How advances in Data & Analytics are elevating the science of the deal
Article originally published in May 2016 edition of Private Capital Magazine
By John Cho (National Practice Leader, Partner, Transaction Services) and Eugene Chan (Data & Analytics Lead), KPMG LLP
After several years of focus on organic growth and internal cost management strategies, corporations around the world are again embracing M&A — and more strongly than ever, note many observers and forecasters. J.P. Morgan, for example, suggests that “with the possibility of renewed and diversified activity from private equity players, 2016 may see a rise in transaction volumes supported by a greater number of deals.”
This rising, competitive environment only heightens the challenge for private equity (PE) investors to effectively identify and close on deals, whether acquisitions or divestitures. The challenges they face — increasing multiples, more competition for key industry assets, etc. — are only growing. As such, M&A players, often needing to determine their course quickly or lose out, are looking for new approaches and methodologies to help them compete in the marketplace and strengthen their decision-making. This change in perspective means augmenting the traditional attention paid to reducing risk with greater focus on business analysis, revenue and profit sustainability.
A strong concentration on risk remains critical to pre-deal due diligence. However, as leading PE players are quickly finding out, adding data and analytics (D&A) to the process lets you take that due diligence to a demonstrably higher level. Rather than relying on summarized data and qualitative information supplied by management, organizations and investors can now leverage advanced D&A tools and metrics to access transaction-level information directly, analyze it and extract insights in near-real time when decisive action is required.
With far greater information available more immediately, investors can shift their investment strategy from a largely defensive approach — focused on existing risk indicators — to a future-focused, offensive one, where emphasis is on the assessment of revenue/profit sustainability and the quantifying of potential revenue and cost synergy upsides. This ability to leverage vast quantities of transaction-level data can be a real game changer, putting savvy investors on the high ground of an extremely competitive landscape and ultimately allow them to bid on quality assets with increased conviction.
Deep Data Dive
Using analytics platforms that can process data at deal speed, investors have a new level of detail and granularity available to them. For instance, they can now assess areas of concern, such as pricing power, commodity implications, foreign currency impact and more. They can also identify, evaluate and quantify their key investment theories regarding a target company. Combined, these abilities enable them to make deals with the confidence in knowing not only what they’re getting, but also what they will have in the future. They can even dive deep enough to produce analysis related to specific customers, products, segments and locations — whatever variables drive the business and industry in question — to evaluate future sustainability for each.
Recent experience with clients around the world clearly indicates that combining traditional due diligence with data analytics and deeper business analysis is a winning formula. For instance, companies that use KPMG’s Strategic Profitability Insights platform (SPI) gain the ability to process enormous amounts of transaction-level information and evaluate it across 70 value characteristics.
This scenario is just one example of a D&A platform being used by leading organizations and investors to significantly enhance due diligence engagements — and results to date have been notable. For example, applying D&A on the sell side of the deal can increase business value by up to two multiples over original forecasts. Similarly, on the buy side, investors have regularly reduced or increased their bids based on a better understanding of performance sustainability. D&A can also help clarify the value of an existing investment, providing insight into how well it’s operating, whether it’s time to sell and potential areas of unlocked value.
The Impact on M&A
In the M&A space, PE investors have always led the way in terms of risk analysis and due diligence. Many are now leveraging D&A capabilities to gain a competitive edge. The methodology’s potential to extend value and increase profit by evaluating not only how a business has performed to date, but how well it may perform going forward, provides a clear advantage — one that investors in today’s marketplace are finding increasingly indispensable.
*John Cho is the National Practice Leader for KPMG’s Transaction Services practice. He is responsible for the execution and coordination of the transaction services offering to both domestic and international clients. Eugene Chan is the Data & Analytics lead for the Transaction Services practice. His mandate is to integrate technology enablers and data and analytics into KPMG’s transaction support service offering.