Boardroom Reflection Survey 2020-2021

We asked business leaders to reflect on the impact of 2020, and had an excellent response with over 500 contributions by 31 January 2021.

Below are some of the initial headlines:

1. There are clear signs of fatigue in our boardrooms
2. Relationships are more important than ever, particularly with customers
3. More vigilance is needed to recognise misinformation
4. Short-term solutions are likely to last significantly longer than originally intended
5. Digital transformation is opening new opportunities for business

We will share further insights into the results in due course.

Toolkit for Challenging Times: A Summary Presentation

The presentation discusses the following:
1. Short term financing options for a company to optimise working capital and government funding options.
2. Cost reduction strategies.
3. Medium and long term funding options including debt, equity and joint ventures.
4. Strategic considerations to adapt the business model, to explore domestic versus international solutions and growth versus restructuring of the business.

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Opportunities and Challenges for 2018


After a decade of post-financial crisis restructuring, 2018 is a year of general optimism around the world, despite financial market volatility and political uncertainty. Companies however need to be increasingly aware of the importance of digital disruption and to carefully consider the competitive environment within their industry to prepare for both innovation and rapid change.

Mergers, acquisitions, joint ventures and divestments both domestically and internationally are all possible in a business environment of low-interest rates and plentiful supply of funding for attractive transactions. We will explore the economic environment, the strategic options a business needs to consider regarding digital disruption and the financing opportunities available.

The Economic Landscape

There has been an active start to 2018 with growth in both the developed and the developing world accelerating for the first time since the financial crisis. The IMF recently increased its forecast of global GDP growth to 3.9% for both 2018 and 2019 from 3.1% in 2015 and 3.6% in 2017

The policy of quantitative easing by the major central banks is reversing with interest rates beginning to rise moderately. There are signs of increasing commodity prices and wages, albeit limited. Furthermore, stock markets continue to be very active and volatility has increased.

There remains a heavy debt burden across the world economies and this may impact the price of assets particularly if interest rates rise too quickly.

In the US, recent tax cuts, expected increase in Government spending and positive earnings from corporates continue to support the market although uncertainty with international trade relations persists. In Europe, stronger growth, employment prospects and a relatively stable political environment is improving confidence.

China continues to grow strongly with a debt overhang, over-capacity issues and the threat of a trade conflict with the US and Europe. However, growth is expected to slow during 2018 as the dollar remains weak.

In the UK, the uncertain political environment due to the divisions regarding Brexit as well as the increasing level of inequality has left the current Tory Government with no clear majority This may lead to an early general election with the potential for a tax and spend Labour Government. This uncertainty has led to slower UK growth than in Europe. Following Brexit in 2019 and a minimum 2-year transition period, we believe that with goodwill from both the Europeans and the British, a mutually beneficial trade and a services agreement can be eventually negotiated.

The recent rise of populism since 2016 in the US and the UK has, in large part, not been replicated in other major economies. With rising inequality, there remains a risk of nationalism spreading with forthcoming elections as in Italy. However, the improving economic environment in Europe should temper this trend.

The key global relationship going forward is between the US and China which will impact trade and potential conflict zones such as North Korea and the South China Sea. Overall, stability both economically and geopolitically will have a positive influence on global markets.

Digital Disruption

The pace of change within industries is accelerating and businesses need to carefully consider their strategies and respond effectively. The developments in big data analysis, cloud computing and artificial intelligence have already had a significant effect on a variety of industries. Innovations in mobility and sensors are likely to speed up growth and productivity and create new opportunities for consumers and entrepreneurs. Significant change is anticipated with workers in certain industries replaced by robots and forced to adapt to a new environment.

Digital disruption is now a universal phenomenon affecting all sectors including, energy, finance, government, healthcare, hotels, legal, music, newspapers, retail and transportation. Companies should carefully consider their strategic responses and their focus on customer service. This will avoid the fate of Kodak and Blockbuster, leaders in their respective industries, but failed to adapt to the new business environments and to anticipate the requirements of their clients. This led to their ultimate demise.

It is the ability to both measure and to analyse data from clients and to provide targeted products and services that will allow companies to enhance their product and service offerings and to retain a strong market presence.

Some of the crucial questions to consider are as follows:

  1. How will technology impact my business? Blockchain will improve connectivity between different markets. In finance it will have a significant effect providing a ledger in the cloud and therefore an ability to execute multiple transactions simultaneously with the potential to disintermediate financial institutions.
  2. How will logistics and customer service affect my business? As an illustration, mid-sized retail businesses are increasingly unable to compete with online stores benefitting from significantly lower overheads. Maplin a UK discount electrical retailer with 200 stores and over 40 years’ experience recently filed for administration.
  3. How can I increase my understanding of customer requirements and enhance my competitive position? Data analysis techniques are improving rapidly and can be employed effectively to provide the necessary decision-making information.

A careful review of the competitive environment facing a company is required annually or in certain fast developing situations quarterly to carefully monitor the opportunities and threats to their businesses. In the US, the Amazon, Berkshire Hathaway and JP Morgan collaboration in the healthcare sector to reduce costs for their almost 1 million employees through new technology will lead to pressure on profits for middlemen in the healthcare supply chain.  This is leading to M&A activity in the sector. The car industry globally is also facing challenges from electrification and driverless cars plus the move away from diesel fuel. The major companies are reacting by acquiring technology, investing in relevant start-ups or merging with competitors as the business environment shifts. With rapidly evolving disruption the key strategic options are as follows:

a.    Expansion via Internal growth;

b.    Acquisition of companies and/or new technologies;

c.    Divestiture of legacy businesses;

d.    Joint venture or strategic alliance in new markets; and

e.    Reduced headcount in certain markets.

Above all, flexibility is required, to adapt to the new market opportunities and threats.


Notwithstanding the modest increase in uncertainty in the financial markets, there continues to be an abundance of financing available for attractive projects. Banks are lending although the loan to value ratios offered are less aggressive than during previous cycles. New challenger banks such as Virgin Bank or OakNorth have been opened to cater for small and medium-sized enterprises and have been able to capture an increasing market share. Financing remains available for cash generative businesses with attractive growth prospects.

Equity investment for earlier stage businesses is available particularly in the growth sectors of artificial intelligence, blockchain technology, cybersecurity, data analysis and health. Attractive tax breaks for investors and funds including Venture Capital Trust (VCT) and Enterprise Investment Schemes (EIS) in the UK. Businesses will need to satisfy certain criteria typically a technology focus and less than 7 or in some cases 10 years since the launch of the product or service. Furthermore, the opportunity to invest via crowdfunding platforms has attracted many investors to these sectors

For businesses with strong sales growth and approaching break-even there are increasing amounts of venture capital and private equity funds available. This has often delayed the requirement for these businesses to raise equity on the public market allowing the initial growth phase to occur with less onerous regulatory requirements.

For larger businesses and for equity buy-outs, financing is available through large funds with several billion dollars under management, the ability to raise equity and access the debt markets in scale. Co-investments with insurance companies, pension funds and sovereign wealth institutions provide access to additional funding sources.

There continue to be a large number of share buy-backs by companies as well as private equity funds de-listing companies. However, the public equity markets remain available for larger businesses, typically those with £50m plus of sales and a positive and growing level of earnings before interest and tax (EBITDA). The AIM market in the UK and NASDAQ in the US cater for the faster-growing businesses but the availability of private finance together with costs of listing and the regulatory requirements have delayed the number of companies accessing the public markets. For companies requiring the ability to raise large amounts of capital relatively quickly as well as providing a currency for acquisitions, the public equity markets remain available.


The economic environment has improved following the financial crisis and simultaneously there is an increasing amount of disruption in many industries. Senior management needs to be cognizant of these developments to ask the right questions and to prepare their businesses for the next decades.


At DC Dwek Corporate Finance, we have over thirty years’ experience and a solid track record advising domestic and international companies to analyse, review and execute the strategic opportunities for expansion or restructuring together with the necessary financing required through venture capital, private equity, debt and the public markets.

David Dwek
Managing Director
DC Dwek Corporate Finance Limited

DC Dwek Corporate Finance Limited is authorised and regulated by the Financial Conduct Authority

This information is provided for information purposes only

Download a PDF of this news story here:
Opportunities and Challenges for 2018

The Brexit Questions – A Strategic Response






How will trading with non-EU countries change?



Will Europe use the UK negotiations as a catalyst for change?



The Brexit Options


1. Hard Brexit






2. Soft Brexit


3. The Norway, Switzerland or Canada Models


4. Alternative Relationships with the EU

a. Continental Partnership


b. Joining the European Banking Union


How should companies respond to Brexit?




1. Identification of the key business uncertainties:

a. Tariffs

b. Currency Implications

c. Employee Hiring

d. Re-Location

e. Additional or Reduced Regulation


a. Within the UK

b. Within the EU

c. Opportunities outside of the EU.



b. Expansion via Internal growth.

c. Reducing headcount in certain markets.

d. Acquisition.

e. Divestiture.

f. Joint venture.

g. Strategic alliance.



Strategic Options





Management Buyouts: Opportunities for divestments

There are attractive opportunities for management teams to purchase their companies from larger organisations, in particular where the business has become non-core. This appeals to vendors as business continuity is ensured, with the potential to retain some upside through an equity holding.

Below, we provide a review of the process, the funding options and the key elements required for a successful transaction.

Key features for a successful MBO

Buyouts originated in the 1970s as large organisations restructured and disposed of non-core activities. Existing, or new, management teams backed by financiers rapidly became an important component of the disposal process.

Across the business spectrum, several factors are required for a successful buyout. These are:

  • A quality business with predictable cash flows and growth potential. In particular, can a management team demonstrate that the development of the existing business has been constrained due to the ownership structure?
    A high quality management team with a motivated leader . Does the team need to be enhanced in the marketing or finance area, or is there the right balance of skills?
  • Committed financial investors for both debt and equity . A buyout requires a strong partnership between all parties to overcome inevitable hurdles.
  • An appropriate financial structure in terms of debt, equity, working capital and capital expenditure . A balance must be found between the attraction of leverage from an equity return perspective and achieving a realistic business plan. The failure of the Le Meridien hotel group buyout was due, in part, to the overambitious growth projections and the large amount of debt on the balance sheet. This became more evident after September 11 2001 , which resulted in a sharp downturn in the tourism industry.
  • A clear exit route, either via a trade sale or a flotation, within a ‘3 to 7’ year time frame. The timing depends on the sector and on business performance. A clear exit goal has the benefit of focusing the management team on the task to be accomplished.

Detailed planning and positioning of the MBO opportunity is required at the outset. It is essential at the earliest opportunity for the management team to state its intentions to the vendors to ensure transparency, and for the MBO team to be considered seriously in the sale process.

The key objective for the management team during the ‘4 to 8′ month sale process is that the business’ performance continues to improve.


At an early stage, the senior members of the MBO team need to develop the new business plan. Typically, it differs from the business strategy agreed with the present shareholders, in particular regarding the growth and exit strategies. The plan provides the basis for discussions with potential equity and debt providers and is instrumental in providing the confidence required to invest in the project. At this stage, a financial advisor can provide the management team with assistance on developing the plan, and can give guidance on positioning it effectively for external financiers.

The planning process also clarifies the resource requirements including the key personnel and the amount of finance needed for working capital and for capital expenditure purposes. A typical plan includes a review of the business and the market opportunity from both a domestic and an international perspective. An analysis of the competitive environment and the marketing and distribution strategy is also required, together with the current and prospective customer base.

The growth opportunities and strengths of the management team are highlighted in the plan. However, it is equally important to emphasise the risks and the actions to be taken to mitigate those risks. The plan needs to be backed up by ‘3 to 5’ year financial projections and the relevant assumptions.

Finally, structuring the business for a future potential exit needs to be considered at an early stage. An example of a rapid exit was Homebase, the UK DIY store chain. Sainsbury’s sold the business to a private equity sponsored management team in early 2001. The business was then restructured and sold in November 2002 to GUS. This was a very profitable deal for both the management and for their financiers. The management benefited from Sainsbury’s desire to dispose of the business rapidly and from the upturn in the retail market. A focused strategy led to a sharp improvement in business performance prior to the eventual disposal to GUS.

Structuring the Capital

Whilst no two transactions are identical, there are several key components to the capital structure of a MBO. There are a number of layers of finance with returns commensurate to the risks of providing the funding. The key components can include:

  • Senior debt . This is provided by a bank or a syndicate of banks. It has the highest ranking capital in the balance sheet and consequently the lowest servicing costs. The interest rate charged depends on the maturity of the debt, the agreed covenants and the risk profile of the business. A balance has to be struck between the amount of debt and the serviceability,particularly in a downturn. For a business with a stable cash flow, a 50%leverage is comfortable. This percentage can be increased especially when there is a large asset base.
  • Mezzanine debt . This is subordinate to the senior debt and ranks higher than equity. It provides a higher return to reflect the increased risk. This debt may have a portion of equity warrants attached in order to improve the risk return profile for the lender. Typically 10-15%of the capital is in the form of mezzanine debt.
  • Preferred equity or loan notes . This is provided by private equity investors and/or institutions.This class of capital ranks before equity and is typically convertible into ordinary shares.
  • Ordinary equity . Management usually holds this class of equity. It is the highest risk, but provides the largest potential return.Management would tend to hold 15-25% of the ordinary equity at the outset with ratchets based on reaching agreed milestones. The vendor may also retain some of the upside in the MBO in the form of ordinary equity or loan notes.

Based on the business plan, the first step is to determine with the lenders the maximum level of senior debt that the company can accommodate comfortably. The other elements of the capital structure would be negotiated individually, but as part of the overall financing package.

Due Diligence Process

One of the main attractions to a vendor selling a business to the management team is the reduced level of due diligence required by the purchasers rather than a sale to an external party. This speeds up the execution process. Similarly,the level of warranties and indemnities provided by the vendors is typically lower, as the management team has a better understanding of the business than an external purchaser.

However, prior to agreeing to finance a transaction, banks and institutions conduct a thorough due diligence both on the business plan and the management team. A review of the financials, legal, tax and operational issues is undertaken by a team incorporating lawyers, accountants and, possibly, consultants. A holistic view of results from the due diligence process needs to be taken after which the negotiations can be finalised with the vendors.

No business venture is riskless, but an effective due diligence process can highlight the key issues that need to be addressed.

Corporate Governance

Whether the company is private or public, the directors’ responsibility is to ensure that any strategic transaction involving the transfer of ownership is carried out in the shareholders’ best interests. The involvement of the management team as a potential purchaser of the business creates the potential for a conflict of interest between their fiduciary duties to investors, who want the highest price for their shares, and the larger profits that the executives stand to make the lower the price of the buyout.

In these situations, the role of non-executive directors is crucial to ensure that objective decisions are being taken that will be in the interest of all shareholders. An example was the public to private transaction of Debenhams, the UK department store group, in mid 2003. Permira, the private equity investor submitted a bid on the condition that it could work with the management team. The intention was to deter rival bidders. The initial bid was recommended by the board, but to deflect criticism, the directors of the company were extremely keen to have another party enter the bidding to demonstrate that the process was transparent. This led to a payment of £1m per week from the company to the Texas Pacific and CVC consortium to prepare a rival bid. TPG won the battle and the management team was forced to resign. This highlights the importance of a transparent process, particularly in a public situation. It is also clear that there are always risks for the management team in aligning itself with one particular investor group.


Careful preparation, a well developed business plan, the formation of theright team and a transparent process are all critical for a successful MBO.

The time is now right for companies to consider divesting non-core businesses with the incumbent management team a serious contender.
The views expressed in this newsletter are those of DC Dwek Corporate Finance Limited and are provided for information purposes only.

Managing the Acquisition Process Effectively

Generating revenue growth for companies is more challenging to accomplish than cost cutting through a restructuring process. Acquisitions are therefore often perceived by senior management teams to be a more certain method of achieving their growth objectives. Whilst there is a greater willingness to complete deals, there remains a degree of uncertainty in the market as a large proportion of acquisitions fail to generate shareholder value for the acquirer. This is due to a combination of:

  • Lack of realisable synergies;
  • Unrealistic expectations, particularly regarding revenue potential;
  • Too high a price paid and value transfer to the selling shareholder; and
  • Ineffective integration planning and execution.

Many companies have been able to acquire successfully, to integrate diverse businesses and to generate value for all their stakeholders. Shareholders of both private and public companies are becoming more vociferous. Therefore, management teams must have a realistic plan to achieve the acquisition benefits. The recent bid battle between Disney and Comcast emphasises the current scepticism of shareholders on potential synergies. With the valuation of Comcast in decline following the announcement of the bid, the management team decided to withdraw their offer for Disney having failed to convince shareholders of the benefits.

Our aim in this newsletter is to review the key aspects required for successful transactions. Senior management, in particular, need to take a holistic approach to the entire acquisition and integration process. Careful planning is essential from the outset with one combined execution team.

Implementing a successful acquisition strategy

A clear strategic rationale is the first step to ensure a successful acquisition. The chances of success are significantly enhanced when the following are taken into consideration:

  • Business synergies, where an acquiring company’s core competences are accentuated;
  • Increasing revenues, particularly through access to additional markets both for existing and new products;
  • Consolidating the business sector with a focus on the potential for cost savings; and
  • Stronger barriers to entry from new entrants.

There have been countless examples of destruction of shareholder value by companies through diversification into unrelated business areas. For example, AT&T made an expensive, and ultimately, unsuccessful move into the cable television industry from the telephony sector in the late 1990’s. This failure was a result of the diversification into a business sector too far from their core competence magnified by the fall in the valuation of related companies.

The initial approach

Once an acquisition strategy has been agreed by the company, a small team is assembled including specialist business development, financial and operational personnel. Financial advisors should be appointed as early as possible to work with the team in researching and approaching potential targets, or merger partners, with the initial intention of selecting a short list of one to three candidates for more advanced discussion and negotiation. The advisors act as a catalyst to the process and their experience in completing similar transactions is crucial in overcoming the hurdles.

At this stage, creative discussions can take place between the parties at a senior level on growth strategies and on the vision for the combined business.

It is tempting at an early stage to focus on the price of the transaction; however, it is crucial to build momentum for the deal, for personal relations to strengthen and for all parties to believe in the strategic rationale, prior to moving to the next phase.

The due diligence process

Due diligence is the most time consuming and least creative part of the M&A process. Whilst fact checking is important and lends credibility to the management team, it is crucial to incorporate due diligence into the integration planning and to keep the same team involved throughout the transaction.

Due diligence can be separated into a number of areas depending on the complexity of the business. The main areas of focus are: accounting, legal, commercial, systems and human resources including pensions. The review will also provide the opportunity to deepen the understanding of the operating managers in the business.

A significant amount of time must be spent on commercial due diligence. Discussions with key customers and suppliers, joint venture partners and with competitors provide invaluable information on the prospects for the business. Often these more commercially sensitive discussions are permitted only after exclusivity has been granted to one party.

Whilst the devil is in the detail and the information gathered is critical to the decision on whether to proceed with the transaction, senior management must also take a more strategic view of the opportunity and use the acquired facts in the negotiations.

Pricing and final negotiations

The majority of acquisitions over the last 20-30 years have not created value for acquiring shareholders. There are many reasons for this phenomenon including the irrational exuberance as to the strategic importance of the deal, weak integration and simply paying too much for the business. In the excitement of the endless opportunities that an acquisition brings, it is essential to have a disciplined approach to the valuation of the business and to be able to walk away from a transaction at the appropriate time. There are several valuation methods that are employed including discounted cash flow, earnings and operating profit multiples as well as analysing comparable transactions.

The intrinsic value of the business is the net present value of expected future cash flows independent of any acquisition. This is the stand alone value and the basis for negotiations. Any price paid above the intrinsic value represents a premium to be shared between the target company and the acquirer’s shareholders. This premium includes a market premium and the potential synergy value. These synergies comprise of revenue enhancements, cost savings including financial engineering and tax benefits as well as process improvements.

The recent pharmaceutical acquisition of Aventis by Sanofi-Synthelabo of France highlights the transfer of value between shareholders. After three months of heated negotiations, at the eleventh hour, Aventis convinced Novartis, a potential white knight, to enter into negotiations. This resulted in Sanofi raising its bid by 14% to win control of Aventis. The higher price paid intensifies the pressure on the Sanofi management team to make the acquisition work. This transaction also highlights the importance of having alternative options such as a white knight in the final negotiations to achieve the best outcome for the selling shareholders.

Achieving closure

Once terms have been agreed and the final agreement signed, there is typically a one to three month period before all the documentation is completed and the approvals received. A surprising number of deals fall apart at this stage and whilst there may be legitimate reasons such as a material adverse change in the business, it is also vital for the acquirers to sell the deal to the company’s stakeholders and to maintain the momentum to ensure there is rapid closure.


Effective acquirers, such as GE, have perfected their ability to integrate companies rapidly into their organisation. The key elements in a successful integration are as follows:

  • Begin the integration process before the deal is signed with a combined due diligence and business integration team.
  • Dedicate a full time individual with decision making powers to manage the entire process.
  • Ensure constant communication to minimise the loss of morale. Reaching to the second tier of management as fast as possible and clarifying their positions reduces the possibility of significant defections.
  • Focus on a rapid integration process. There needs to be clear decision making authority from day one. A 100 day plan is required and tough decisions, particularly on personnel issues, have to be taken at the outset. Paralysis in decision making must be avoided.
  • Integrate not only the business operations but also the corporate culture. This is particularly important in cross border mergers.
  • Poor integration planning and execution is one of the major reasons for value destruction in mergers and acquisitions and senior management must devote all the necessary resources to overcome the hurdles.


Successfully acquiring and integrating businesses only occurs through a disciplined process and experience. A clear strategic rationale is required at the outset with identifiable synergies in combining the businesses.

A combined acquisition and integration team is required, which is supplemented by the necessary advisors to provide an independent view. Thorough due diligence must be undertaken which is critical both to the final negotiations and to the integration.

It is important to note, in the excitement of the deal, that often more value can be generated for shareholders by walking away from a transaction than by pursuing a merger or acquisition of limited strategic benefit.

In any case, courage and tenacity are required to become an accomplished acquirer.


Public or Private?

The decision to stay private or to remain public is one of the most critical in the life of a company. The availability of a variety of financing options from the private equity and banking sectors has provided both large and small businesses with an alternative to a formal listing on one of the main stock exchanges.

Many companies are also considering de-listing from the stock exchanges through public to private transactions. There is often a belief that the market is undervaluing their business prospects or that life outside the public gaze is less onerous.

However, the public markets, at the appropriate time, provide excellent liquidity for investors and facilitate the use of company shares for fund raising, acquisitions and strategic purposes.

In our latest newsletter, we explore the options of staying private or remaining public. The ultimate decision for the company rests with the option that facilitates the growth in shareholder and stakeholder value.

Why do companies want to go public?

There are many reasons for companies to seek a listing on a major stock exchange and in the appropriate circumstances these far outweigh the associated regulatory and related costs. These are:

  • Capital for growth. Fast growing companies are often constrained from rapidly raising funding in the private markets. Public companies can raise funds efficiently from equity investors through rights issues and the sale of shares to domestic and international investors. Similarly, once a company is listed and has developed a diverse investor base, it opens possibilities to access the domestic and international bond markets. The hybrid securities markets are also available and provide a variety of options such as convertible securities.
  • A currency for acquisitions. When a company is public, shares can be used for acquisition purposes as the stock market provides both liquidity and a clear valuation of the business. The shares can be exchanged for those of a target company or funds can be raised from investors to pay for a specific transaction.
  • An opportunity to exit the business. For the shareholders in a private company and for employees with stock options, a stock market listing provides a market valuation for their equity holdings. It also provides the opportunity to sell all or part of their shares and to exercise their options.
    This is of particular importance to short-medium term financial investors looking to exit all or part of their investments. However, it is normal practice when a company obtains its primary listing for existing shareholders and particularly for management to be locked-in and prevented from selling their shares for a short period.
  • Prestige and peer pressure. Companies on attaining a certain size in an industry and where the leading players are all listed on major stock exchanges often feel that it is necessary to join the “club” of their listed peers. A listed company can also attract talented management and employees in an industry helped by the resulting transparency of the business prospects.

Becoming a public company is an important milestone in the development of many businesses. Being under public scrutiny requires more rigorous regulatory and governance procedures. In addition, a company must be prepared for the enhanced financial reporting requirements and the resulting analyst and investor attention. However, these procedures can be very effective in professionalising and in providing a strong platform for the development of a business.

Why are many companies looking to revert to private status?

Notwithstanding the many positive benefits of a public listing, there are a number of public companies or large private companies that have eschewed the public markets and have remained private. The main reasons are as follows:

  • The availability of alternative sources of capital. The phenomenal growth of the private equity market over the past few years provides an almost limitless amount of equity capital for companies with the requisite growth prospects. There are an increasing number of the private equity groups managing funds of several billion dollars combined with an increased capacity of the banking community to provide significant leverage for transactions. This has provided a realistic option for companies with small, medium and large market capitalisations to revert to private status.
  • Undervaluation by the public sector. There are certain sectors which at times become unfavourable for institutional investors. This is often the case for companies which are complex to value, including holding and property companies. The market often values such businesses at a discount to the net assets and provides an investor group with the opportunity to purchase the assets at an attractive price.
  • One classic example is the Virgin Group in the mid-1980’s. Richard Branson, the flamboyant entrepreneur, wanted to raise funding to develop his airline, music and related businesses and he therefore floated part of his group on the London Stock Exchange. The group’s share price underperformed the market and two years later Richard Branson took the company private, citing that the investor community was short-term focused and misunderstood the growth prospects for his businesses.He has since grown his group internationally in a variety of sectors, including budget and long haul airlines, train operations and mobile phone networks.The group has typically raised finance through individual transactions such as the sale of the music business to Thorn-EMI, the formation of a $600m joint venture between Virgin Atlantic and Singapore Airlines or through the flotation of  Virgin Blue, the budget Australian airline.
    Ability to restructure a business outside the public eye. An undervalued business or a business in need of restructuring can be taken private and reorganised without the quarterly reporting requirements and the associated analyst and media attention.
    Management and investor incentives. Taking a company private, restructuring it and then concluding a sale of the business either in the private or public markets can be very profitable for the management teams and their financial backers.Institutional investors are however aware of the upside potential in a successful public to private transaction and are consequently demanding a higher premium for the initial sale. They are also often sceptical about the upside potential when a company returns to the public market following a restructuring. Notwithstanding these reservations, there remain significant incentives for a successful public to private transaction.
    Whilst strong corporate governance is required for all companies, a private company has a reduced regulatory, media and analyst burden as compared to a public company. However, private equity investors and bankers are rigorous in their monitoring role of their investments and the management team are set strict performance targets. Successful exits are very well rewarded with management teams typically awarded 10-20% of the equity in the business.


With the availability today of almost limitless amounts of capital, large and small companies with solid growth prospects have a wide range of options in deciding on their public or private status. The regulatory burdens of running a public company today have become onerous and this is prompting a number of companies to consider the attractive option of private status. Whilst the governance and professional requirements are the same whether a business is private or public, the ability to restructure and refocus outside the public eye is a tempting option and provides the management team and the shareholders with strong potential financial incentives.

Selecting and executing the appropriate strategy to support a business throughout its development cycle requires the necessary management expertise, combined with sound financial advice.

Successful Restructuring

Continuous growth in shareholder value remains the key business objective for private and public business enterprises. However, growing revenue and profitability year after year in fiercely competitive markets, is a challenge that few companies achieve on a consistent basis. Expansion through acquisition, whilst tempting for revenue growth, can lead to complex integration issues and periods of under performance. Several executives of HP have had to resign over the past decade due to poor integration of acquisitions.

Companies will therefore have periods where restructuring and business refocusing is required. It is crucial that the board of directors and the management team recognise the requirement to restructure, develop an executable plan and, if necessary, negotiate with creditors and shareholders. In cases where financing difficulties become apparent, the court based solutions of administration and/or insolvency can be avoided if the need for change is accepted.

In this newsletter we plan to analyse the restructuring process and highlight solutions to ensure a successful outcome.

Why do companies get into difficulty?

There are several reasons why companies reach a situation where a refocusing, or a restructuring, is required. These include changes in the competitive environment and an inappropriate cost or capital structure.

Changing Market Dynamics

The globalisation of business has lead to a rapidly changing environment. The winners are the companies able to embrace these changes by reducing costs, whilst increasing the quality of their products and services to their customers.

Capital Structure

In a low interest rate environment, there is a tendency for companies to leverage their balance sheets as the cost of debt is significantly lower than the cost of equity. Finance theory also highlights the advantages of holding a certain amount of debt on a company balance sheet to benefit from the tax shield effect of interest payments. Furthermore, the leverage buy-out specialists have found that a significant amount of debt on the balance sheet matched with the necessary incentives, focuses the attention of the management team to cut costs ruthlessly, expand the company’s markets and repay debt as rapidly as possible.

However, in a competitive environment, with declining revenues and profitability, inappropriate amounts of debt on the balance sheet requires rapid action and restructuring.

Cost Structure

Companies that are unable to reduce their costs in comparison with their competitors will rapidly lose profitability. Maintaining a flexible cost base in rapidly changing market conditions is an important goal for companies. The ability to outsource production and services provides a company with the opportunity of converting fixed into variable costs. There are of course limitations to outsourcing, particularly in the areas where companies need to develop and maintain their competitive edge, such as product development. However, the cost advantages versus the potential loss of control of certain aspects of the business have to be considered carefully.

Restructuring options

The first task for the board of directors and for the senior management team is to accept that there is a requirement to restructure the business. Private equity firms, due to their effective monitoring role of management, can often force change in a company’s management team and accelerate a restructuring more rapidly than in a public company situation. In some cases, a change of senior management is required in order to refocus the business, as occurred at IBM in the early 1990’s. Lou Gerstner, an outsider, successfully led the transformation of the business from a focus on hardware to one on services.

In any case, the commitment of the senior management team must be secured as early as possible in the process and an executable short to medium term plan must be put in place with clearly identifiable targets.

Cost Cutting

Stage One of the restructuring process is for the company to cut costs and to redeploy resources as rapidly as possible. Once the decision on the direction of the company has been taken, the disposal of surplus assets needs to be executed. Whilst a rapid sale reduces the proceeds, a structured auction with sufficient competitive tension ensures that a market price is obtained for the assets. In the situation where assets are required for the future business, it may be possible to remove them from the balance sheet through sale and leaseback transactions, or through the formation of joint ventures and alliances with partners.

Throughout this process, it is essential to reduce the uncertainty for employees through constant communication. A well executed cost reduction plan needs to include careful management of the free cash flow generated by the business.

Negotiating with Creditors and Shareholders

With an over-geared balance sheet and falling profitability, early discussions with creditors and shareholders are essential in order to develop a realistic workout plan. Whilst shareholders may be unwilling to inject further funds into an ailing business, creditors will be keen to avoid, as far as possible, a court based administration and insolvency procedure due to the high costs involved. With a credible plan and management team, convincing creditors to accept significant reductions in their repayments is an achievable objective.

Deals can be structured creatively to include short term payment holidays or balloon payments, once the business has been transformed. Equity sweeteners also can be added to provide creditors with upside potential in return for a lengthening of the repayment period, the injection of further debt and/or the reduction of liabilities. As long as creditors have the confidence that the restructuring plan is achievable, there are many alternative financial structures that can be negotiated between a willing management team and creditor group.

Merger into another Firm

During the restructuring and asset sale process it may become apparent that a full sale, or merger of a business, either to a competitor, or to a financial investor is required. The existing business either can be fully absorbed into another company in a similar sector to generate synergy benefits, or can be retained as an independent subsidiary under new direction. In either case, such a strategic transaction is transformational for the business and provides a catalyst for the successful restructuring of the business.

A Formal Restructuring

In the situation where a more drastic financial restructuring is required and there are too many disparate creditors, it can be impossible to negotiate a restructuring without a formal process. In the UK and in the US there are two main methods:

• Administration or Chapter 11
This is a formal supervised modification of claims on a business. The aim in these situations is to preserve the business as a going concern, or to sell the business. Creditor claims are frozen and in many cases a radical restructuring plan is put in place. The aim of the process is to preserve as much value for the creditors as possible, often to the detriment of the equity holders.

The administration/Chapter 11 process has been used in certain circumstances by aggressive management teams in the UK and in the US to force creditors to accept write-offs of their loans. However, the administration process also has negative consequences for the business and often leads to customers and suppliers renegotiating, or cancelling their contracts. This often impacts negatively on the future viability of the business.

• Liquidation or Insolvency
The most drastic situation for a business is liquidation, or insolvency, where the business effectively ceases to exist and a court appointed liquidator disposes of the assets and makes a distribution to creditors according to their level of security. Shareholders and unsecured creditors will invariably receive little or no payment in this situation.


Financial distress is costly for creditors and shareholders and prompt action at an early stage is essential to achieve a successful outcome. Close communication between the management key shareholders and creditors is necessary in order to avoid a court based procedure with the detrimental effect of the business.

Obtaining the necessary financial and legal advice at an early stage can assist a management team in developing a plan that is achievable and provides the necessary confidence to the key creditors and shareholders.

Considering Flotation?

Embarking on a listing is one of the key decisions that a company’s board can take. To ensure a successful transaction, the board needs to select the timing, the advisers, the location of the listing and the non executive directors for effective governance.

In this newsletter we will explore the factors required to turn a company into a public entity and to ensure that life in the limelight acts as a stimulus to growth in shareholder value. We will then look at a case study of a successful flotation on the AIM market in London of Gilat Satcom, an international satellite voice and data supplier, based on the views of David Dwek, who was appointed to its board as a non executive director at the time of flotation.

Reasons for a Flotation

A flotation is a key milestone in the development of a business, even though there are alternatives which include private equity and bank financing. In the appropriate circumstances, the advantages of a public listing far outweigh the associated regulatory and related costs. These are:

  1. Access to capital. Growing companies are often constrained from rapidly raising funds in the private markets. Once a company is listed, funds can be raised efficiently from investors through rights issues and equity placings as there is a deep pool of funds available from both institutional and private investors. In addition, a diverse investor base allows a public company to broaden its funding sources through the domestic and international bond and hybrid security markets.
  2. Exit Opportunities. A stock market listing provides transparency to the valuation of a business. It also provides the necessary liquidity as a minimum requirement of around 25% of the outstanding share capital is often required to be in public hands. This allows shareholders, including employees with share options, to sell their shares at the appropriate time. On initial flotation, management and shareholders are normally “locked-in” for a 6-12 month period to ensure their commitment to enhance shareholder value.
  3. A Currency for Acquisitions. The transparency afforded to a publicly listed company on the valuation of their business allows the use of shares in exchange for a target company. Alternatively, funds may be raised through a sale of equity to investors to fund a cash based acquisition.
  4. Improved Profile. The increased profile and regulatory requirements provide companies with a stamp of approval, enhancing the perception of financial stability of the business, leading to improved relations with customers and suppliers, as well as attracting and retaining key management.
    Becoming a public company requires more rigorous regulatory and governance procedures as well as enhanced financial reporting requirements. A company will also be in the public eye and the directors’ actions will be under scrutiny. However, the increased professionalism of the business through efficient systems and control procedures provides a solid base for the future growth of the business.


Choice of Market

When considering the listing location for a flotation, there are a number of factors to take into consideration:

  1. Domestic vs International. Initial consideration is often given to the domestic market; however, with the globalisation of the international capital markets there are strong opportunities for internationally oriented firms to float their shares on foreign markets. London and New York remain the most active markets for such listings. Russian and Israeli companies in the energy, mining and technology sectors have been actively seeking listings on the London market this year and Chinese companies, due to their large size, in New York. Following flotation, maintaining active and on-going investor relations is crucial to develop investor interest and to avoid the “orphan stock” scenario.
  2. Regulatory Requirements and Market Capitalisation. Heightened regulatory requirements, have substantially increased the costs of maintaining a listing. In the US, the Sarbanes Oxley legislation has led to an increase in on-going costs from an average of $1.8m to $3m per annum. This, combined with the investor and analyst requirement for liquid stocks, implies that a minimum market capitalisation of $150-200m is required prior to a flotation. A main listing on the London Stock Exchange requires a similar market capitalisation and a target £50m capital raising to generate sufficient investor interest. There are, however, alternate options for international companies such as pursuing a domestic followed by an international listing.
  3. Small to Medium Sized Companies. The London Alternative Investment Market (AIM) is an attractive option for companies with a capitalisation less than $100m. There are also less onerous reporting and regulatory requirements than for a US SEC Registration or for primary London listing. Overall, the market has gained in depth and liquidity with over 1000 domestic and international companies listed on AIM since the market’s inception in 1995.  All major UK institutions now invest in AIM with around 35% of the market institutionally invested. Investors have become increasingly comfortable with the market as the directors of listed companies have to take full responsibility for information and the timing of disclosure. Nevertheless, with smaller market capitalisations and, consequently, lower liquidity, there is often higher volatility in the share prices of the companies traded, particularly of the smaller companies. Raising equity finance, particularly following the initial listing is, however, a rapid process for companies with attractive growth prospects. In general, the AIM market can be viewed as a stepping stone for a company and an intermediate financing vehicle prior to a move to a larger exchange, or to an exit of the business.

With the increased regulatory and reporting requirements, irrespective of the market chosen, the decision to float must be based on a realistic assessment of the company, its growth prospects and whether the alternative options of private equity and bank finance may be more appropriate.

Factors leading to success

There are a number of ways that will ensure a company has a successful public market experience:

  1. Sufficient management depth. Running a public company from the regulatory perspective and reporting to the investors requires an experienced management team. Companies need to strengthen their board of directors and to ensure that there is sufficient quality in the management team to deliver the business plan.
  2. Business Plan. The goal of investors is to realise a growth in shareholder value through capital gains and dividends. The relative performance of a company within its sector will also be closely followed. A clearly executed plan based on either organic and/or acquisition growth is necessary and the performance of the management team will be judged against the targets set. Managing investors’ expectations is a challenge, but is crucial for success.
  3. Managing investors. Consistent investor relations are crucial in order to maintain interest in a company following a flotation, particularly for an international company. Regular news flow and meetings with investors is essential. This is particularly the case when there is a downturn in the fortunes of a company. A clearly argued strategy on how to rectify the situation can often lead to investors purchasing further shares. This requires a significant time commitment of the senior management, but will be worthwhile, especially when further financing is required.

Case Study: Gilat Satcom Limited

Gilat Satcom is an Israeli based international provider of broadband and voice satellite services, particularly in emerging markets. The company has grown rapidly and profitably over the past two years and in early 2005 merged with its largest local competitor. This has provided a revenue base in 2004 of around $28m and profit of $2m.

In the past, SEC Registration and a quotation on NASDAQ would have been the preferred route for the company. However, following the enactment of the Sarbanes Oxley legislation in the US, the regulatory requirements on public companies increased significantly requiring Gilat Satcom to reach a market capitalisation of $150-200m for the US markets to be sufficiently attractive for investors.

The directors, therefore, had to decide on the advantages of a domestic listing on the Tel Aviv Exchange, or an international listing on AIM in London. For a company with significant international business, AIM offered access to large institutional investors and the liquidity of the market for future fundraisings.

Gilat Satcom took the decision earlier this year to pursue an AIM listing. Domestic and international financial and legal advisors were appointed and the fund raising was completed in a four month period. The due diligence process was rigorous and the prospectus issued was very detailed with a full verification process of all the statements. A research report was prepared for the investors and the senior management of the company was involved in an extensive two week roadshow in the UK and Europe where they met with a large number of institutional investors. The company floated around 22% of its share capital and raised $8m in August 2005.

To satisfy investor requirements, two UK based non-executive Directors were appointed: David Dwek was appointed to the Board in mid August 2005.

In 2008 a controlling share of the business was sold to a major local telecom investor and operator. The business was subsequently de-listed from the AIM market as the free float of shares was too ,ow to maintain sufficient liquidity in the secondary market.

Under current equity market conditions it is once again attractive for companies to consider a flotation of their shares. For a fast growing company requiring their equity to grow organically, or via acquisition, a listing can provide the necessary platform to achieve their objectives.

Given the current regulatory and market capitalisation requirements, the choice of market for a listing is important. In addition, deciding when to float is crucial. There are alternative sources of finance which should be carefully considered by the board of directors prior to flotation. The right decisions at this crucial stage in a company’s development will lead to success.

How to enhance a company’s valuation prospects?

Enhancing shareholder value is a key objective for the management teams of both private and public companies. A company’s strategic plan requires a clear focus on the options to crystallise an increase in value through a liquidity event such as a flotation, an M&A transaction, or a joint venture.

In our previous newsletters we have examined strategic business options including management buy-outs, acquisitions and stock market listings. All these transactions require an appreciation of the valuation of a business and how this can be enhanced. Below, we will review the alternative methods which can be used and discuss the applicability to both private and public situations.

Valuation methodologies

Valuing a business is often more an art than a science. For a public company, the market capitalisation or the equity value, of the business provides an important reference point based on publicly available information. To assess the full value of a business, the following factors need to be taken into account:

  1. the liquidity of the shares;
  2. the premium required to take control of the business; and
  3. the capital structure.

For private companies and divisions of public companies, straightforward mathematical formulae can be employed. These calculations generate the company’s value based on either forecasted cash flow, earnings, or by analysing the value of comparable listed companies and recent M&A transactions in an industry.

Prior to performing the arithmetic, it is important to take a strategic view of the industry and of the future prospects of the company in order to place the valuation figures in the correct context. An analysis of the competitive environment, barriers to entry, potential for substitute products and the strengths and weaknesses of the company will put the forecasted cash flow and earnings into perspective. Below, we will review the three most commonly employed valuation techniques.

Discounted Cash Flow

The discounted cash flow (DCF) approach is the most commonly used method to value companies, or specific projects. The basis of the calculation is free cash flow. This is cash available for distribution to the debt and equity providers after all planned investments have occurred, including both working capital and taxes. Adjustments are made to the financial statements for non-cash items including depreciation and goodwill. A financial model is developed of the forecasted profit and loss, balance sheet and cash flow statements for the company. Typically, a five year period is used. The assumptions underlying the forecasts are important to the integrity of the model. Furthermore, the process of developing the model and checking the consistency with the competitive strategy of the company within the industry is as important a process as the calculation of the final valuation figure.

As a going-concern a business will normally operate well beyond the 5 year forecast period. It is therefore necessary to estimate the “terminal” or “continuation” value of the business. Over time, with competition, a firm’s performance tends to converge to the industry average with 5-7% growth rather than say an initial 15-20% growth. With normalised cash flow and growth prospects a valuation according to comparable multiples will provide reasonable accuracy. This is typically an EBITDA multiple; or earnings before interest, tax, depreciation and amortisation. Therefore, the valuation of a company taking into account the time value of money can be separated into its constituent parts.

Value of
expected future
free cash
Present value of
free cash flows
during explicit
forecast period
Present value of
terminal value at
the end of the explicit
forecast period
The resulting value represents the enterprise value of the business available to all security holders discounted with the Weighted Average Cost of Capital, or WACC. The WACC reflects the combined cost of debt and equity with the weights of these capital sources based on their market, rather than book values. The key point to highlight is that a company’s WACC declines as it employs additional lower cost debt, thereby reducing the proportion of the more expensive equity. This is due to the tax shield resulting from the tax deductibility of interest payments.

The DCF process provides a valuation of the enterprise. The value of the equity can then be calculated by subtracting the net debt (total debt minus cash) from the enterprise value of the business. As with all valuation methodologies, it is important to carry out sensitivities around the key assumptions and to focus on a valuation range rather than on a specific number. Furthermore, as we discuss in the next section, comparing the DCF valuation with alternative methods is important as a sanity check. Each valuation approach contains useful information and, relying on several approaches in combination, is likely to produce more accurate valuation ranges.

Comparable Company Valuations
A more direct approach often used in practice relies on valuation multiples including:

  1. Price to earnings (P/Earnings per share);
  2. Price to book (book value of net assets); and the
  3. EBITDA multiple (market value plus net debt/EBITDA).

Multiples are estimated from the prices of public companies with growth and risk characteristics comparable to the company being valued. Firms in the same industry are the usual source of comparables. Precedent M&A or IPO transactions in the same industry are likely to be a good match especially if the targets had similar growth rates and margins. M&A transactions will provide an understanding of the premium paid under recent business scenarios. In the late 1990’s the premiums paid approached the 40-50% range. Since then, management teams have become more discerning and have been able to conclude transactions within a more reasonable 15-20% range.

Multiples can be applied to historic of forecast financials to obtain the present value of the enterprise or of the equity. Alternatively, the multiples are often used for the termination value in a DCF calculation. A forward multiple can give a better estimate of value because it incorporates expectations about the future. P/E multiples often differ between similar companies due to accounting differences, such as depreciation in earnings calculations. Net debt differences can also affect interest expense and earnings. For these reasons the EBITDA, or cash flow multiple is often used. For a business with good growth prospects a forward EBITDA multiple in the 8-12 times range provides a useful rule of thumb.

Revenue multiples are calculated by dividing the enterprise value by revenues. They are used to value companies for which no earnings are expected in the short-term. They can also provide an idea of value where no reliable cost information is available. These multiples are often used for technology companies with strong growth prospects. It must always be remembered that the key element in a company’s valuation is not the revenue generated, but the free cash. Many expensive acquisitions have occurred in the technology sector on the mistaken assumption that revenue growth leads to free cash flow!

Choosing the value to apply in a particular situation can only be made after a careful study of the company and its industry. A comparison of the value of similar public companies can provide a reasonable guide to value, particularly in private situations.

Valuation in merger and acquisition discussions


The intrinsic value of the business is the net present value of expected future cash flows independent of any acquisition. This is the stand alone value and the basis for negotiations. Any price paid above the intrinsic value represents the control premium to be shared between the target company and the acquirer’s shareholders. This premium includes a market premium and the potential synergy value. These synergies comprise revenue enhancements, cost savings including financial engineering and tax benefits as well as process improvements.

Valuation at the time of flotation

With regard to a flotation, or a secondary offering of shares, it is typical for a company to be valued based on the comparable multiples of similar listed companies. In these offerings it is normal for the sale to take place at a slight discount to the existing equity value of companies. This discount is typically in the 2-5% range depending on the situation.
Improving valuation prospects

Whilst strong growth prospects for both an industry and an individual company are important factors in a valuation, there are a number of additional factors where a company can improve its prospects prior to a strategic transaction:

Depth of management team
Developing a core group of managers to lead a business without over–reliance on one person will be value enhancing for new shareholders. It is typical for an acquirer to enhance a management team with financial expertise whilst retaining an experienced Chief Executive and operating management team. However, in turnaround situations, replacing the top management team is often essential to revitalise the business.

Share Structure
A simplified share structure with one class of shares and one share one vote will enhance the transparency of the company. Private companies often have several classes of shares which have been issued during several rounds of financing. Alternatively, certain shareholders often retain voting control irrespective of the amount of financing. A simplified share structure will improve a company’s valuation, particularly when a flotation is under consideration.

Capital Structure
An under leveraged balance sheet will provide an opportunity to a private equity firm to restructure a business, increase debt levels and improve the return on equity. Furthermore, existing shareholders should question whether the current or an enhanced management team can restructure the business and increase the value without changing ownership. This has occurred successfully at Marks & Spencer over the last 18 months following the unsuccessful bid from Philip Green who attempted a leveraged public to private transaction.

Effective Corporate Governance
A board with effective independent directors successfully challenging the Chief Executive will lead to improved decision taking compared to an autocratic board. Separating the role of Chairman and Chief Executive has improved the governance at UK companies, although in the US there remains a preference for a combined role. A more effective board structure is important for key strategic decisions including acquisitions, divestitures and flotation. All of these transactions have a key impact on valuation.

Generating a valuation is basic arithmetic. The key factor to enhancing a company’s value is through the execution of opportunities that enhance the prospective free cash flow of the business. A company’s strategic position within an industry with solid growth prospects is essential plus a well structured business and an experienced management team.

Valuation is an art and not a science, but the process of calculating a company’s value in a systematic way can uncover key growth opportunities for a business.