M&A across the border

By all appearances it looks like it’s going to be another record year for M&A activity in 2006. A new study by KPMG surveying both private equity and corporate senior executives in North America is predicting that this year’s M&A activity will surpass last year’s record performance. Perhaps more importantly for private equity firms, the study also found that cross-border M&A activity isn’t just being pursued by big players. More and more cross-border activity is taking place at the mid-market level, where private equity firms tend to concentrate.

Malcolm Wright says cross-border M&A activity is increasing

More than 60 percent of the participants in the study estimated that at least 25,000 deals will be completed in 2006 worldwide, and 66 percent expect their own companies to complete at least one cross-border transaction by the end of the year. Compare that with 2005, when market reports indicate a record 23,000 deals were completed worldwide and 50 percent of those were cross-border.

“It’s not just big companies now who play on a global level, it’s gone down to the mid-market,” says Malcolm Wright, national services leader of KPMG’s transaction services practice. “For private equity funds, who traditionally have focused more on the mid-market, they’ve gotten more comfortable with doing cross-border work. We see our private equity clients becoming more adventurous.”

Wright says the study also shows that senior executives aren’t just focusing on cross-border acquisition work, they’re also spending as much time focusing on selling assets as well. Forty percent of the people surveyed expected to do an acquisition and a disposal by the end of the year.

“In the past people have focused a lot on acquisition work,” he says. “But we’re seeing, in our own business, that helping people sell assets is critical now as well.”

At the same time, the study also showed that executives continue to be concerned that a number of challenges could affect the success rate of M&A transactions. Hidden or unrecorded liabilities and incomplete planning prior to the transaction ranked as the top two tax issues facing M&A participants. This concern is particularly strong for cross-border transactions, where a miscalculation about tax structures or cultural attitudes can spell disaster.

A simple way to look at it is, if you are investing outside the US or Europe, then for every hundred miles you go, your due diligence needs to ramp up another notch. Malcolm Wright, KPMG

“When you go offshore, financial data is not always what it first appears to be,” Wright says. “Private equity buyers in particular are incredibly focused on getting to a recurring quality of earnings number.”

Wright says more thorough due diligence for cross-border transactions can help confront these issues, and as more private equity firms look globally for opportunities, there are rules of the road that one should follow.

“A simple way to look at it is, if you are investing outside the US or Europe, then for every hundred miles you go, your due diligence needs to ramp up another notch,” he said. “In emerging countries in particular you need to be very careful about the quality of data you’re given.”

A similar recent survey of European private equity firms and mid-market corporations showed that over two-thirds of senior executives surveyed expect European M&A activity to increase in the next six months. That survey also showed that just under a third of European private equity firms will focus on fundraising in the second half of 2006, with 75 percent expected to be in acquisition mode.