EY’s Chris Smyth
Value creation in the world of dealmaking often takes time to be realized
Chris Smyth is confident the positive momentum surrounding dealmaking will continue into 2019.
“Companies are so focused on growth and M&A is seen as a key lever to drive that growth and innovation,” says Smyth, EY’s Central Region Transaction Advisory Services Leader.
EY’s Global Capital Confidence Barometer is updated twice a year, surveying thousands of executives across more than 40 countries. The most recent update, conducted last spring, found that the appetite for deal volume continues to grow.
“Even the activity we’re seeing year to date for deal values is at a record high,” Smyth says. “I know that can turn on a dime and you can never be too confident in the market on a particular day. But it does look good now and I think Northeast Ohio will be participating in that activity.”
Smyth has advised buyers and sellers in more than 200 transactions ranging in size from $30 million to more than $3 billion. He specializes in financial due diligence, consolidations/roll-ups, carve-out transactions, accounting for transactions and analyzing purchase price adjustment mechanisms.
In this week’s Dealmaker Q&A, we caught up with Smyth to talk about the principles of effective dealmaking.
What is one of your keys to being a good dealmaker?
You hear people say that sometimes, they get too emotional about a deal or they start to spend so much time on a deal, they just want to get it over the goal line. The great dealmakers really maintain discipline within the process. They keep their emotions in check, but they also are able to apply critical thinking and have the ability to make decisions.
Often in an M&A or divestiture process, there will be curveballs. Things will not go according to plan. Some of the better dealmakers can flex and still make decisions while remaining disciplined and focused.
There has been a vast amount of study not just by us, but by consulting and strategy firms. A deal can make economic sense and you can put together a model that says, ‘Hey, this deal looks great on paper.’ But it all comes down to execution and driving the value creation around the philosophy and what was underwritten in the deal. Ultimately what makes people successful around transactions is their ability to execute, governance, accountability and patience. A lot of times, that value creation will take place over months, if not years.
What’s a trend you’re seeing within current M&A activity?
There is a lot of activity around carve-outs and spin transactions. You look at situations like the DowDuPont merger or the spinoff of GE’s health care business.
We’re seeing a lot more activity around that, which is principally a result of corporates doing more of a real portfolio review and divesting of non-core assets. A few years ago, I had a carve-out transaction which became an extremely long process. But working with our client, they stayed focused, which gets back to the importance of discipline.
They were very persistent. It was a complex messy situation, but one that looks like it is turning out well based on early indicators. One of my observations from that experience is just because something is messy or complex, it doesn’t mean there can’t be a good outcome. I do see some of our clients have a level of patience and actually pride themselves on their ability to get things done in complex and messy situations. There are particular parties that thrive in that environment and others that just don’t know how to transact. I do think investors need to know what their sweet spot is and how they are going to play and manage their process. It’s critical to being successful in the deals they choose to participate in.
What is a common pain point in the dealmaking process?
The balance of being competitive at a price point that makes sense for you with how you view a particular asset. In the context of a diligence process, one thing parties often struggle with is how much information do they need to get comfortable with some of these key areas that they’re looking to underwrite. The first bit of advice I give clients is you don’t want to take shortcuts on those areas that are fundamental to how you think about the deal.
Unfortunately, there are some areas where you may not get the level of information you want. So you need to be creative and think about how do you close some of those gaps or de-risk some of those areas based on how you structure other aspects of the deal. Whether it’s reps and warranties, contingent liabilities or another variable, there are ways you can close some of those gaps to get the confidence level and comfort you need to still get a deal done. If you’re a buyer, be cautious to not get so focused on the need for certain information, maybe an area that is not as fundamental to the principle of what you are underwriting, that you turn the seller away to go to another party.
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