2016 M&A Monitor: Shedding light on M&A in Belgium

In these times of globally booming M&A activity, I am pleased to present the first M&A Monitor of the Centre for Mergers, Acquisitions and Buyouts of Vlerick Business School. This Monitor supersedes the annual Entrepreneurial Buy-out Monitor that Vlerick has conducted over the past years. The scope has been expanded to consider all types of mergers and acquisitions. By capturing the opinions of 142 M&A experts in Belgium – including bankers, private equity investors, advisors, brokers, lawyers, family offices and mezzanine players – we provide a comprehensive overview of current trends and challenges in the domain of M&A in Belgium. The findings presented in this report are of great interest to all professionals active in the Belgian M&A market, as well as to decision-makers on both the selling and the buying sides. The results strongly indicate that Belgian M&A activity is surging − with 2 out of 3 respondents observing an increase in the number of M&A transactions. Competition amongst buyers has intensified, as the current market is clearly demanddriven, fuelled by easily available bank financing and the extensive amount of dry powder of private equity companies. The increased interest of family offices, wealthy individuals and foreign PE firms in the Belgian midcap segment puts additional pressure on the buy-side. A demand-driven M&A wave naturally results in rising valuations and M&A multiples. The experts surveyed overwhelmingly indicate that multiples have increased over the past year, leading to an average EV/EBITDA multiple across all industries and size classes of 6.1. Nevertheless, the imbalance between high demand and limited (high-quality) supply of companies also calls for caution. Academic evidence shows that transactions taking place at the top of an M&A wave are typically less profitable. These deals are more likely to be driven by hubris and herding behaviour. In addition, most interesting targets have usually been acquired at the start of the wave, leaving only targets that do not fully meet the ideal selection criteria. That’s why a detailed upfront assessment of the motives for buying a company, and a realistic estimate of potential synergy gains, prove to be of utmost importance in successful M&A. Our survey results indicate that realising economies of scale is considered to be the primary motive for strategic buyers, while financial buyers focus mainly on opportunities to follow a buy-andbuild approach or improve revenue and/or margin. The results presented in this monitor also provide interesting insights into the deal structure (use of vendor loans, earnouts, leverage ratios) and process (nature of sale process, use of vendor due diligence, length of M&A process). We open the black box of price negotiations and find, for example, that almost 1 out of 2 experts indicates that the average final deal price exceeds the initial indicative offer, while only 1 in 4 reports a lower final deal price compared to the offer price.BANK J.VAN BREDA & C°BDOGim

2018 M&A Monitor: Shedding light on M&A in Belgium

Is the sky really the limit for M&A? Since the first edition of this Belgian M&A Monitor five years ago, we have witnessed a continuous surge in the number of transactions and the multiples being paid. The average EV/EBITDA multiple in Belgian M&A increased from 5.0 in 2013 to 6.7 times EBITDA nowadays. The number one concern highlighted by M&A advisors that filled in our survey, is the current overheating of the market. Nevertheless, two out of three respondents expect M&A activity in Belgium to keep on rising in 2018. It is of course not surprising to observe elevated multiples in a seller’s market that is characterized by economic recovery and easy access to cheap financing. However, the question remains of whether acquisition prices have reached their limits. Part of the answer lies in the interpretation of the multiple which is in fact simply the inverse of the required return by investors. An EV/EBITDA multiple of 6.7 indicates that investors would realise a return of approximately 15% before taking into account any investment expenditures. A further increase in prices would result in returns that no longer outweigh the risks associated with the acquisition. We can only hope that both strategic and financial buyers keep on making this reflection. Despite the critical note in the above paragraph, high multiples could of course be warranted in case of strong growth potential or limited risk in the target’s business. That is why we report for the first time valuation and financing multiples per sector. Industries with relatively lower multiples are “Retail” (5.3x EBITDA), “Transport and logistics” (5.7x) and “Construction” (6.0x). Sectors characterized by superior multiples are “Technology” and “Healthcare” (both 8.2x), “Pharmaceuticals” (9.2x) and “Real Estate” (9.3x). We are convinced that publishing these sector multiples increases the practical usefulness of this Monitor even further in setting price expectations for Belgian M&A. In previous editions, M&A advisors emphasized the Belgian unstable regulatory and tax environment as a restraining factor for M&A activity. In our most recent survey, we explicitly inquired respondents about their expectations concerning the reform package agreed upon by the Belgian federal government and presented in its “summer agreement”. While the vast majority of M&A professionals expect a neutral or slightly positive impact due to especially the decrease in corporate tax rate and the introduction of tax consolidation, some also highlight the interest deduction limitation based upon EBITDA and more stringent conditions for the exemption of capital gains as possible limiting factors. In the remainder of this 2018 M&A Monitor, detailed insights are presented into the evolution of Belgian M&A activity, current typical payment and financing structures and various process characteristics that could be highly relevant for buyers, sellers and all professional parties involved in Belgian M&A.BANK J.VAN BREDA & C°BDO BelgiumNautaDutilhGim

2019 M&A Monitor: Shedding light on M&A in Belgium

All good things must come to an end… This phrase also holds in M&A markets that have historically been characterized by a wave pattern. While the most recent global wave started around five years ago, a turning point might have been reached. The global amount spent on acquisitions increased further in 2018 to almost $4 trillion, despite a very strong drop in deal volume during the final quarter. The sudden plunge in deal activity seems to be driven by political and economic uncertainties rather than financial constraints, with a cost of borrowing staying at a historically low level and dry powder at private equity funds reaching a record level of$2 trillion (Bain & Company Global PE report). The results of our own Belgian M&A monitor confirm that deal activity surged in 2018 but, at the same time, the surveyed experts largely expect a stabilising market in the year to come. Interestingly, some remarkable changes can be observed in motives driving Belgian M&A transactions. Whereas realising economies of scale stays the number one acquisition reason, other motives, like gaining new technologies and attracting talent (or “acqui-hires”), have increased significantly in importance over the past years. Deal drivers in private equity transactions remain constant with a buy-and-build approach as preferred value creating strategy. In addition, we observe a significant decline in the fraction of cross-border deals by Belgian acquirers from 36% to 25%. The major contribution of our yearly M&A monitor is that we present unique insights into the specific Belgian M&A setting that is particularly characterized by small and mid-market deals. While only limited information is publicly available on mid-market M&A, virtually no data is published for really small transactions. Therefore, we present a separate category of data for deals with a transaction value below €1 million for the first time. Remarkably, the surveyed professionals are much more positive on growth expectations in this segment of the market with 2 out of 3 respondents expecting a further growth in 2019. The intensified competition in the midmarket segment might indeed push strategic as well as financial buyers more and more towards smaller deals. In last year’s M&A monitor, we expressed a clear call for caution in terms of multiples paid, questioning whether the elevated acquisition prices still allow to realise returns that outweigh the risks of the transaction. For the first time in six years, however, we now observe a slight drop in EV/EBITDA multiple across all Belgian transactions from 6.7 to 6.5 (ranging from an average of 4.4 for deals smaller than €1 million to 9.7 for deals exceeding €100 million). The minor reduction in multiples is mainly driven by the smaller deal categories (below €5 million). Nevertheless, upcoming sellers should not yet panic as the majority of surveyed experts do not yet predict a significant decrease in multiples in 2019. These observations and many other typical deal, financing and process characteristics are presented and discussed in detail in the remainder of this document.BANK J.VAN BREDA & C°BDOGimvNautaDutilhSOWACCES

2017 M&A Monitor: Shedding light on M&A in Belgium

Following an annual tradition, this M&A Monitor presents an overview of current trends in the Belgian M&A market. Based on survey responses of 120 M&A experts in Belgium, we present unique insights into the evolution of M&A activity, typical multiples, deal structures and process characteristics. Every year, we devote special attention to one particular aspect of M&A. In the current edition, we focus on cross-border transactions by Belgian acquirers, representing around one third of all deals that the surveyed experts have worked on. The most targeted countries in Europe are France, The Netherlands and Germany. Despite a global drop in M&A activity (from a record level of $4.5 trillion in 2015 to around$3.5 billion in 2016), Belgian M&A volume is still growing intensively. Two out of three respondents observed an increase in Belgian M&A activity in 2016. Moreover, only 10% of all experts anticipate a possible drop in 2017. While we observe a similar picture for Belgian targets acquired by international companies, more conservative growth numbers are expected for cross-border takeovers by Belgian acquirers. An uncertain political climate as a result of the Brexit, Trump’s US protectionism, and upcoming elections in several EU countries might impede Belgian acquirers from pursuing a cross-border external growth trajectory. The continued traction in the Belgian M&A market is also reflected in elevated multiples. The average Enterprise Value (EV)/EBITDA multiple rose for the fourth year in a row towards a level of 6.4. Belgian acquirers are even found to pay on average 7 times EBITDA in cross-border acquisitions. Academic evidence indicates that cross-border acquirers are willing to pay higher premiums because of the cross- border targets’ country-specific knowledge and local distribution networks. The respondents indicate that bank financing is readily available at cheap rates and has improved especially for the segment of deals worth less than €5 million. The average ratio of net financial debt (NFD)/EBITDA for this segment of smaller transactions increased from 2.1 in 2015 to 3.3 in 2016. Banks seem to increasingly consider acquisition financing of smaller companies with a proven track record as an alternative source of income, leading to looser credit standards. In line with rising bank financing, a decline in the amount of (semi-) equity that is needed to finance an MBO/ MBI is observed for transactions under €5 million, dropping even below 30% on average. Similarly, the use of vendor loans and earnouts across all deal sizes has diminished significantly. These findings, and many other critical aspects of domestic and cross-border M&A, are explored in detail in this 2017 M&A Monitor.BANK J.VAN BREDA & C°BDOGim

Can Auditors Mitigate Information Asymmetry in M&As? An Empirical Analysis of the Method of Payment in Belgian Transactions

SUMMARY In this paper, we empirically examine the relationship between the external financial statement audit and the method of payment across a sample of Belgian mergers and acquisitions between listed and private firms over the period 1997–2009. We investigate whether a Big N audit (at the target level) reduces the need for a contingent payment resulting from information asymmetry about the target's value. In addition, we analyze whether a Big N audit (at the bidder level) limits incentives for bidders to exploit private information about their own value. Using multivariate ordered probit and binary regression models, we determine that contingent payments are less common when the target is audited by a Big N auditor after controlling for several other deal and firm characteristics. Furthermore, we find that the incentive to use stock payments in periods of stock market overvaluation is lower for acquirers with a Big N auditor. Finally, target shareholders are more likely to accept a contingent offer if the acquirer's financial statements are certified by a Big N auditor. JEL Classifications: G34; M4.</jats:p

Financial statement filing lags: An empirical analysis among small firms

This article examines financial statement filing lags among a sample of Belgian small firms. Our results indicate that around one-third of small firm financial statements are filed late (after the legal deadline), but that monetary sanctions could be an effective tool to encourage compliance with legal deadlines. Whereas the deadline and late filing sanctions are filing incentives, various factors, such as firm size and presence of an external financial statement audit, also affect financial statement filing lags. Evidence indicated that extremely late filings were associated with lower financial statement quality. </jats:p