The number of carve-out acquisitions is expected to rise as businesses in Asia Pacific look to restructure because of the coronavirus outbreak, said TMF Group recently.
Those that do should approach with a note of caution after research revealed around a fifth of carve-outs result in millions of dollars wasted because of inefficiencies, the firm noted.
According to an independent survey commissioned by TMF, 34% of senior executives from private equity firms with buy-side experience and 27% from corporations had their most recent cross-border carve-out failed to deliver on expectations.
- 24% and 19% of respondents, respectively, indicates that costly overruns significantly impacted the deal.
- Businesses in APAC were much more likely than those in other regions to experience deal delays (33%), against just 18% of those in the Americas and 16% in EMEA, said TMF.
- Where a delay resulted in increased cost, a clear majority of those from private equity firms (92%) said it added 10% or more of the original value of the deal, with 30% saying more than 16%.
- The figure for corporates was equally high, with 85% claiming it increased add-on costs by 10% or more, and 38% at 16% or more – all considerable sums given that most of the carve-outs were valued at over US$ 50 million, and some more than US$1 billion.
In terms of learning from experience, the biggest obstacles to cross-border carve-out success identified by APAC, along with the other regions, is dealing with legal and regulatory issues.
This was cited by 52% of corporates and 48% of private equity firms, followed by misalignment of operating models, cited by 43% and 46%, respectively, the firm pointed out.
Part of those challenges was down to geographical complexities - separating out a business from its parent when several jurisdictions are involved, and not having sufficient local market experience across each of those.
Nearly 60% of corporate respondents said their most recent carve-out involved operations in four or more countries (with 10% involving ten to 19), while 42% of private equity respondents said their most recent deal also involved a business operating across four or more places, TMF said.
Those sponsors on both sides that had limited or no presence in any target’s local market were more likely to have disappointing outcomes.
Indeed, 38% who fell into that criteria said their most recent carve-out had largely failed to meet their overall strategic goals, and 38% said it also took longer than expected to generate value, according to TMF.
Respondents from APAC — who were most likely to have limited or no presence — ranked issues such as cultural clashes, complying with local accounting and tax requirements and human resources regulations as much more difficult than those in other regions, the company added.
What could be done to increase the chance of success
When it comes to other success factors, the research indicates that the right expertise and resources need to be brought on board as early as possible.
Of those who experienced delays in completion, 78% of corporate and 64% of private equity respondents said they believe they could have avoided the overrun and additional costs if they had been better prepared.
“Untangling a business from its parent company across multiple jurisdictions to create a fully standalone entity can be complex,” said Paolo Tavolato, Head of APAC, TMF Group. “In some regions, for example, companies can run six processes in parallel, while in others, each task needs to be completed in sequence.