Global merger and acquisition (M&A) activity bounced back during the first nine months of 2010: Kraft and Cadbury; Nokia Siemens and Motorola; Oracle and Sun Microsystems; 3G and Burger King Holdings Inc are just a sample of the partnerships forged during 2010.
Record M&A levels were reached by the end of the third quarter of 2010 – the total value of global M&A activity for the first nine months of the year increased 21 percent from 2009 levels to $1.75trn. This marked the strongest quarter recorded since Q3 2008. In Europe, over $300,000m of M&A deals were completed in the first nine months of 2010.
Throughout the downturn, M&A deal teams have looked for ways to leverage balance sheet performance and drive cost saving and efficiency programmes across the merged entities. Buildings can underpin the delivery of operational efficiencies and are typically used to justify transactions, as well as accelerating physical and cultural integration.
Property assets should be at the top of the list in the M&A Boardroom – they are critical components capable of providing significant savings and central to the failure or success of a deal. Moreover, the imminent arrival of IASB Lease Accounting Standards will provide a long overdue reality-check which will mean greater accounting transparency for listed companies, with leases being brought onto the balance sheet as liabilities, along with their matching assets.
Gearing for change
As part of the operational platform, the core asset base of the target company or a source of cost savings, property is a core element of the M&A transaction.
Property functions have been leading the corporate sector’s cost-savings agenda over the past two to three years, and are today seen as crucial contributors to achieving efficiency gains post-merger, consolidating business operations and facilitating the outsourcing of non-core infrastructure processes. In M&A transactions, preparedness and transparency are essential for both parties – these skills can be the difference between the failure and success of achieving intended synergy gains.
Assessing the nature, value and importance of the property portfolio during the transaction phase, and then integrating the two operating companies post-completion are complex but essential to the success of a deal. Careful preparation, clear identification of objectives and responsibilities, and forensic attention to detail during implementation are vital.
No two mergers or acquisitions are the same – each deal will have its particular requirements – but the importance of property is a common denominator. From pre-transaction preparation and due diligence through pricing and into post-completion integration, the corporate property team has a significant role to play. They are an essential source of support to the deal team, advising of the potential risks and rewards of an acquisition, and then delivering the cost and operational synergy targets arising from the merger.
M&A rationalisation has encountered a lot of problems in the past, and corporates are still learning – the speed of planning and delivery of all activities can be slow due to delivery barriers, ultimately delaying the timescales of the whole M&A and rendering it cost-inefficient.
The pace of organisational change can be tough to overcome, and this will continue to be a hurdle unless carefully coordinated alongside effective property strategies. The complexity of organisations, clashes in company cultures and inadequate due diligence can be under-anticipated. Moreover, the specialist nature of property in the portfolio – whether consisting of data centres, laboratories or logistics units – can also be overlooked.
Emerging markets? Flourish
Sectors seen to take particular advantage of the expansion window in 2010 include the technology, financial, manufacturing, pharmaceutical and commodities sectors. Interest from Asia Pacific, and particularly from China, will continue to increase, and corporates will make use of high cash balances and historically low borrowing costs to look for bargains and expand their businesses.
It is increasingly important that corporates understand their property portfolio dynamics across borders – activity involving companies located in emerging markets totalled $551.6bn during the first nine months of 2010 – a massive 72.6 percent increase on 2009 levels, and accounting for 32 percent of global M&A activity during the period.
Emerging market M&A has exploded – backing the notion held by some that commercial power is sliding from west to east. Asian investment in Africa and South American countries is steadily growing, and according to KPMG’s latest Emerging Markets International Acquisition Tracker, companies in emerging economies recorded a 25 percent increase in cross-border deal activity in the first half of 2010.
As emerging economies such as China gain wealth faster than their developed counterparts, it is evident that the worldwide economic climate is guiding geographical diversification.
Beyond 2010
In the months ahead, corporates will continue to seek increased efficiencies in their property portfolios, whether through enhanced sustainability measures, flexible desk-sharing initiatives or property acquisition and disposal.
Despite the difficulty of gaining upfront capital investment during the downturn, corporates have been driving opportunities to relocate suitable back-office or research and development functions to low-cost locations. Market sentiment and confidence in M&A improved markedly during the first nine months of 2010, compelling emerging and major markets to improve economic conditions.
The key lesson for corporate property executives is to ensure that they understand their portfolio dynamics. The team which demonstrates the greatest understanding of their property portfolio and its alignment with the business strategy will prevail.
If there is one takeaway from our experience it is this: success favours the prepared.