M&A is getting more complex: this is how you integrate all various aspects

What are the most important trends in the Belgian M&A market at the moment? What kind of M&A year will 2024 be? And which important drivers will drive M&A in the Belgian market and how has that changed in recent years? “Digital transformations and the energy transition will remain major drivers for all sectors”, according to Nancy De Beule & Véronique Gillis from PwC.

MandA.be discusses these and other prominent questions with two veterans in the Belgian and international deal market. Nancy De Beule has worked in M&A for more than twenty years. She is currently Tax Lead Partner of the Mergers and Acquisitions team at PwC. Her colleague Véronique Gillis started her career in auditing at PwC 27 years ago and moved to M&A five years after that. Now, together with Nancy, she leads the M&A-team at PwC which is focused on corporates, private equity firms, family offices, family businesses, venturing, and real estate. “We saw a lot of deals and how M&A evolved over the years”, she says. “When we started, the deal team consisted of about 10 people and now we are with approximately 150. That tells you something about the growth of M&A in the past decades.”

M&A is a cyclic market, which goes up and down. Currently it’s obviously down, but this doesn’t impress the dealmakers as much as they have seen it happen before. “For the younger people, it’s the first time that they encounter a downturn, but we are used to it by now”, says Nancy De Beule.

Looking back and looking ahead
The two M&A-leaders from PwC are looking back on a tough deal year. “The EMEA market was down in general, but there are differences between countries. Deal volume in de Benelux was down with 13 percent, which is quite a lot”, says Gillis. According to De Beule it was mainly in the second half of the year that the volume dropped significantly.

Also, it may seem counter intuitive but private equity (PE) was less impacted at the EMEA-level than strategic M&A by companies. “The data that we have at PwC says that in terms of volume of deals it was a reduction of 4-5 percent for PE and a decline of 19 percent for corporates”, according to Gillis.

But in that area too, there are differences between countries. Véronique Gillis: “My feeling is that in Belgium PEs were more affected and we saw less private equity deals. Especially in the large cap space. And when I was talking to German colleagues a few months ago, they told me that in Germany the large PE funds were sending their cash back to the Limited Partners because they thought they were not going to use it in the coming months.”

Nancy De Beule: “On the corporate side in Belgium, we still witnessed quite a lot of activity. Corporates are still doing some deals, but especially due to the transformation they are going through, corporates are also looking – as part of the value creation they are looking for – at whether or not they want to carve out certain business units or assets. So, they are also spending quite a lot of time on carve-outs, which can be an opportunity for private equity or other interested parties to step in. Post-deal integration and cost optimisation, after years of performing acquisitions, is for some also high on the agenda.

So, in terms of deal volume there was still quite a lot of activity, and the two M&A-leaders of PwC have reason to believe that in 2024 the deal market will be improving further. “Inflation has been going down, the interest rates have stabilised and are expected to reduce, and there is still a lot of dry powder”, says Véronique Gillis. “So, I think that the market will pick up again in 2024.”

However, much will depend on the political stability, adds Nancy De Beule. “Whether or not the market will recover is influenced by all kinds of external factors on which we don’t have a lot of influence. For example, there will be elections in many countries in the coming months. There are a lot of geopolitical factors that can influence the M&A market.”

The major deal drivers and opportunities in 2024
Sectors that were connected to the digital transformation and energy transition were less impacted by the decline in M&A described above. These transformations will surely continue in 2024, both De Beule and Gillis expect. Nancy De Beule: “Both these major transformations require knowledge and capabilities. To acquire this, companies are looking to do either acquisitions or achieve it through corporate venturing. They also need capital, because certainly in the energy sector a lot of CAPEX is required. So, they are also looking into ways to attract cash, be it senior debt, bonds or via private equity or family offices.”

Another major deal driver in the coming years will be ESG. “In our M&A-survey two years ago, everyone thought ESG should be a priority, but they didn’t yet take it much into account when doing deals”, says Nancy De Beule. “This is now completely different. It is now an Indispensable criterion in deals either by helping the acquirer become more ESG-compliant or by adding ESG-value to their business. Buyers are looking also at the value creation aspects of ESG when looking at targets…”

The dealmakers also expect that ESG will become a much more important factor in deal financing. Banks are already looking much more prudently at the sectors they want to finance in the near future and which ones they will not. Their willingness to invest in companies with a negative ESG-impact will certainly decline in the years to come.

Although the interest rates and the inflation seem to have stabilised, this will also continue to impact the M&A-market in 2024, especially for leveraged deals and therefore the private equity sector. However, there are opportunities on the rise as well. “Typically for the Belgian market, we have a large number of mid-size businesses where families are involved. I expect activity in transferring family businesses to the next generation”, says Nancy De Beule. “where a PE-firm or a family office can play a role to help the NextGen to finance the hand-over. Also, a lot of families want to internationalize, and they are often looking to a partner to help them with this internationalisation (to finance it, to find interesting targets to expand their business, etc). So, in that scenario also, I expect that they will be looking at private equity or to other professional parties to help them with that strategic move.”

New tax laws, more regulations and digital transformation: M&A is becoming more complex
So, plenty of opportunities in 2024, but both dealmakers also stress that the environment is becoming more complex from a technological, regulatory and a tax standpoint. Véronique Gillis: “The regulatory environment is much stricter than in the past, with the foreign direct investment screening regime in place and deals that are under more scrutiny from the antitrust institutions. All this does not help in doing deals, especially the very large transactions are impacted.”

Nancy De Beule, who is a tax specialist, says: “If you work internationally, the tax framework is becoming more complex also. Sometimes companies calculate synergies but when they look at these synergies after tax, they find that more than half of the projected savings are destroyed, so tax can have a major impact and should be taken into account as from the start throughout the deal process, be it pre-deal, in the deal, but certainly also post-deal, in the integration phase.”

“On the technology side, “Technological due diligence and IT due diligence are becoming much more important for buyers to make sure that the company they buy is future proof on the technology side. And that they have a good sense of the difficulty and costs of integrating all systems into the IT backbone they need to realise the planned synergies and add value. So, much more attention is being paid to these technological aspects.”

And while talking about synergies, the post-merger integration must be thoughtfully prepared and implemented in order for M&A deals to deliver synergies and create value. “And overall we see that the increased complexity leads to a longer and more difficult integration process”, observes Véronique Gillis.

Searching for the main drivers
Another trend in the due diligence process is an increased number of vendor due diligence (VDD) processes taking place. “In the past, it was really for larger tickets. Nowadays, even for small or mid-sized transactions, we often have a VDD”, says Véronique Gillis. “The aim is not only to have an independent view on normalised EBITDA and cash flows, quality of net financial debt and normalised net working capital but also to help to understand the main drivers of the evolution of sales, gross margin and EBITDA and also the upward potential of a business. And to that extent, data analytics can help gaining much more insights into the business, its resilience, its profitability.”

When it comes to the length of DD-processes, Gillis sees both very long and short processes. The quick one typically happens with deals in which there is a lot of competition and bidders want to make a confirmatory bid as quickly as possible. Gillis: “Then it’s really focusing on the keys, what we call the key schedules. So, what is really the normalized EBITDA, which we should bid and what is the bridge between the enterprise value and the equity value? And also: what are the largest risks in terms of tax, HR, legal, et cetera. It is really focussed on the key topics that matter most.”

“Another trend that we see is more locked boxes and earn-outs in transactions”, adds Nancy De Beule. “That is because there is so much uncertainty on the level of recurring EBITDA and because there is often a price gap between the seller and the buyer. A way to try to overcome this gap by using an earn out agreement.”

Other areas which are getting more attention in the DD-process are the already mentioned IT and ESG, but also cyber security is on the agenda. “Pensions is also a hot topic to look at for the moment”, adds Nancy De Beule. “To get a grip on the impact of the moving interest rates.”

Last, but not least, the people side is taken into account. Both from an employment law and payroll tax perspective, but “we definitely also look at other people related topics”, says Nancy De Beule. “For example, when the buyer wants to put someone in a leadership role post-deal, we help them to determine whether he or she is the best person from the target company to take on that role. The cultural differences are also an important topic to focus on where we help buyers to deal with the most important cultural challenges in the post-merger integration phase. What we have learned through experience and our previous M&A-survey is that cultural differences are one of the most important reasons why the integration doesn’t go well. Cultural differences between countries can be very high, but even between Flanders and Wallonia, there are cultural challenges. And if the people are frustrated or not motivated, it will eat up your EBITDA really fast”, the dealmaker concludes.

Nancy De Beule, Partner, PwC Belgium

Nancy De Beule joined PwC in 1996. She has been involved in transactions related work since 2001. She provides tax services across the deal continuum including carve-outs, due diligence, acquisition structuring, tax modelling, post deal integration and restructurings and reorganisations. She has been involved in a lot of significant Belgian as well as international deals. She works both for private equity as corporate clients.

Véronique Gillis, Partner, PwC Belgium

Véronique Gillis joined PwC in 1995 and has been active in M&A since 2000. Over the years, Véronique accumulated significant expertise in financial due diligence, business plan analysis, overall assistance in acquisitions and disposals and in the related deal structuring, and deal project management. She works for both private equity and corporate clients, assisting them for domestic as well as cross-border transactions.