During a merger or aquisition, due diligence is a critical stage in understanding the risks and liabilities the target company or new entity may face. Lawyers, accountants, investment bankers and other experts review contracts, financials and countless other documents to ensure they know all the details about the companies involved so there aren’t any surprises once the deal closes. But due diligence is taking on new characteristics as the internet takes on a prominent role for most businesses.
While investors might not be noticing, there is a significant shift occurring within the private equity industry — and these changes could benefit the performance of their portfolio.
The 2017 Tax Cuts and Jobs Act is perhaps the signature legislation of the Trump administration. For individuals and joint filings, it completely overhauled the tax brackets as well as the amount to be paid. This is in addition to changes to estate tax deductions, revisions to deductions for large medical expenses and many other updates.
While major law firms provide valued counsel to clients during this current wave of corporate mega-mergers, some of these firms face the same issues, as the legal industry is itself experiencing merger mania.
We’ve written a lot about mergers and acquisitions over the last year. The market is certainly robust, with megadeals leading the way. In fact, the M&A market is on pace for a record year according to Bloomberg, exceeding the $4.1 trillion total of 2007. But not all deals involve a combination of two companies. In fact, private equity M&As, where a fund developed by a PE firm purchases an asset, are in the midst of a strong run of growth.
According to Thomson Reuters, the rate of PE M&A deals is on the rise. During the first half of 2018, they accounted for 27 percent of all M&As, up from 24 percent in 2017. Not only are the total number of these deals on the uptick, but their value is increasing as well. The same research shows the total value of the deals from 1H 2018 were up 36 percent year over year.
The jump in deals was most prominent in a few sectors — technology (specifically cybersecurity and software as a service) and retail. On the technology side, the software as a service (SaaS) market has blossomed to $43 billion worldwide just in 1H 2017. Its growth rate is far outpacing that of the regular software market by approximately a 2-to-1 margin. Interest in cybersecurity is practically self-evident given our need to protect data in an increasingly wired world.
Adam Holt, an analyst at MoffettNathanson, told Investors Business Daily that because access to capital was relatively easy, these firms were in no rush to sell. But when Trump’s tax reform passed in late 2017, this kickstarted new opportunities for companies looking to sell and deep-pocketed PE firms looking to buy.
Another area where PE firms are jumping in is with conglomerates selling off business units. In June General Electric sold their power division to the private equity firm Advent International for $3.25 billion. In July, Brynwood Partners purchased a business unit from J.M. Smucker Co. that included the Pillsbury brand for $375 million. In late 2017, the giant Unilever sold off its margarine and spreads division to KKR for $8 billion.
In each of these cases, the PE firm will acquire these businesses and make operational and workforce improvements with the goal of selling them for a profit. But before the first dollar is spent on a PE M&A, it’s important to have the right technology and infrastructure in place to conduct successful transactions.
Companies like SmartRoom offer a private equity technology package to simplify and accelerate information and content management across your entire fund. The package combines 3 of the industry-best PE technology solutions including:
- SmartRoom VDR: a next-generation virtual data room for all your PE use cases for one flat-rate annual fee. You can use SmartRoom for portfolio divestitures, fundraises, add-on acquisitions, lender communication and more; all for one low-cost.
- SmartLP : a cloud-based platform that allows your fund to automate the customization and distribution of investor documents and then allows investors to access those documents in a secure, centralized hub. SmartLP combines the automation of report creation with a simple intuitive online experience for today’s investors.
- CRM for Deal Professionals: SmartRoom has partnered with DealCloud to bring you the only customer relationship management platform build exclusively for deal professionals. Seamlessly execute fundraising, sourcing and deal management strategies on one platform.
For more information on private equity technology solutions visit: https://smartroom.com/private-equity/