Why does an average 16% of deal value drain away?

Carve-outs have become increasingly popular among dealmakers – with a threefold increase in volume since 2016. And, post COVID-19, this impetus should continue as a mixture of pent-up demand, distressed and non-core assets and lower valuations lure cash-rich private equity firms and corporates back to the deal table.

However, a new study of the cross-border carve-out market, commissioned by TMF Group, suggests that dealmakers could be losing substantial amounts of money due to avoidable delays and a disregard for the three fundamentals of successful carve-outs.

The study, produced in association with Mergermarket, surveyed 200 C-suite executives at corporate institutions and PE firms based in 29 countries, all of whom had buy-side experience of a cross-border carve-out over the past three years.

According to the findings, 19% of corporates and 24% of PE firms say their most recent deal took longer than expected, which can cause costs to climb – by an average of 16% of original deal value when overruns last more than four months. Given that some carve-outs are valued at more than US$1 billion, any escalating costs due to avoidable delays cannot be overlooked in complex, international deals.

Why is this happening? According to Larry Harding, Head of TMF Group in North America,  executives are not factoring in the three keys to carve-out success –  preparation, local presence and persistence. Failure in any one of these can cause delays, create unexpected costs and kill long-term deal value.

Lack of preparation is the tip of the iceberg: 78% of corporates and 64% of PE firms say delays in completion could have been avoided with more preparation. To be properly prepared, you need to see the complete picture, and that requires a detailed understanding of the deal in a local context.

Deal delays are not a give

“Just below the surface of every cross-border carve-out is a network of potential bumps in the road, from chambers of commerce to regulatory agencies and various authorities governing business licensing, social security, pensions and payroll tax. Mistakes made with any of these can push deadlines and throw unexpected costs into the mix,” says Harding . “But deal delays are not a given, if you do your homework, find the right local expertise, take local timelines into account and prepare, prepare, prepare.”

Each process in a cross-border carve-out is unique to every country. Local offices with detailed jurisdictional knowledge can offer their expertise so that everyone knows what is needed when – and prepare the groundwork to make it happen in a reasonable time. Without local expertise, it’s easy to fall foul of nuances and subtleties in local processes, which comes at a cost.

This approach produces clear results, according to the study. More than three-quarters of those with a moderate to well-established local presence say they have mostly successful outcomes in their deals. Having that expertise on the ground will also keep timelines on track and that will help retain value in the long run.

To find out more, download the report here.