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Mixing the right ingredients for a perfect M&A

Despite the uncertainty of Brexit and the pessimistic economic indicators mushrooming up across the global economy, the food and drink sector is likely to see an upturn in M&A activity. As it does so, those involved in deal making and particularly those businesses whose forays into the M&A world are infrequent, would be – according to Aon’s recent C Suite Series report Leaving nothing on the table: Unlocking off-radar transaction value – well advised to take another look at their due diligence process, as well as understanding how insurance can play an expanded role in areas like improving balance sheet liquidity.

Hard times for some…

It seems counterintuitive to expect to see M&A activity rise when the economy has started to slow and political issues like Brexit are causing uncertainty, but there are always going to be plenty of big players keen to take advantage of the opportunity that can present itself in straitened times. Whatever the outcome of Brexit, it will cost many organisations leading to an increased level of business failure – most probably at the smaller end of the market for those food and drink companies without the financial clout and/or the internal expertise to navigate what’s coming. Talking to our trade credit clients, it’s clear that the market is already hardening; making it more difficult to get appropriate limits in place for cover against the risk of not being paid with some customers being excluded altogether. If a business is not being paid, they won’t survive.

…will lead to opportunities for others

These likely failures give those companies with the balance sheet strength the opportunity to spot a good deal and take advantage. Added to that is the growing interest of private equity in the sector. Traditionally they have been put off by the lower returns on offer but as factors like a growing population start to impact demand, they’re starting to see more value in food and drink.

There are also a lot of start-ups with the potential to cause disruption to the sector and investors want to be a part of that whether it’s taking advantage of agtech – applying technology to the food sector to make it more efficient and productive – for example, or businesses operating in innovative spaces like protein alternatives. These small operations are accelerating quickly and their challenge is having the financial might to quickly scale, leading to some of the big players buying those businesses as bolt-on acquisitions.

From the tangible to the intangible

So, the conditions are right for increased M&A in the food and drink sector, but are food and drink companies in a position to maximise the value from these transactions? As Aon’s M&A report reveals, a big challenge is recognising the shift from tangible to intangible assets. In 1985, the $1.5 trillion in assets for the top five S&P 500 companies was split between $1.02 trillion in tangible assets versus $482 billion in intangible assets. Fast forward to 2018 and those figures have been turned on their head, with intangible assets for the top five now representing $21.03 trillion versus only $4 trillion of tangible assets. How has this shift to the intangible impacted the food and drink sector? Thirty years ago, if a food company was buying another business, they were probably buying a factory with a range of products. That is still the case, but today they’re also buying a huge amount of intangible value such as customer relationships, brand equity, and talent. That is why it is so important for businesses involved in M&A that instead of focusing on the 20% of the deal that relates to the physical assets, they think about the 80% that is not a physical asset but can have a far bigger impact on whether the business succeeds or not.

M&A is in their DNA

For many of the large global players, M&A is in their DNA. It’s something they do regularly with two or three acquisitions a year and it’s likely they will be quite sophisticated in their due diligence, applying the necessary focus to areas like cyber, supply chain, and talent. The big players do this relatively well, but if you look at the next cohort of businesses who perhaps do one acquisition every five or ten years, it’s important they recognise that the pace of change in what defines good due diligence has changed hugely in recent years. As Aon’s cyber report finds, all businesses need to rethink the breadth and depth of pre-transaction due diligence, with more specialist approaches to areas like cyber, intellectual property, human capital, environmental, and risk and insurance.

The role of insurance has changed significantly and as the use of warranty and indemnity has taken off in deal scenarios, so has the understanding that insurance can free up capital on the balance sheet as well as helping to hedge transaction risk. A lot depends however on the sophistication of the risk manager when it comes to the use of the different insurance solutions available and how engaged they are in the process – sometimes it can be too late in the day that insurance is brought to the table.

Maximising deal value

Maximising value from the deal is critical for any food and drink business involved in M&A. By focusing more on pre-transaction due diligence, gaining deeper risk insights, and using insurance to harness the arbitrage advantage, businesses will be in a much better position to see successful outcomes from the likely consolidation and disruption that is becoming a feature of the food and drink sector.

To find out more about maximising value from M&A, read the full Aon report: Leaving nothing on the table: Unlocking off-radar transaction value

Aon UK Limited is authorised and regulated by the Financial Conduct Authority.

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