-border M&a

if yes, by how much do you expect cross-border dealmaking will increase?

Cross-border M&A values expected to rise by €101bn in the next year

0

20

40

60

80

100


Per

cen

tage

of

resp

ond

ents

By > 25%By 25%

By 20%By 15%

By 10%By 5%

23%

41%

12%

14%

6%

5%

23%

34%

15%

11%

6%

12%

if yes, which factor(s) do you believe will underpin this

Appetite for growth to drive increased cross-border deal flow


0 10 20 30 40 50 60

To integrate corporatesupply chains

Growth ambitionsand growing

investor confidence

To captureinternational innovation

To achieveeconomies of scale

To increasemarket share/broaden

geographic footprint

The need to enterfast-growing markets

56%

55%

45%

40%

40%

34%



Despite relatively high expectations for deepening economic integration with markets beyond European shores, the survey pool suggests Germany will remain a key deal market for other Europeans. One third of those polled say Germany will be their top foreign M&A partner in 2012 and an even higher percentage will stay focused here for the next five years. A Swiss private equity practitioner believes cross-border deal flow will be sustained with its neighbour because “the economy is stable in Germany,” which, given the fragile state of the global economy, cannot be taken for granted.

One half of respondents say attractive asset valuations will act as the main driver of increased cross-border M&A with their selected markets going forward. Given that less expensive targets are often found in either emerging markets or economies struggling for growth, this will likely be a catalyst for cross-border transactions.

A closer look at respondents’ top M&A partner countries – China, Germany and the US – reveals just how sharply deal drivers will vary from one region to the next. Respondents focused on China, for example, say their interest is fuelled primarily by increasing trade and investment liberalisation. China’s opening economy narrowly surpasses the more strategic aspects of M&A expansion such as sector-based considerations and the offer of competitive manufacturing and production costs.

In contrast, those who identify Germany as their principal cross-border M&A partner country identify sector-based considerations as the top driver, followed closely by the country’s large and mature M&A market. The US has a similar appeal: as with Germany, respondents drawn to the US say the market’s size and maturity is the greatest draw, followed closely by asset values.

cross-border share of overall global M&a

30

32

34

36

38

40

42


Per

cen

tage

of

tota

l dea

l vol

um

e &

val

ue

2010

34%

37%38%

41%

2011 YTD

“ in the current global economy, expansion into new markets is key.” private Equity partner, poland

“ growth is a necessity for a business – and because markets are stagnant in western europe, companies will need to go abroad for survival.”

private Equity partner, france



“ i think there are a lot of investors from the us visiting poland. right now they are looking for different opportunities from what other parts of europe can offer, and us investors are always warmly welcomed in poland.”

private equity, poland

“ north africa is attractive because it is rich in natural resources; if we are talking about china i think low employment costs and asset valuations are attractive.”

Legal advisor, russia

China to become principal cross-border M&A market

Attractive asset values to spark cross-border deal flow


0 10 20 30 40 50 60

North Africa

The Baltic states

United Kingdom

Brazil

Russia

France

India

USA

Germany

China 37%48%

33%36%

25%29%

25%36%

17%19%

14%16%

11%14%

10%12%

9%11%

8%9%


which country(ies)/region(s) do you believe will be the principal markets with which your country will conduct cross-border M&a over the next year? and over the next five years?

why do you believe these specific countries will witness greater levels of cross-border M&a with your home market going forward?

0 10 20 30 40 50

Favourable tax/regulatory environment

Increasing investmentand trade liberalisation

Country benefits from alarge/mature M&A market

Improving macroeconomicfundamentals

Sector-based considerations (e.g. accessnatural resources, new technologies,

skilled work force, customers, etc.)

Competitive manufacturingand production costs

Offers attractive asset valuations


49%

45%

44%

40%

38%

38%

15%


With M&A playing an increasingly important role in companies’ growth strategies, this section examines the key drivers of M&A success in a rapidly changing climate. Respondents’ feedback reveals a firm understanding of the importance of relationships, communication and planning through all stages of the M&A process. From deal origination to integration, deal success depends almost entirely on relationships and people – and these factors are growing ever more important in today’s competitive cross-border landscape.

When asked about the most important elements in sourcing acquisition targets, 68% of respondents identify professional contacts as a very important, if not the single most important, aspect of deal origination. In fact, survey results show that the importance of professional contacts outweighs all other factors – the calibre of internal M&A teams, sector specialists and external advisors. This is summed up quite clearly by a respondent who says professional contacts “can spot current opportunities that no one else will be aware of, and also execute deals in a way that others can’t.”

Professional contacts identified as best source for deal origination

0

10

20

30

40

50

60

70

80

90

100

Intelligenceservices or

news media

External advisors(investment bank,financial advisors

or lawyers)

Sectorspecialisation

InternalM&A team

Professionalcontacts

Most importantVery important

ImportantNot very important

Least important

Per

cen

tage

of

resp

ond

ents

1%

9%

22%

29%

39%

9%

5%

30%

40%

17%

13%

3%

27%

39%

18%

16%

5%

31%

29%

18%

17%

7%

37%

26%

12%

how important are the following factors for successfully sourcing an acquisition target for an M&a transaction?

ChAptEr 3: M&a success factors

“ you have to have the right people. banks, external advisors, everyone working on the deal should be high-level, even pr departments, as you want to guard against a negative reaction on the investors.”

Corporate executive, russia


Relationships play an equally important role at the due diligence phase, when respondents say they are most concerned with getting solid financial and operational assessments, and thorough appraisals of management and staff. Interestingly, during this phase, respondents are more concerned with these on-the-ground people issues than the legal issues – contracts, data and other documents are lower on respondents’ list of priorities than people.

Respondents’ feedback on M&A due diligence is particularly interesting when viewed against the backdrop of today’s increasingly global marketplace. Respondents note that access to information can vary considerably across countries and regions, and that transparency issues can often obscure the M&A process. The corporate executive of a Russian company explains that in his experience, “management – their motivation and their honesty – is crucial, because the financials are not always transparent.” An investment banker based in Poland shares a similar experience with investing abroad in emerging markets: “You will miss a lot if you don’t dig deeper into things, or if you are only looking at a data room. It is crucial that you understand what is happening on-site.” Transparency and corporate governance in growing, less established markets are clearly on the minds of deal makers. As such, it is important to note that the same technology that often streamlines the process – online communications, data rooms – can also work against it.


Financial health is the most important due diligence factor

0

10

20

30

40

50

60

70

80

90

100

A well-manageddata room for

document review

Review of supplierand customerrelationships/

contracts

Appraisal of attitudes/views of seniormanagementand key staff

Operationalassessment,

including onsitefacility inspections

Assessing companyfinancial position

and feasibilityof forecasts

Most importantVery important

ImportantNot very important

Least important

Per

cen

tage

of

resp

ond

ents

3%3%3%

14%

37%

44%

1% 1% 1%

6%

15%

35%

43%

5%

23%

37%

33%

8%

26%

43%

22%

8%

32%

38%

18%

when conducting M&a due diligence how important are the following factors?

“ talking specifically about cross-border M&a i think the most important thing is to have the right advisors. you should have a local understanding of the way to do business in foreign countries. you should not rely on your usual lawyers if they are not natives of the country.”

Legal advisor, france


Building relationships is key for deal success say two thirds of respondents



0 10 20 30 40 50 60 70

Understanding ofregulatory/tax frameworks

Retaining competentM&A advisors

Face-to-face engagementwith transaction partners

Clearly establishedobjectives

Building relationshipswith stakeholders

65%

64%

62%

47%

43%

what do you believe are the key elements to successfully complete an M&a transaction?

coMpletion & integrationStakeholder relationships, clearly established objectives, and face-to-face engagement are the top three keys to successful deal completion, and post-merger integration likewise depends on engagement and communication.

One executive explains that deal objectives must be communicated company-wide – not only to top-tier management – for a transaction to be successful: “In order for a deal to be successful, everybody needs to know why you are doing it, and everybody needs to be convinced internally. Good organizations always have clear goals.” A UK-based M&A lawyer states that trust must take priority because “if you can’t gain confidence, you can’t do the deal.”

The personal aspects of deal making are equally important for private equity firms, even those who do not necessarily have to deal with integration issues. Successful buyouts, say several private equity respondents, depend on gaining a company’s trust. A UK-based private equity practitioner says that ultimately, “the stakeholder is the one who is going to sell, and they are the ones who have to find faith”; similarly, a private equity practitioner based in Switzerland says his main concern is “gaining the trust of the company that’s going to sell to us.”

Integration is repeatedly described as a complex, multi-faceted process by respondents from all sides, with respondents placing the greatest emphasis on communication and planning. An executive from a leading UK-listed insurer says the acquirer’s post-deal plans should be “crystal clear” from the start and should be “communicated very early.”

Nearly three-quarters of deal makers say a clear and actionable post-merger integration plan is key to ensuring a successful integration, and 69% of respondents say a strong relationship with management is critical. One UK-based executive stresses that integration should be underpinned by an up-close look at internal teams: “It is important to understand that you are buying a team – and when you are buying a team you want to have good people.” A practitioner from a Switzerland-based private equity group seconds this statement in explaining: “M&A is fundamentally dependent on people, and you need to understand the company you are buying at the people level.”

Planning is essential for successfully integrating targets


0 10 20 30 40 50 60 70 80

Early and open communicationwith key stakeholders

Retaining talented staff

Cultural understanding

Understanding the strategic fit ofthe target within your business

Building goodrelationshipswith management

Having a clear and actionablepost-merger integration plan

73%

69%

67%

64%

61%

59%

during the post-merger phase of a deal, what do you believe are the principal factors needed to ensure the successful integration of an acquisition company into a business?

deal MaKing: evolvedFinancial crises, political changes and new regulatory frameworks are just some of the many changes brought by the past three years alone. As deal makers continue to adapt to this uncertain setting, the same time-tested imperatives

to deal making – relationships and communication – will be all the more important. Respondents to this year’s Doing the Deal have made clear that deal makers cannot afford to overlook these areas in a dynamic and increasingly international marketplace.


Respondents consistently warn, however, that the landscape going forward will be an unfamiliar and challenging one. Opportunities in emerging markets will draw no shortage of interest from acquirers, but these acquirers must be ready to pounce quickly while also coming to the table with carefully constructed deal objectives and due diligence strategies. Many of our respondents stress the importance of on-site risk analysis and close monitoring of business activities on the ground.

Even in their home markets, deal makers will face new layers of complexity. Heavier regulatory burdens and tight financing markets will add yet another wildcard to the mix. Financing difficulties and economic uncertainty will still leave a considerable valuation gap between buyer and seller expectations – meaning buy-side and sell-side due diligence will be all the more important.

Having witnessed their fair share of bubbles and busts, the deal makers we spoke to know that short-term value creation and projected synergies are only small parts of a bigger equation. Deal craft is ultimately rooted in the time-tested basics of relationships and communication, and as the M&A market becomes increasingly global, these personal aspects of M&A will become all the more critical.

With this in mind, deal makers are looking ahead to an extremely difficult balancing act: businesses must be ready to pounce quickly on new opportunities, which means they must be ready to address some of the most time-consuming and important aspects of deal making – building relationships, communicating objectives and conducting bulletproof due diligence – in a compressed time frame and under dynamic market conditions.

outlooK

Matthew albertAuthor

Deal makers are largely optimistic in the M&a market’s resilience. Deal flow over the next 12 months, though still under pressure, will be underpinned by companies’ cross-border growth initiatives, distressed opportunities and sector-specific factors, including a healthy appetite for assets.


doiNG thE dEAL rEport 2011/2012david giaMpaolo

David giampaolo is Chief executive of investor network Pi Capital, a role he has held since 2002. Pi Capital is an innovative investor network, focussed on finding growth equity and alternative asset investment opportunities and negotiating participation in select private equity deals and funds for its members. David hosts a series of monthly, “lunches and dinners” which bring together some of the most renowned business and political leaders based in europe.

David previously founded, built up and sold several businesses and health club chains in the US and UK. He has financial interests in several other businesses and industries (both as an angel investor or co-investor) including Fitness First, the world’s largest health and fitness group. No stranger to sensing the pulse of the M&A market, in Europe and beyond, David shares his thoughts on this year’s NetJets Europe: Doing the Deal study.

the report has shown that there is increased optimism for M&a activity over the next year, are you surprised?

“In many respects, the optimism is to be expected. Every cloud has a silver lining: in this case, the volatility within the European market will likely lead to an increased number of distress-driven M&A deals and ‘forced’ takeovers. The market disruptions will leave a lot of otherwise healthy companies, with bad balance-sheets, open to greater corporate activity.”

What challenges to M&a activity have you and your members seen?

“The experiences of our members seem to replicate the outcome of the report in respect to the difficult financing

environment due to the lingering economic weakness and the fact that the banking sector itself has its own solvency and liquidity challenges. This is not being helped by the continuing uncertainty of economies in countries such as Greece, Portugal, Ireland etc, the potential impact of which cannot be underestimated. This difficulty in gaining financing is severely impacting many companies throughout Europe.”

have you seen any industry specific M&a?

“It was fascinating to read in the study of the increased growth in emerging markets as centres of M&A activity for European dealmakers. This reflects what we’ve seen by way of positive developments and activity within those markets. One example you picked up on in the study is the fact that companies in more established markets are able to offer great IP and advanced technology to companies and parts of the world that desperately need it, leading to emerging markets businesses strategically acquiring developed businesses. I expect we’ll see much more of this in the year ahead.”

have you seen any specific M&a trends in europe?

“There are definitely clear differences and trends emerging within Europe. The stark differences between the economic robustness between Northern and Southern Europe are very clear to see. Germany has, relatively speaking, a fairly robust economy and acts as a key supporting economy in Europe. This seems to be reflected in the report with the more bullish attitudes of the German respondents to M&A activity. In contrast, the UK’s economy has been built significantly on debt and is much more reliant on London as the central economic hub so it is unsurprising to see more pessimism from UK businesses.”

“It is also clear that business leaders and management teams are going to have to adapt better and faster to a business environment with very low GDP growth, extreme market volatility and the scarcity and higher costs of debt capital management for many years to come.”

“ the netJets europe doing the deal study gives an accurate, up-to-the-minute insight into the minds of key players in the european M&a market. its findings on optimism mirror what we’ve seen from our members as they look to distress-driven and opportunistic investment options, its assessment of the challenges – from economic worries to challenges with financing – hit at the heart of current large-scale investment issues. it unpicks and investigates one of the key cornerstones of M&a success – the personal contact and relationship – both in terms of identifying, successfully completing and subsequently integrating acquisitions. even in a tough market, being smart isn’t enough. who you know, and how well you know them, is the key to success.”

david Giampaolo, Chief Executive, investor network, pi Capital


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