Impact of LBOs on the company’s financial management

March 9, 2021

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M&A (Mergers and Acquisitions) activity has been increasing since the third quarter of 2020, which saw a record number of large deals of more than $5 billion. Mainly in the technology and pharmaceutical sectors, as indicated by PwC when analyzing global M&A industry trends. Some of these deals are Leveraged Buyouts or LBOs. 

This activity is influenced by: 

  • Rising valuations on the back of the stock market rally. 
  • The maintenance of interest rates at historic lows. 
  • Competition among many investors in search of these types of operations.  

M&A trends between companies and business groups

In the face of the crisis, many companies have mitigated their liquidity problems by financing themselves through public aid programs. Some have reached an unsustainable level of debt and will need to restructure, refinance or transform themselves to adapt to the new reality. Sometimes, the entry of financial investors or operations such as leveraged buyouts can help them to solve their needs. 

In addition, other M&A transactions arise from the divestment of non-strategic operations that large companies and business groups continue to carry out in order to focus on key businesses. Other groups continue to look for growth options through consolidation operations in key sectors for economic recovery. 

Thus, many companies have strengthened their liquidity position not only to meet their operating needs, but also to have cash available for investment and growth. It is estimated that, thanks to this financial management, they collectively have more than $7.6 trillion in cash and marketable securities available. 

Accurate and precise financial information: Key to success in LBO transactions

The complexity of an LBO requires a financial and legal due diligence process of the target company to ensure its viability. The result will determine the progress in the negotiation of the LBO, the collateral requirements and the closing of the price, terms, etc. of the transaction. Or, perhaps, its cancellation.   

Accordingly, the acquiring party relies on the expertise of external legal advisors, corporate finance consultants and industry specialists. Both in the investigation of the target company’s situation and in the different phases of the LBO transaction.  

Consultants may require updated data of different types and formats from various departments or units. The managers and teams of the company under analysis must meet these requirements at unpredictable times. And make it compatible with the normal financial management, preparation of the periodic financial reporting, etc.  

The CFO must also prepare for potential financial questions. Or defend the underlying assumptions of financial projections, including calculations such as future cash flows or valuations.  

Therefore, in order to meet the company’s requests for accurate and precise information, some financial departments choose to invest in a CPM solution that will provide them with: 

  • Collecting heterogeneous data quickly 
  • Analyzing information in real time 
  • Automating and streamlining control and review processes 
  • Facilitating budget simulations, forecasts and adjustments. And collecting and integrating them from various sites, etc. 

Talentia CPM allows you to provide new investors with the right content, at the right time. This financial software provides consistent information available in real time. Besides this real-time financial view, it supports the value creation sought by LBO operations.