A new deal culture?

With US private equity (PE) increasingly targeting the European mid-market, BDO expects a shift in deal culture. 

The past few months have seen US private equity firms taking a growing interest in the European mid-market, BDO’s sphere of activity. Reason enough for the worldwide accounting firm to indicate how European firms should prepare. With comments from our M&A Professor Mathieu Luypaert.

American private equity houses are very successful and this is not a change to be feared, but management teams and shareholders will need to adapt. Specifically, to get better value and greater certainty, they will need to prep earlier, prep more and prep differently.

Three differences

As BDO points out in its international M&A quarterly, “Horizons”, a quick look “over the pond” reveals three key differences: the diligence and completion process, the debt market and the status of management.

1. Diligence is more data-driven in the US, with a level of analysis and a thirst for numbers that is often at a different level compared with European firms. Completion is not an event in a deal; it is a process.
➔ European firms should invest in more data that can easily be used.

2. The US debt market is more fluid, less structured and more moulded to underlying credit.
➔ With the influx of debt funds brought on by the global financial crisis, this is perhaps what we now have here in Europe, too.

3. Instead of MBO (management buy-out), which is the predominant thrust of the European mid-market, there is more of a feel of the IBO (or institutional buy-out) from the US.
➔ European firms should take a critical look at their management teams.

Professor Mathieu Luypaert comments: “The increasing amounts of dry powder (cash holdings) held by US PE firms, combined with strong competition in the US takeover market, prompt these PE houses to look for interesting target companies overseas, resulting in a serious switch in deal culture. While cultural differences in post-merger integration have been identified as one of the most important factors for M&A failure, cultural differences in how to approach the deal process might be just as important but have received little attention in the academic literature up until now. BDO’s article provides very valuable insights in this respect, highlighting more data-driven due diligence, litigation as a negotiation tool and less dependence on current management.”