How to Unlock ‘Off Radar’ Value in M&A Deals
In an interview for Aon’s new M&A report, ‘Leaving nothing on the table: Unlocking off-radar transaction value’ – produced in collaboration with the Financial Times – Sean Mercer, Managing Director at The Carlyle Group says: “There’s an increasing view that every deal we do now is a technology deal, regardless of sector…most deals face some impact from the pace of technological change – this particularly comes to bear on cyber and intellectual property due diligence.”
This quote neatly summarises the idea that even if you’re buying an ‘old industry’ business, everyone has technology exposure. It is one key reason why all those involved in the M&A process need to rethink the breadth and depth of their pre-transaction due diligence.
Shift from the tangible to the intangible
The digital disruption that businesses are seeing is also having a big impact on the shift in business value from tangible assets to intangible assets. Our report shows that in 1975, the bulk of the assets that made up the S&P 500 were tangible. Fast forward to 2018 and the situation is reversed with intangible assets representing over USD$21trn (versus just USD$4trn in tangible assets). But it is not always understood that if every deal is a technology deal then inherently there is a lot of intellectual property within those businesses; a lot of which is not properly identified, understood, valued, or exploited when it comes to the commercial opportunities available to generate returns out of the individual parts of the IP stack.
More focus needed on cyber due diligence
Our report, which seeks to look at the traditional approaches to M&A due diligence and shed new light on some of the untapped opportunities in the transaction process, finds that many acquirers still relegate cyber to a sub-component of IT due diligence which focuses on more traditional areas like IT infrastructure, data centres and IT governance.
Cyber due diligence demands more of a focus given it looks at business critical areas like the security of customers’ data, intellectual property, and exposure to hacking risks. The failure to address cyber risk in a holistic way can erode deal value in areas like identifying underinvestment in cybersecurity and result in missed opportunities such as in agreeing cyber fixes pre-transaction.
There is more work to be done on assessing the tangible risks too, particularly in areas like human capital. Traditionally seen in the M&A context as a case of valuing pension liabilities, we think there is an emerging trend, particularly in the new gig economy, to understand the talent and reward dynamics in a much more detailed way pre-deal, particularly in the purchase of people heavy businesses – such as technology-based companies.
Deeper risk insights
Turning to the role that data can play in the M&A process, our report finds that here too, there is a real opportunity to go deeper into risk insights. The insurance industry holds an enormous amount of data and can now deliver modelled insight into many different risk scenarios. For example, we recently carried out a piece of work for a client looking to buy an airport where we were able to provide modelled output for the impact a terrorist attack would have on the airport in terms of its ongoing commercial viability, delivering much greater and deeper risk insight.
Harness the arbitrage advantage
Insurance is also playing an enhanced role in the M&A process. As dealmakers realise the potential of harnessing the arbitrage advantage that insurance offers, the use of warranty and indemnity insurance for M&A deals has taken off in Europe in recent years. Not only can insurance help protect against traditional M&A risks, it can free up capital on the balance sheet.
As our report concludes, the challenge for many businesses in the M&A process is to see whether insurance instruments can solve other types of deal risks in a better way than other, more traditional financing solutions. If businesses can also tie that in with greater risk insight and focus on extracting value from intangible assets, it will give deal makers the opportunity to gain an edge and find new sources of commercial value.