Maximising Asset Value for Mergers & Acquisitions

Published 26th July 2010

Merger and acquisition activity may be on the up but for many organisations now looking for a buyer, maximising value is a major challenge. And while cash rich companies are keen to expand where possible, no organisation wants to acquire a business that is likely to need unexpected investment in the current climate.

Yet with the majority of organisations still reliant upon spurious fixed asset data held in spreadsheets, achieving an accurate picture of the balance sheet and true profitability is proving a major challenge and a potential deal breaker.

Failure to put in place an accurate, up to date asset register could result in the company assets being significantly undervalued. It could also undermine the organisation’s ability to demonstrate strong cost control through asset reallocation and, with no asset maintenance history, a potential purchaser has no insight into asset health and the potential investment required, which could further reduce the price offered.

Karen Conneely, Group Commercial Manager, Real Asset Management outlines the importance of an accurate audit trail of fixed asset information to maximising both the value of a business for sale and the post merger consolidated organisation.


M&A Increase
The acquisition of Cadbury by Kraft appears to signal another upswing in merger and acquisition activity that has been at a virtual standstill for the past couple of years. Certainly corporate and private dealmakers are predicting that mergers and acquisitions will increase during the first half of 2010. This increase will be led by manufacturing, financial services and healthcare according to a survey by the Association for Corporate Growth which revealed that 82% of respondents expect merger activity to increase over the first half of 2010.

However, 40% of those surveyed also believe that a quarter to half of these deals will be distressed deals. For any organisation facing up to the need to sell or go out of business, it is therefore essential to maximise business value in any way possible.

And an important component of this valuation, especially in the manufacturing sector, is asset value. Yet while many UK organisations appear highly confident of the value of their corporate assets, claiming 95% accuracy of the asset register, in reality around 50% of assets on the books are actually no longer in use. As a result, a proportion of items on the asset register are still being depreciated after disposal, reducing profitability without just cause.

The problem is that while most companies have good systems in place for recording initial investments, they pay lip service at best to managing later asset disposal. Far too many organisations are still reliant upon spreadsheets for recording assets and create confusion by failing to record the movement of assets between locations.

Whilst that may not affect their value to a finance team concerned primarily with depreciation, should a company opt to divest a number of locations, inaccurately recorded assets could severely compromise the value of the agreement to either party.


Asset Loss
With such a lack of robust information, how can any acquiring organisation undertake due diligence on behalf of shareholders? And for those organisations looking to maximise company value prior to a sale, poor asset information can only result in significant undervaluation.

Acquiring organisations also need to understand asset health. Information on asset maintenance history and remaining asset lives is key to determining the required ongoing investment. Whilst cash rich companies are now looking to maximise the current economic situation, few will be keen to make major investment to overhaul an unhealthy asset base. An inability to provide accurate, trusted information over asset status and health can only result in further devaluing of the business.

In this economy it is also essential for every business to demonstrate strong cost control to improve corporate value, and good asset management is key to that process. As the recession has taken a strong hold and capital expenditure capped there has been a growing move to recycle assets and maximise the asset lifespan, from office equipment and IT kit to major pieces of manufacturing equipment.

Indeed, as organisations have relocated manufacturing activity from the UK to Eastern Europe and Asia, growing numbers are now actively considering relocating core equipment rather than purchasing new. Those companies that have put in place a strong asset register and management processes are now in a position to create an internal market for buying and selling assets within the Group to improve cost control and maximise asset value.

Retailers also have a chance to improve value by adopting a more robust attitude to asset tracking. One large multiple was recently able to add significant value by linking in store asset value to the time left on store leaseholds. By apportioning new store assets across the remaining life of each store lease in a number of refitted stores, the organisation dramatically improved its P&L. This had a big impact on the valuation when the company then sold a number of its stores to a rival.

Conclusion
For those cash rich organisations looking to exploit the growing numbers of distressed businesses, the opportunities in the current market are significant. But any business looking to sell needs to ensure its asset information is up to date and trusted. Without accurate records about asset life, usage and refurbishment history, potential acquirers will struggle to put a correct figure on asset value.

And without access to a consolidated asset register that also records asset maintenance, it will be impossible to ascertain an asset’s longer term value to the business. The result will undoubtedly be a significant reduction in any potential offer – or a significant business risk incurred by the acquiring organisation.

In contrast, an accurate asset register provides a platform for improved cost control and the ability to demonstrate sound business practice. It will also offer additional value to a potential acquirer by providing a platform for rapid post merger/acquisition consolidation – a key issue in achieving business success and reducing costs.

Non-organic business expansion may look strongly appealing in 2010 but with cost control under focus and a sustained reluctance to embark upon unscheduled capital expenditure, should any merger and acquisition activity really take place without a trusted, accurate audit trail of company assets?