deal flow innovation financial modelling: complex ... · global m&a deal volume h1 2017 vs h1...
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Paul Lom, DIRECTOR E: [email protected] M: 0408 586 672
Alastair Richards, ASSOCIATE DIRECTORE: [email protected] M: 0413 418 311
Liam Murphy, DIRECTOR E: [email protected] M: 0414 384 667
Shaun Lindemann, DIRECTORE: [email protected] M: 0403 833 784
John Bell, DIRECTOR E: [email protected] M: 0413 448 552
Rick Hopkins, DIRECTOR E: [email protected] M: 0411 490 666
FIND US ON
ON CORPORATE FINANCE
www.pkf.com.au
ISSUE 18
QUARTERLY INSIGHTS INTO KEY FINANCE
MATTERS AFFECTING YOUR BUSINESS
IN THIS ISSUE• DEAL FLOW• NSX
INNOVATIONFINANCIAL MODELLING:
COMPLEX SCENARIOS CREATED SIMPLY
focus | on corporate finance
Financial Models – What are their real value?Financial models can be used for a range of different purposes and they can vary significantly in complexity.
Some people use financial models to perform relatively straight forward calculations to forecast or estimate something of a financial nature. This may include working out the repayment profile of a loan or seeing what happens if the interest rate changes.
Financial models can also be used for more complex scenarios such as:
• Operating models with multiple years of projections – for example assessing what the performance of a business be over the next five years, and what happens under certain assumptions or if some drivers change.
• Investment or acquisition assessments – determining whether or not to purchase or sell a business unit.
• Valuation and discounted cash flow models – how much is a business is worth.
• Bank funding – how much can be borrowed and how much can be repaid.
• Management reporting – automating the month end reporting process by using a financial model to draw together figures from a variety of sources, or presenting the data automatically in an easy to use format.
The options are endless due to the enormous flexibility financial
modelling offers but how can you utilise one in your own operations to best benefit from its implementation?
Common usesWe have seen an increasing requirement for banks to review robust 3-way financial forecasts (projections which include a profit or loss, balance sheet and cash flow statement) to support applications for finance. This trend has been consistent for new to bank clients or existing clients looking to extent existing facilities. In these circumstances – the value they offer is tangible as expansion, growth and in some instances survival of businesses are dependent on finance outcomes.
But what of those businesses that are not at a level yet to require funding? This is where business owners or managements’ commitment to tracking and driving performance may determine the requirement to create and implement a model for management purposes. In a world where what gets measured often gets done, the incorporation of a budget setting strategy to set goals against what performance can be measured can be an important management tool which all businesses should consider regardless of size.
Common failingsFinancial modelling generally tends to be performed using Excel, however recently there has been an increasing trend for models to be prepared using financial modelling software. These software packages allow the user to input a series of assumptions which
FINANCIAL MODELLING
then generate a profit or loss, balance sheet and cash flow. Users of these packages should be aware of the limitations of these packages, as they have a limited amount of flexibility and may not properly fit the situation or scenario which the financial model is being used to assess (after all it’s better to make the model fit the business, rather than the business fit the model). Furthermore, if the model doesn’t quite fit the business, it may result in materially different figures being generated and thus the wrong decision being made.
Often financial models are prepared using a standard model or a template as a base. It is quite often easy to identify when a financial model has been prepared in this way, as there is redundant functionality and quite often errors which haven’t been updated or corrected due to the adjusted purpose and updated use of the model. Again, the risk of using these models is the potential for them to present incorrect figures resulting in sub optimal decision assessment. When considering the preparation of a financial model based upon a precedent or existing model you should consider the increased risk against the potential saving of time.
How PKF can assistAt PKF we have a team within our corporate finance division which specialise in the preparation of financial models. Each model is built from scratch and tailored to meet the client’s needs.
We spend time getting to know exactly what the client wants the model to do, what inputs they would like, how they would like each
input to be able to be adjusted, what the purpose of the model is as well as what outputs are required. As part of this process we lead the client though the steps to identify in detail, the answers to these questions, whilst also offering suggestions based on our experience of developing and reviewing many models in the past.
We then build the model with clear, straight forward and easy to understand input sheets, so users can make adjustments as and when they wish. This results in output sheets or a “dashboard” which is created with the user in mind, stripping down the information to just the key pieces required, whilst also preparing full profit or loss statements, balance sheets and cash flows. The calculation sheets will also be clearly visible, for users to delve into if they wish, but we would recommend they are left unadjusted otherwise it may result in errors in the model. We intentionally prepare models without the use of macros, as we have noticed users tend to prefer a more simplified and transparent approach. We also give users full access to the model’s workings, should they wish to perform their own checks or make their own adjustments.
The result of the above process ensures a robust model which is easy to use, fully integrated and most importantly, it’s designed specifically for the client’s purpose and requirements.
If you would like any assistance or wish to discuss preparing a financial model for your purposes, contact one of your local Corporate Finance representatives.
on corporate finance | focus
DEAL FLOW Global M&A activity has been strong for the first half of the year up 8.4% to US$1.5 trillion in terms of deal value. A number of cross-border megadeals drove growth as international deals rose 28% to reach US$703.4 billion1 while domestic transactions fell 4.4% to US$788.9 billion1. However, deal makers remain cautious, as deal volume for H1 2017 fell by 1,077 deals to 8,077 due to geopolitical factors and uncertain worldwide economic growth.
North America continues to have the greatest deal value over other regions at 43.9% of global M&A activity by deal value1. This trend has been supported by several megadeals. Notably, this included the US$23.6 billion merger between US-based medical supply manufacturers Becton, Dickinson & Co. and C.R. Bard during April 2017 as the industry seeks synergies through consolidation. Amazon’s US$13.4 billion acquisition of Whole Foods Market stirred grocery businesses across the nation.
Energy, Mining & Utilities was the top performing sector during the first half of 2017 up 51.9% by deal value on H1 2016 reaching US$267.9 billion1 benefiting from favourable commodity prices.
Asia-Pacific deal value made up 19.5% of the global aggregate at US$290.4 billion for H1 20171, a decline of 10.5% on the prior year following a shortfall of megadeals in the region and lacklustre Chinese M&A activity. The emerging superpower, China, declined as a share of Asia-Pacific deal value, decreasing 22.7% on H1 2016 to US$136.0 billion for the first half of 20171 as the Chinese government tightens outbound M&A policies and continues to impose restrictions on capital flows.
Australia, a viable candidate for the strongest performing nation in the Asia-Pacific region in terms of M&A activity, accounted for 13% of deal value in H1 2017 up from 6.2% in H1 20161.
Australian M&A activity increased deal value by 88.9% to US$35.7 billion in H1 2017 up from US$18.9 billion in the prior year attracting an additional 54 deals.
Australia remained a favoured target for inbound M&A in the Asia-Pacific region during the first half of the year on the back of two of the top five deals in the region, both in the Energy, Mining and Utilities industry. These included the US$9.8 billion takeover of Australian-listed Duet Group by a consortium led by Cheung Kong Property and the 50.4% stake in Endeavour Energy for US$5.6 billion by an assortment of investment banks.
Global M&A Deal Volume H1 2017 vs H1 2016
Global M&A Deal Value H1 2017 vs H1 2016
2,509 2,715
218 256174 173 179 233
1,783 1,842
3,110 3,091
0
500.0
1,000
1,500
2,000
2,500
3,000
3,500
NorthAmerica
Central &South
America
Europe Middle East & Africa
AsiaPacific
Australia
Num
ber o
f Dea
ls
H1 2016 H1 2017
594.5656.4
23.7 25.226.8 38.4 18.9 35.7
333.9
491.0
342.8
481.9
0
500.0
1,000
1,500
2,000
2,500
3,000
3,500
NorthAmerica
Central &South
America
Europe Middle East & Africa
AsiaPacific
Australia
Num
ber o
f Dea
ls
H1 2016 H1 2017
focus | on corporate finance
A strong first half of 2017 has been positive for Australian mid-market M&A as volumes surge across the region. Mid-market deals continue to give companies opportunity to achieve inorganic growth and tap into new markets whilst managing financial capital risk.
The Asia-Pacific region continues to drive Australian mid-market M&A whilst there has been an emergence of interest from US and European regions.
Australian mid-market M&A activity is expected to grow through the 2017 calendar year with a positive environment for domestic and offshore buyers, due to low interest rates, low inflation and a relatively stable and attractive currency. Australia maintains its reputation as a safe-haven for long term investments and as a launch pad into the Asia-Pacific region.
Prolific M&A activity during the first half of the year has seen new heights reached in Australia
and across the globe. The first half of the year has also been a strong period for PKF Corporate Finance.
Despite favourable market conditions for M&A, it is important dealmakers remain cautionary, performing adequate due diligence, to ensure the successful completion of the deal. As part of our multi-disciplinary practice we have recently completed and advised on a number of M&A deals including the following:
• Tech-Link acquisition of storage and materials handling manufacturer, Dexion;
• Furnware’s acquisition of Sebel Furniture;
• Field Solutions reverse takeover of Freshtel; and
• Trustees Australia aquisition of software business Cashwerkz.
DEAL FLOW CONTINUED
1 Mergermarket and Merill Lynch Corporation, (2017), Monthly M&A Insider: An Acuris Report on Global M&A Activity, July 2017
PKF International Limited administers a network of legally independent firms and does not accept any responsibility or liability for the actions or inactions of any individual member or correspondent firm or firms.
Our Corporate Finance Team
Andrew Jones, DIRECTOR E: [email protected] M: 0403 302 971
NSX INNOVATION AND ACCESS TO CAPITAL FOR SMALL TO MEDIUM SIZE ENTERPRISES
If you would prefer to receive your newsletter via email, please contact your local Corporate Finance representative.To download a soft copy of this newsletter please visit: www.pkf.com.au/Our-Services/Corporate-Finance
Simon Rutherford, DIRECTORE: [email protected] M: 0425 266 123
Nick Navarra, PRINCIPALE: [email protected] M: 0421 302 390
Paul Lom, DIRECTOR E: [email protected] M: 0408 586 672
Alastair Richards, ASSOCIATE DIRECTORE: [email protected] M: 0413 418 311
Liam Murphy, DIRECTOR E: [email protected] M: 0414 384 667
Shaun Lindemann, DIRECTORE: [email protected] M: 0403 833 784
John Bell, DIRECTOR E: [email protected] M: 0413 448 552
Rick Hopkins, DIRECTOR E: [email protected] M: 0411 490 666
Steven Perri, DIRECTORE: [email protected] M: 0402 032 148
“NSX brings a true commitment to service and support for companies and investment products that list
on its market.”
By Andrew Musgrave, Head of Business Development, National Stock Exchange of AustraliaInnovation is probably one of the most important forces currently fueling growth of new products, sustaining incumbents, creating new markets and promoting global competitiveness. Even so, many firms do not invest enough in innovation and lose sight of long term ambitions in favor of short term goals. In Australia, one area that has come under the microscope in recent times is the issue of raising capital for small to medium size enterprises (SME) and crowd source funding. Access to capital by SMEs is challenging due to the banks’ tough credit processes and their generally asset based approach to lending. This is particularly true for Fintech companies as they struggle to fit within the banks’ risk appetite. Because of these restrictive lending practices, crowd source funding has gained traction in recent times and the Australian Government has responded by implementing the Corporations Amendment (Crowd-Sourced Funding – “CSF”) Act which enables small businesses to raise capital via crowd funding platforms. This legislation will enable retail investors to buy up to $10,000 worth of shares in unlisted companies with an annual turnover of up to $25,000,000. As CSF platforms gain traction, traditional stock exchanges will need to evaluate their existing business model and look at ways of expanding their services to cater for private companies. Capital raising alternatives to an IPO, such as venture capital or crowd source funding, while growing rapidly still provide a relatively small pool of capital for SME’s. The National Stock Exchange of Australia (NSX) is the second largest exchange in Australia and is creating a better experience for companies
and investors in Australia. NSX brings a true commitment to service and support for the companies and investment products that list on its market. A lack of competition leads to stagnation and resistance to change. We are focused on developing new, innovative solutions that help drive more efficient and affordable markets. This new innovation, outside of traditional IPO’s, will also look to capture a new breed of companies and capital raising options that are becoming increasingly prevalent in today’s capital markets and allow us to better meet the needs of our customers.
With the restructure of NSX over the past 12 months, we know that the most important thing to an investor is the company, not the exchange that it is listed on. That’s why we have invested with IRESS to create a single point of market access and a uniform process for brokers whether they are trading ASX or NSX stocks. This IRESS solution went live in June 2017. With the introduction of IRESS, a collaborative approach when working with our issuers and engaging with emerging growth companies at an early stage, we believe an innovative re-focus on the fundamental values of a stock exchange can reverse the disruptive effects of trade focused business models, and give companies, brokers and investors access to a stronger, fairer and more transparent stock exchange.