Private equity flips its economic defibrillator
Private equity has had record years but will these continue as the impact of COVID-19 hits?
4 November 2021
A share purchase of another company means that the minute the purchase is made, the acquirer is responsible for all the purchased company’s contractual and regulatory obligations but also importantly, get the immediate of all revenues. Although on the surface this would seem to be the most interesting of options, this is also the one that carries the most risk and, ultimately, the most work. When doing a share purchase, one must, aside from the regular due diligence, be especially careful with respect of the representations and warranties. These representations and warranties, “guarantee” that all that was presented was true and factual and if there are some outstanding issues that warranties would cover eventual financial penalties or fines. Although any eventual fines may be covered, the amount of time that these sorts of issues can be great and very distracting for an organization. If the issue is one that attracts press attention, there can be reputational damage as well. Although the issue may have happened under former ownership, once it is announced in the press, it will be the current owner to suffer any negative press.
Moreover, once the target organization has been acquired, all HR related issues are then taken over by the buyer. This means that if there are headcount reductions to be managed, long term contracts to be honoured etc, it is now the buyer’s responsibility. Although eventual severance packages can be negotiated prior to closing date, it will still be the buyer that will have to manage the process and communication. Since many business cases for Financial Services are based on an HR saving, this area needs to be investigated, negotiated, and executed very carefully.
As is normally the case, the other institution will have a different system landscape that will also need to be rationalized. As we have seen more and more, many of these IT/Outsourcing contracts are very difficult to unwind.
On the positive side, the minute the purchase is made ALL revenues go to the buyer. This can be very important depending on the buyer’s cash flow.
Conversely, an asset deal is normally a purchase of client assets with or without the accompanying relationship managers. This means that the buyer looks at a number of accounts with assets and decides whether to buy them or not. As a general rule, this sort of transaction is of a lower risk but if the transaction is structure as an onboarding of clients (where the client has to opt to go to the buyer) it can also be much longer to onboard and achieve the wanted revenue.
The make-or-break issue around share deals (depending on how they are structured) is how many assets come over to the buyer and/or how many of the assets stay at the buyer’s institution between the short and medium term.
Although asset deals may arguably be more desirable than share deals, challenges remain to make them successful. Here the challenge is to make sure that the right Relationship managers join the firm and the clients are willing to move their accounts to a new institution.
If the deal is set up as an onboarding of new clients, this enables the buyer to onboard their clients through their normal due diligence KYC process. This greatly reduces the risk of unsavoury clients although it does put pressure on the buyer to actively market their institution to convince the client to onboard and remain.
Another asset deal set up is to sell the assets directly to the buyer and then do their best to keep them. This is a desirable method of buying the assets but once again, a big effort must be made to retain the clients.
Whether it be a share deal or an asset deal, these transactions are not simple and must be carefully planned and executed. In the next series of articles we will discuss how corporate culture should be introduced for these very different types of transactions and make them successful for the buyer.
Now that we have described the different deal types, we will begin to describe how to successfully implement a merger or acquisition. Our next article will be role of corporate culture in a successful transaction.