Advisory Services' budget vary through the different worksteps. To simplify, we may split the overall M&A process into the following steps:
Strategic Analysis/Screening. The budget spent on this part of the work does not depend strictly on one or several deals. It reflects more the nature of the situation the potential acquirer is in, and the need to clarify the strategic vision by setting up priorities.
Deal Opportunity Analysis. With this work starts the spending on a specific target. The number of potential contributors increase as time passes, with the involvement of audit firms, lawyers, tax specialists, manufacturing experts,...
Transaction Development covers the due diligence work. The budget spent on this phase depends on the scoping of the due diligence. It will also depend on the probability of success.
Negotiation Advice and Execution. This includes the work conducted by bankers and lawyers during the negotiation process : deal structuring, SPA negotiation, signing and post-transaction execution...
Transition Management. This work phase covers potentially any functional or operation process. The budget spent on this aspect is by far the most important one when dealing with complex integration projects. It becomes all the more important as detailed implementation work has to be conducted, for example on the IT side.
The budget spent on Advisory Services may be estimated at c.1.00-1.50% of Deal Value. This represents c. €10-15bn in Europe for 2007, H1.
It is however a very fragmented market, both in terms of expertise (audit, tax, legal, operations, funding,..) and in terms of organisation size (from global leading firms to individual experts with a regional/national playground). The Project Management aspect may be evaluated at 0,05-0,2% of deal value, or 5 to 20% of overall advisory services. This represents between €500mio and €3bn total value at European level.
Complex transactions (i.e. with multiples countries, business units, legal entities,...) increase potential risks and transaction implementation budgets. PMI spending are very linked to the perception of risk taken by the acquirer. This perception is influenced by a number of factors such as:
the geographical proximity and fragmentation, which deals with the cultural issues and the issue of mobilising people on a new corporate project
the type of organisation acquired, which corresponds to the number of autonomous units to integrate, the intensity of resistance to change to overcome...
Integration-related services are limited and unjustified under a certain deal value. We estimate this limit at around €10m in deal value. Under this level, services are very focused on accounting, legal and financial aspects. Above this level, operational services may be justified by risk reduction and/or by increased value capture.
Strong differences exist between countries. Generally speaking, France is a market where management consulting services are not as accepted as in the US or the UK, executives being very cautious on maintaining a strong control on information and decisions.
Conclusions - Recommendations.
The PMI market is a huge market in value. It is not evenly distributed according to the deal size, nor to the geographical M&A volume. It is also a fragmented market. We think the market driver for PMI budget spending, i.e. the perception of risk, will not change in the coming years (cf the following Point of view).
Author: Gilles Ourvoie (gilles.ourvoie@pmifactory.com).
Gilles has worked for c.15 years on strategy and PMI projects for major international groups. Within the Strategy & Transformation consulting activity, he has developped the French PMI Center of Excellence at Gemini Consulting and Capgemini (1997-2004). Between 2004 and 2007, he has launched the Transaction Integration Services practice of Ernst & Young France (within the TAS Corporate Finance), and in the CWEA Area (Italy, Spain, Belgium). As such, he was part of the TIS Global Leadership Team. Since 2007, Gilles is Partner at PMI Factory.