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PEs, corporates will struggle to carve out parts of parent firms in Asia-Pacific: Study
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Carve-out acquisition deals -- which involves untangling a business from its parent firm -- may rise as businesses seek to restructure their operations and improve cash flows in the wake of the Covid-19 pandemic.

However, a share of such deals in the Asia-Pacific region are already seeing delays because of hurdles including regulatory and legal issues as well as misaligned operating models, according to a report by multinational professional services firm TMF Group.

The report, which surveyed both corporates and private equity firms in 2019, also said that these delays see significant costs being added to these deals. These issues are faced by both private equity firms and strategic firms, according to the report.

Around 34% of executives at private equity firms with buy-side experience and 27% of corporations said their most-recent cross-border deal had failed to deliver on expectations. 

Around a third of businesses in the Asia-Pacific are more likely to see delays as opposed to 18% in the Americas and 16% in Europe, West Asia and Africa.

The numbers provided by the report also acquire much more significance given the fact that a lot of private equity and strategic respondents from across regions – 42% and 37%, respectively – said that the value of their carve-out deals fell in the $51-150 million (Rs 388-1,140 crore) region.

Drivers for such deals differ between private equity firms and corporations, with the former looking for value-for-money propositions, and the latter seeking to expand their business and services portfolio.

A significant portion of private equity firms (64%) also look at the potential acquisition of intellectual property and technologies while evaluating such deals, underscoring the growing importance of proprietary applications as a differentiating factor when it comes to raising capital or taking firms to public markets.

However, both sets of respondents cite legal and regulatory hurdles as the biggest challenge they face, according to the report. Misalignments in operating models also come up as a significant challenge to carve-outs.

Private equity players also cite limited support from sellers as a challenge, while 38% of corporates say they face difficulties with thorough financial assessments of their deals.

Most of these deals involve units that have international operations, too, leading to integration procedures. 

However, while 58% of private equity firms said that their most recent carve-out deal involved three countries or less, around 49% of corporates said that their acquisitions involve between four and nine countries.

Separately, 10% of corporate respondents took part in deals that involved operations in up to 19 countries.

“Untangling a business from its parent company across multiple jurisdictions to create a fully standalone entity can be complex,” TMF Group head of Asia-Pacific Paolo Tavolato said. 

“In some regions, for example, companies can run six processes in parallel, while in others each task needs to be completed in sequence.”

This leads to an uptick in costs, impacting the overall value of the deal, with the percentage increase being linked to delay time for deal completion. 

A one- to two-month delay may see a 10% rise in costs, with deals taking more than four months above their expected closing period adding on more than 16% of the original value of the carve-out.

Tavolato also said that TMF expects a significant reduction in the number of transactions in the immediate term because of the coronavirus pandemic. 

“But there are clearly going to be big opportunities for the cash-rich corporates and private equity firms, with the latter reported to be sitting on a record level of dry powder at the end of last year,” he added.

The report by the Netherlands-headquartered firm says those looking at cross-border carve-out deals need to focus on factors such as local advisors and timelines and adequate research if they wish to unlock value from their acquisitions from the start.

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