Capital Insights Issue 14 - EYFILE/ey...For more insights, visit capitalinsights.ey.com, where you can find our latest thought leadership, including our market-leading Capital Confidence

Yahoo CFO Ken Goldman on deals, driving growth and

getting back to basics

Tech control

Private equity: What the future holds

Social media assisted M&A

Australia: dealmaking down under

Capital InsightsHelping businesses raise, invest, preserve and optimize capital

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ContributorsCapital Insights would like to thank the following business leaders for their contribution to this issue:

Peter CookPartner, Gilbert + Tobin

Kevin AlbertGlobal Head of Business Development, Pantheon

Neil MacDougallPartner, Silverfleet Capital

Nigel DansonCEO, Interact

Tim CampbellChairman, Urban Age Institute

Antoine DreanFounder, Triago/Palico

Yasser El-AnsaryCEO, AVCAL

Peter EngelkeResident Senior Fellow, Atlantic Council

Dominique GaillardManaging Partner, Ardian

Robin BishopHead of Macquarie Capital, Australia and NZ

Mounir GuenChief Executive and Founder, Mvision

Alexandra Reed LajouxChief Knowledge Officer, NACD

Sven LidénChief Executive & Head of IR, Adveq

Luke McKeeverChairman, Neighbourly

Caroline MurphyDirector, Strategy & M&A, Fremantle Media

Bob MorseCo-founder and CEO, Strattam Capital

Aaron P. RubinPartner, Morrison & Foerster

Lorne SomervillePartner & Head of TMT, CVC Capital Partners

Adam TurtleCo-founder, Rede Partners

David PetrieHead of Corporate Finance, ICA, England & Wales

Alfredo De MassisProfessor, Lancaster University

Rachael BassilPartner, Gilbert + Tobin

David MurrayDirector, Murray Capital

Rod RichardsManaging Partner, Graphite Capital

Simon TomsCorporate Finance Partner, Allen & Overy

Philippa StonePartner, Herbert Smith Freehills

James WilkinsonPartner, Reed Smith

Shaheena Janjuha-JivrajAssociated Professor, Henley Business School

Tony HillDirector, DealNexus, Intralinks

Janos BarberisFounder, FinTech HK

Ken GoldmanCFO, Yahoo

William DoranPartner, Reed Smith

Capital Insights from EY Transaction Advisory Services

For EYMarketing Directors: Antony Jones, Dawn QuinnProgram Directors: Jennifer Compton, Farhan HusainConsultant Sub-Editor: Luke Von Kotze Compliance Editor: Paul Simon Design Consultant: David Hale Digital Innovation Lead: Mark Skarratts Senior Digital Designer: Christophe Menard

For Remark Global Managing Editor: Nick Cheek Editor: Kate Jenkinson Editor for the Americas: Sean Lightbown Head of Design: Jenisa Patel Designer: Vicky Carlin Production Manager: Sarah Drumm EMEA Director: Simon Elliott

Capital Insights is published on behalf of EY by Remark, the publishing and events division of Mergermarket Ltd, 4th Floor, 10 Queen Street Place, London, EC4R 1BE.

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EY | Assurance | Tax | Transactions | Advisory

About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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About EY’s Transaction Advisory Services How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you’re preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda.

© 2015 EYGM Limited.

All Rights Reserved.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

The opinions of third parties set out in this publication are not necessarily the opinions of the global EY organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.

capitalinsights.ey.com

Helping businesses raise, invest, preserve and optimize capital

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erving Optimizing

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For more insights, visit capitalinsights.ey.com, where you can find our latest thought leadership, including our market-leading Capital Confidence Barometer.

Pip McCrostie

Global Vice Chair Transaction Advisory Services, EY If you have any feedback or questions, please email [email protected]

As M&A activity for 2015 looks set to eclipse the previous highs of 2007 and finally break away from the shadow of the global financial crisis, it’s clear that dealmaking as a route to growth is firmly back on the boardroom agenda.

Deal activity is being driven by disruptive forces, triggered by changing consumer behavior, sector convergence and technology — and our view is supported by FremantleMedia Director of Strategy and M&A, Caroline Murphy (page 10).

We see examples across many sectors — the convergence of automotive and tech is not only leading to driverless, but also web-connected cars. In pharma, the discovery of new drugs is accelerated by increased computing power and advanced modeling in medical trials.

As a result, all sectors have re-engaged in M&A and we are seeing an uplift in the value of deals across a broad range of geographies. In addition, there is increasing focus amongst investors on benchmarking growth relative to competitors. In a global economy where growth is still relatively low, M&A is an increasingly attractive option to accelerate strategic objectives, market share and competitor position.

Although the global deal market appears very frothy, there is evidence to counter claims of it overheating. While deal values are nudging record highs, deal volume remains some way off record 2007 levels and bid-premiums are only on a par with the mid-points of previous M&A cycles. This suggests that dealmakers are acting with relative caution, exercising discipline in selecting the right strategic deals at the right price.

Executives are more confident in the global economy, corporate earnings and attractive interest rates. This is fostering the conditions for companies to make bold M&A moves.

I hope you enjoy this issue of Capital Insights, which explores the expectations of a global M&A market in recovery, breaking free from the shadows of crisis.

shadowsOut of the

capitalinsights.ey.com | Issue 14 | Q3 2015 | 3


Capital InsightsHelping businesses raise, invest, preserve and optimize capital

Q3

2015

20Yahoo

Features10 Q&A: Caroline Murphy, FremantleMedia International

The M&A Director discusses change, content and challenges in media and entertainment.

14 Lights, camera, transactionAs the border between media and entertainment blurs, what does this mean for deals in the industry?

20 Cover story: Tech controlYahoo CFO Ken Goldman on how he intends to steer the internet giant back to the top.

26 Private equity: facing the futureAs PE houses sit on more dry powder than ever before, what does the future hold?

30 Rules of attractionThe future of PE funding is under question as private equity enjoys a revival.

33 How social media is changing M&AAs social media use shows no sign of slowing, how can businesses use social platforms for deal success?

36 Doing your dutyWhat crucial tax considerations need to be made when discussing a deal?

38 Deals down underWith a weak dollar, low interest rates and high asset sales, Australia is ripe for increased M&A activity for the rest of 2015 and beyond.

44 Relative successThere is much that public companies can learn from their family business peers.

48 Capital citiesRapid urbanization presents both opportunities and challenges for dealmakers.

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Accountancy Firm of the Year

#1 EY — recognized by Mergermarket as top of the European league tables for accountancy advice on transactions in calendar year 2014

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On the web or on the move?Capital Insights is available online and on your mobile device. To access extra content and download the app, visit capitalinsights.ey.com

Regulars06 HeadlinesThe latest news and trends in the world of capital, and what they could mean for your business.

08 Transaction insightsKey facts and figures from the world of M&A. This issue: half-year 2015 M&A update.

13 EY on the US After a strong first half of 2015 for M&A in the US, H2 could be even more exciting, says EY’s Richard Jeanneret.

19 EY on EMEIAEY’s Andrea Guerzoni explains why 2015 could be a watershed year for M&A in Europe as companies return to the dealmaking table.

43 EY on Asia-PacificEY’s John Hope speaks to colleagues Charlie Alexander and Marc Entwistle, and FinTechHK’s Janos Barneris about the rapid growth of the fintech industry.

50 The last word Guest columnist Alexandra Reed Lajoux discusses the fallen reputation of financial services.

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HeadlinesConvergence and consolidation help break TMT recordsThe technology, media and telecommunications (TMT) sector topped the global M&A charts in H1 2015. According to Mergermarket figures, the first half of the year saw 1,322 deals announced, worth US$396.5b and representing 22.8% of the global M&A market. Compared with 2014, value increased by 26.1%, while volume fell by 10.4%.

There were three TMT transactions in the top 10 deals for H1 2015, including Charter Communications’ bid for Time Warner, and British giant BT’s US$19b bid for EE. The main drivers of activity in the TMT sector have been consolidation and cross-sector convergence.

It seems that consolidation will continue, as size matters in this sector. Tom Connolly,

Female-friendly family businessesBy their nature, family businesses often tend to have greater focus on inclusivity and longevity — demonstrated in their higher proportion of female leaders. A survey by EY and Kennesaw State University, Staying Power, found that women make up an average of 22% of the top management team at family businesses, compared with 12.9% at global corporates.

The survey also found that 70% of family businesses are considering a woman for their next CEO. And of those, 30% are strongly considering a woman for the top spot. One woman leading a Fortune 500 family business is Campbell Soup CEO Denise Morrison, who took on the role in 2011. When interviewed in 2014, she said: “Diversity and inclusion is a very important part of building a high-performance culture.”

Social mediaIn a few short years, Facebook, Twitter, YouTube and LinkedIn have become a fundamental part of our lives. And the stats are there to prove it:

2.2b Number of social network users worldwide

304mNumber of monthly active Twitter users

968m The daily active user base of Facebook

300The hours of video uploaded onto YouTube every minute

332mThe number of people on LinkedIn

930The average number of connections for a CEO on LinkedIn

Sources: Wearesocial.com; LinkedIn; Facebook; YouTube; Twitter; Statista

For more on social media and M&A, go to page 33.

EY’s Global Head of Media & Entertainment in Transaction Advisory Services, says: “In an environment where you are trying to negotiate the most favorable deals for your business, being a minor player is a disadvantage.”

In a June survey of TMT companies from law firm Reed Smith, 84% of respondents expected there to be more cross-sector M&A in the next 24 months.

For more on the industry, read our in-depth review of the media and entertainment sector on page 14.

This is a lesson that public, non-family companies can learn from their family business counterparts — particularly at a time when only 3.9% of CEOs across the globe are women. As Carrie Hall, the Americas Family Business Leader at EY, says: “Family businesses may offer a path forward for all businesses seeking to achieve gender parity within their leadership ranks.”

To read more about family businesses, see page 44.t

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PE is fighting back As M&A continues to break post-crisis records, private equity (PE) has been conspicuous by its absence. Research from data firm Dealogic reveals that only 5% of deals announced during the first half of this year were PE-backed. This is down from 9% in the same period last year and represents the lowest percentage for 14 years. And figures from Mergermarket for US PE showed that both buyouts and exits were down from a year ago.

Challenges from cash-rich corporates, skyrocketing valuations, more stringent regulations and competition from institutional investors mean that PE firms are having to work harder to get deals across the line. As Jeff Bunder, EY’s Global Private Equity Leader, says: “There’s a competitive aspect to the market, and there’s also a supply-demand imbalance.”

However, the opportunities are there, and the second half of the year may see an upswing in PE activity. Data firm Preqin reported that PE dry powder stood at US$1.3t at the end of H1, the highest amount since records began in 2000.

In addition, a new report from law firm Travers Smith, Calling the shots: The evolution of European PE funding, found that the debt climate is extremely favorable to buyout houses. The survey found that PE sponsors now have a wealth of choice when it comes to financing — indeed, 65% of financing for PE deals in Europe came from alternative debt instruments, such as unitranche and direct lending. With this in mind, PE firms can face the future with renewed optimism. But the overall winners will be those that adapt to this more challenging environment. For more on the future of PE, turn to page 26.

The gloves are offThe hostile deal is back. According to Thomson Reuters’ data, US companies launched 40 hostile campaigns in H1 2015 — double the number for the same period in 2014. The drivers for this activity appear to be consolidation and convergence in sectors such as TMT and pharma and hefty corporate balance sheets. According to Standard & Poor’s, US non-financial companies held US$1.82t in cash and short- and long-term investments at the end of 2014 — 5% up on 2013. Recent unsolicited bids have included drugmaker Shire’s move for biosciences company Baxalta and Mylan’s bid for fellow pharma company Perrigo.

For those companies on the defensive, New York Times Deal Professor Steven Davidoff Solomon has compiled a handy six-point guide on how to “respond to the barbarians at the gate” including “exploring alternatives” and a “just say maybe” defense. You can read the Professor’s full piece by visiting capitalinsights.info and clicking on issue 13.

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Dealmaking dynamiteAs H2 2015 commences, boards and investors are surfing a wave of M&A that shows little sign of breaking. According to Mergermarket figures, H1 2015 saw US$1.7t worth of deals, the highest figure for a half-year period since 2007. This figure compares with US$1.52t for the same period last year — a rise of 11.6%. For more on M&A in H1 2015, turn to Transaction insights on page 8.

Megadeals march onDeals valued at over US$10b were the lifeblood of the 2014 M&A revival. Blockbuster deals, including Charter Communications’ US$78b deal for Time Warner, have continued apace during H1 2015, with 28 such deals totaling US$678.1b, according to Mergermarket figures. This is the highest volume and value for megadeals for any H1 on Mergermarket record.

The future is mobile Corporates not harnessing the power of mobile could be left behind. Research from IT advisory company Gartner found that data traffic will reach 52 million terabytes in 2015 — an increase of 59% from 2014. And this is set to triple by 2018. A poll by UK communications watchdog Ofcom discovered that smartphones are the device of choice for 33% of Britons, while 30% prefer laptops.

Offerings up but values downThe first half of 2015 was a mixed bag for IPOs. According to the EY Global IPO Trends report, there were 631 deals globally — a 6% increase on H1 2014. However, total capital raised was 13% lower. Despite this, Maria Pinelli, EY’s Global Vice Chair for Strategic Growth Markets says: “We do not believe the pattern of IPO activity in 2015 reflects a widespread lack of confidence.”

Rising sun, rising M&A Japan has a real yen for cross-border M&A. According to Mergermarket, Japan’s outbound deals for 2015 so far total US$54b, up 63% from the same period in 2014 and surpassing 2014’s total of US$53.3b. The financial services (FS) sector is the most targeted for outbound deals, with 26.8% of the total. Notable deals outside FS include media group Nikkei’s US$1.3b acquisition of the Financial Times.

TransactioninsightsKey facts and figures from the world of M&A. This issue: Half-year update.


A fter four consecutive quarters of rising deal volumes, H1 2015 saw deal numbers fall for the first time since H1 2013.

Yet values have continued their upward trajectory, with deal values in H1 2015 worth US$75b more than those in H2 2014. This value growth is fuelling positive predictions for the remainder of the year: “2015 is set to be the best year ever for M&A in terms of value,” says EY’s Deputy Global Vice Chair, Transaction Advisory Services, Steve Krouskos. “The first half of 2015 has seen new deal records, with capacity for even further growth.”

Higher values, in spite of lower volumes, can be attributed to a greater number of megadeals. There were 29 deals worth

more than US$10b in H1 2015, compared to 15 in H2 2014. These included several industry-defining mergers as companies consolidate, such as the US$55.5b Kraft-Heinz deal and Nokia and Alcatel-Lucent’s US$15.2b merger.

Even sector spreadsEight sectors recorded deal values of more than US$100b in H1 2015, compared with seven in H1 2014. Technology saw a huge influx of capital, with more than US$200b in deals in H1 2015 compared with US$121b in H1 2014. Contributing to that total was Avago’s US$35b buyout of Broadcom and Intel’s purchase of Altera for US$15.4b.

Value in Asia and EuropeOn a regional level, Asia and Europe have shown deal value increases in H1 2015, despite falls in overall deal volume. This is particularly true in Asia, where deal value increased by over US$100b from H2 2014 to H1 2015. Much of this

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Global M&A volume and value, H1 2012—H1 2015

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came down to two related deals — the merger of Cheung Kong and Hutchison Whampoa worth US$40.8b and CK Hutchison Holdings, spinning off its property business, Cheung Kong Property Holdings, in a deal worth US$34.9b.

In Europe, deals above US$5b made up 46% of total deal value, amounting to US$211.3b — a 46% year-on-year increase in deals of this type. The UK and Ireland were the top destinations for European M&A, leading in terms of both volume and value, with 23.6% and 52.8%, respectively.

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M&A by sector, H1 2014—H1 2015

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“There is so much changing that sometimes it’s hard to keep up.”As part of Capital Insights’ focus on the media and entertainment sector, Caroline Murphy, FremantleMedia’s Director of Strategy and M&A, talks change, content and challenges.

T he TV industry has changed immeasurably in the past five years. Indeed, it’s possibly a misnomer even to label it TV anymore as so much content is now consumed on tablet, smartphone and laptop.

Meanwhile, the likes of Netflix and Amazon have made the old channel-surfing system seem like a relic from a bygone era.

FremantleMedia has been at the forefront of this televisual revolution with interactive shows such as America’s Got Talent, The X-Factor and the global Idols series. The company was also swift to pick up on the growth in mobile gaming when it purchased Canadian company Ludia five years ago.

In this fevered environment, the role of strategy and M&A director is vital in keeping a step ahead of a media-savvy audience that is hungry for content and new ways to watch it. Caroline Murphy has worked in TV for more than a decade and has been witness to these myriad changes. With the recent upsurge in M&A in the sector and the growing convergence between the televisual and the digital, she explains FremantleMedia’s strategy for staying ahead of the competition.

What is the current state of the media and entertainment M&A landscape?It’s been very busy over the past 12 months. There have been a huge number of big deals going down — people merging or buying

each other. UK media company All3Media was bought by Discovery and Liberty; Time Warner and ITV have been making some big bids. [US giant] Viacom bought [the UK’s] Channel 5, and there

was the merger between [global production houses] Shine, Endemol and Core and more recently Zodiak and Banijay Group. There’s been a lot going on. I think we’re going to see it quieten down a bit now because there’s not really a lot more for the big companies to buy up. Now it’s a matter of letting those deals bed down and seeing how they work out.

What is your acquisition strategy?Our acquisition strategy is quite measured — it could be that a great opportunity comes

Now it’s a matter of letting those deals bed down and seeing how they work out.

FremantleMedia


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up, or it could be that we want to be in a key market where we do not currently have a presence. We will look to grow organically where we can, but where we can’t do it quickly enough, we’ll look at acquisitions. All our acquisitions have to make commercial sense though. Growing our scripted and digital pipeline are priorities for us, so we’re looking at those opportunities at the moment. Recent acquisitions and deals include Miso Film and Corona TV [sister company of Corona Pictures] in scripted and increasing our stake in digital native media company, Divimove.

How do you go about integrating companies?When it comes to integration, I don’t think there is a one-size-fits-all approach. We did a number of deals this year, one of the most recent in February 2015 being with Corona TV. It operates relatively independently, it can create and do all the things that it likes to do, but it gets the benefits of being part of the company’s network — other than that it operates as a standalone company. Similarly, we have a company called Ludia in Canada, which is a mobile gaming company. Ludia is a fantastic business, it has just launched the new game for [summer blockbuster] Jurassic World, which is doing very well. It’s a great business and we help it out in all sorts of ways, but we’re not actively involved in the day-to-day running of the business. Then there are other instances where we buy a company and we fully integrate it. This is something we assess on a case-by-case basis.

Valuations are already high and still rising. What do you predict will be the outcome of all this deal activity? A lot of companies have paid huge sums of money for acquisitions over the past 24 months. I’m a little skeptical as I think people have overpaid for things but time will tell whether that is the case or not.

Once these deals have bedded down, over the next couple of years we’ll see the spinning out of new start-up companies, where you’ll have a whole round of people buying each other once again; it’s very cyclical.

It’s a very exciting time to work in television and there’s a lot of potential growth internationally. TV is a fantastic business to be in and personally really interesting because of the quality content we are producing. It’s also a great time because audience behavior is changing so much. There’s continual innovation about different types of content, presenting on different platforms and different ways of using content. There is so much changing that sometimes it’s hard to keep up.

Jurassic World mobile game, Ludia

Acquitted, new scripted content from FremantleMedia International

Britain’s Got Talent, FremantleMedia International

© Miso Film Norge, TV 2 Norge, SVT, Miso Film

©Ludia 2015

© Splash News 2015


What are the greatest changes you have seen in the industry during your career? Digital has been the major change of the last 10 years. Everybody used to watch TV at the same time on a few channels. Then pay TV came along and gave viewers lots more opportunity to watch more content. Digital networks and online platforms have really transformed things. Now people can consume what they want, whenever they want. That has implications for us — you need to make your content accessible everywhere. The fact that people use social media around content, especially the younger audiences, means we need to make sure that people can find our content in places other than TV screens. This is why we have teams of people on Twitter, developing apps, on Facebook, on all social networking sites — you get those real communities around particular shows or particular pieces of content.

What are the challenges that companies in entertainment and media face, and how can they overcome these?I think the big challenge we face, as an indirect result of digital is audience fragmentation. Twenty years ago, you could regularly have 20 million people in the UK watching a TV program. Britain’s Got Talent was a fantastic success this year with over 10 million viewers on a regular basis — but that’s almost unheard of these days.

Audience fragmentation has a number of implications. You need to be where the

audience is. If they’re not watching TV on a Saturday night then you need to be where they will be — whether that’s on YouTube or on Facebook.

Companies these days also need a diverse

content portfolio. While we’ll continue to produce entertainment shows, one area of focus in our new strategy is scripted shows, which have a longer shelf life. A show like Deutschland ’83 [a new cold war drama set among the Pershing Missile Crisis of the 1980s] will still have relevance and resonance for audiences around the world in 10 years’ time.

The industry sees a constant battle between content and distribution. Why is content so important? Content is still king. Distribution is important and innovations in distribution platforms mean that the way people can watch content is ever-changing. But people don’t watch a platform — people get Netflix and Amazon because they’ve got really great content on them. When Netflix started investing in new content like House of Cards and Orange is the New Black; that was really what put it on the map. So, yes, content is absolutely king.

For further insight, please email [email protected]

I think the big challenge we face, as an indirect result of digital is audience fragmentation.

Britain’s Got Talent, FremantleMedia International

Modus, new eight-part series, FremantleMedia International

© Splash News 2015

©Miso Film 2015, Photo Johan Paulin

Richard Jeanneret is the Americas Vice Chair of Transaction

Advisory Services, EY.

EY on the US

Richard Jeanneret

13

Technology, life sciences, health care and financial services are the sectors to watch as we enter H2 2015 in the US. The improving

economy, sustained low-interest-rate environment and strong US dollar is continuing to help drive a growing number of acquisitions.

The first six months of 2015 saw 31 deals announced with a value over US$10b, compared with just 18 in the same period in 2014, according to Dealogic data — and the highest number ever announced for the first half of a year.

Technology and life sciences saw the greatest increases in deal volume in H1, cementing their places among the sectors that are going to be the most interesting to watch in the remainder of the year.

The life sciences and health care industries continue to abound with transformative deals driven by a push for consolidation and convergence. As both sectors face increased competition in a customer-driven marketplace, life sciences and health care companies will both look to strengthen their positions and grow through M&A activity.

The life sciences sector, which claims 4 of the 10 largest US deals for the year so far, continues its two-year streak of active dealmaking. US transaction volume is up 22% from H1 2014, and deal value is up 45.2% to US$236.1b, compared with US$162.6b from the same period last year.

Many pharmaceutical and medical technology companies are growing at a slower rate than the industry overall and risk being left behind; the last two years

Building from a strong start, the second half of 2015 is looking to surpass the first, with even more M&A activity predicted for the US.

have shown that one of the most effective ways for companies to keep pace with business growth is through M&A.

The financial services space has also seen a boom in deal values over H1, with banking and capital markets M&A deal value spiking to US$49.8b, a huge 240% increase on the deal value total from the first half of 2014. While banking and capital markets deal volume dropped off by 5.6%, this precipitous rise in value signals a pickup in the sector that will likely continue through the rest of the year.

US deal pipelines are full, and companies are exuberantly seeking assets to grow and transform their businesses. After a period of intense focus on cost control and organic growth, CEOs are coming off the bench and doing significant deals, but we are seeing a more disciplined approach to the deal frenzy than in previous boom times.

Positive macroeconomic indicators, resurging confidence, shareholder pressure and cross-border momentum all combine to create the perfect recipe for a strong deal market set to continue throughout the remainder of 2015, as companies seek to transform their businesses. Expect second quarter earnings challenges to be a catalyst for inorganic growth as well.

For the past several years, we have been waiting for companies to transact in order to beat out the competition and grow, and, now more than ever, it is imperative that companies manage their capital portfolio for growth before the good assets are all gone. The second half of 2015 will be exciting to watch as deal momentum in the US continues.

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Lights, camera, transactionThe media and entertainment sectors are becoming ever more entwined. Capital Insights explores the impact that this is having on M&A.

Confidence is key for any industry, and none more so than the media and entertainment (M&E) sector. The good news is that confidence among executives about M&A in the sector is at its

highest level for four years, according to the latest EY Global Capital Confidence Barometer (CCB), published in May.

Some 50% of the respondents to the CCB survey said that they expected to pursue acquisitions in the next 12 months — an increase of 14 percentage points on the same time last year. And 89% said that cross-border M&A opportunities were on their radar.

Last year saw both volume and value at a five-year high. According to Mergermarket figures, there were 666 deals in the sector, valued at US$76b. So it is unsurprising that H1

2015 — with 262 deals, valued at US$26b — did not quite reach those lofty heights.

However, according to Will Fisher, EY Media and Entertainment Transaction Advisory Services Leader for the UK and Ireland, there are reasons to be optimistic about the market in H2 — not least of which is the fact that his team’s deal pipeline has never been so full.

His confidence is borne out in EY’s CCB, which shows that deal numbers in the M&E pipeline have leapt in the past six months, with 29% saying they have five or more deals on the go, up from 16% in October 2014.

Investing

Optimizing

To only be a broadcaster or a wireless company or a telephone company is just not enough these days.


Lights, camera, transaction

“There was perhaps a pause for the UK election, but since then it has really accelerated,” says Fisher.

“The UK market is particularly hot at the moment. US businesses are looking at Europe because it is harder to find growth in their domestic market. The UK is attractive — it has content that can travel to the US and internationally.”

Tom Connolly, Global Head of Media and Entertainment Transaction Advisory Services at EY, agrees with this assessment. He believes that a few specific factors have led to a pause in the market.

“There is the political turmoil, in Greece, for instance,” he says. “But there is also the movement in the US toward a Title II-type regulatory environment for cable and broadband providers.” This refers to the Federal Communications Commission (FCC) decision to treat the cable and broadband industry like a public utility, enforcing net neutrality.

Connolly believes that such factors, along with US media multinational Comcast’s abandonment in April of its proposed US$45b merger with Time Warner

Raising

Cable, have “caused people to pause, take a step back and reassess the landscape.”

However, this has not slowed the market entirely. There have been a number of big deals in the first half of 2015, including Verizon’s successful US$4.1b bid for AOL.

And as we enter H2 2015, as predicted by EY’s latest M&E CCB, consolidation, convergence, content and cross-border deals will drive M&A in the sector.

Come together“There’s always consolidation,” said Barry Diller, Chairman of US media giant IAC/InteractiveCorp, in a recent

interview. “Consolidation is the nature of things.”

Indeed, some of the most valuable players in the M&E space — such as Disney with the purchases of Pixar, Marvel and Lucasfilm — are products of consolidation in some way.

“In an environment where you are trying to negotiate the most favorable deals for your business, being a minor player is something of a disadvantage. I think there will be a continued drive to get economies of Fr

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Media and entertainment in numbers

50%Of companies expect to pursue acquisitions in the next 12 months

29%Of companies have more than five deals in the pipeline

89%Of companies are looking across borders for M&A

77%Of M&E executive are confident that the state of the global economy is improving

Top M&E M&A destinations1. US2. UK3. Netherlands

4. China5. Australia

Source: EY Media and Entertainment Capital Confidence Barometer May 2015.

In the spotlightCapital Insights reveals the six key factors that will put your company ahead of your rivals in the M&E dealmaking arena.Focus on the end-user. “Ask yourself how, when and why customers are going to consume or access the content,” says EY’s Fisher. “Companies need to understand the technologies that are emerging, and keep an eye on how they will move. They need to be less worried about embracing a technology and then finding out what that means for their content. Instead, they must be flexible to find the technology to suit their content.”

Don’t stifle innovation. When a large media company takes over a smaller, more innovative business, culture can present a challenge. “Fast-growing disruptive companies have often got where they are by ignoring the rules of the game and by operating as aggressively as possible in order to grow,” says EY’s Connolly. “When these young companies become part of a bigger company, they have to adapt, but you do not want to handcuff them.”

Keep talent happy. Identify key employees at the target company, and ensure that they are fully motivated and incentivized post-acquisition.

Get the financial structure right. When M&E businesses acquire smaller, and arguably more innovative businesses, it is common to take a controlling but not 100% stake. And earnout deals, whereby the final price paid for the business is dependent on its post-acquisition performance, are also becoming popular.

“We have seen the earnout structure, which had become less prevalent, coming back,” says Fisher. “A way of bridging the gap between the seller’s and buyer’s perception of value is with earnouts. It also motivates the core talent and founders to stay in the business longer.”

Think about integration from the start. When asked about the biggest obstacles to integrating an acquisition in the

technology, media and entertainment space, 31% of respondents to law firm Reed Smith’s recent Wired Up survey pointed to the difficulty in creating synergies once the deal is done. And 18% said that effecting actual transformative change is also a challenge.

Integration planning must start during the due diligence process. “An effective integration plan needs to be identified, and leaders should be working together well before closing occurs,” says Herb Kozlov, Reed Smith’s Global Corporate Group Head in the Wired Up report.

Strategic thinking. Be clear about why you are buying the business. Particularly if you are a business from outside the core sector looking to converge.

On the webFor more, read the 12th edition of the Media and Entertainment Capital Confidence Barometer at www.capitalinsights.ey.com/M&E


scale and deploy capital to get the highest returns,” says Connolly.

FremantleMedia’s Director of M&A and Strategy Caroline Murphy doesn’t always agree. “We don’t necessarily subscribe to the idea that bigger is better ... I’m not convinced that some of these recent deals will bear fruit.”

The nature of the megadeals announced in H1 in media distribution shows that consolidation is on the corporate agenda, and Murphy sees this as part of the industry’s natural cycle; consolidating, growing and divesting in turn.

However, in the US, the FCC and market forces will determine how much consolidation actually takes place. The FCC is currently looking at the proposed tie-up of cable telecoms companies Charter Communications, Time Warner Cable and Bright House Networks. And the regulator also reviewed AT&T’s US$67b takeover of satellite television company DirecTV, which completed on July 24 this year.

Content versus distributionWhen it comes to winning customers, content may still be king, but distribution is very much a kingmaker. These two complementary yet conflicting bedfellows have been competing for decades. However, alliances are being drawn up that could cause repercussions in the market.

Content seems to hold the upper hand — because distribution technology, as it matures, becomes easier to replicate. “Technology is being less used as a differentiator,” says Fisher. “As the technology has become better understood, the focus has swung back to content.”

Amazon, worldwide, and BT in the UK are using content to sell their distribution

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platforms as the technology behind those platforms becomes more commonplace. Meanwhile international cable company Liberty Global increased its stake in ITV, the LSE-listed UK commercial broadcaster, to 9.9% in July. But according to Fisher, uncertainty may be delaying further deals in Europe.

“If there is uncertainty, that risk has to be priced in. So people are not keen to sell,” he says. “These are not distressed sales. So where you have unwilling sellers and uncertain buyers, they don’t have to happen.”

Convergence on the cardsOne of the current buzzwords in the M&E sector is “convergence” — the joining together of businesses from across the entertainment, media and communications sectors. And it is something that is bringing another cash-rich and acquisitive sector into the mix — technology.

Wired Up, a report published in June by Mergermarket and law firm Reed Smith, revealed that there were US$34.5b of convergence transactions last year, up 11% on 2013. Furthermore, 84% of respondents to the survey expect to see more convergence deals in the next two years.

“Convergence is likely to be one of the main drivers for M&A activity in the next period, whether it is companies looking to find add-on products to improve their platform or to enable them to deliver different products in different ways as a means of accelerating their growth,” says James Wilkinson, a Reed Smith partner who specializes in Technology, Media and Telecommunications. “To only be a broadcaster or a wireless company or a telephone company is just not enough these days.”

Convergence megadeals in 2014 included:• Gaming technology company Scientific Games

Corporation’s US$5b takeover of gaming entertainment business Bally Technologies in the US

• French advertising and PR group Publicis’ US$3.3b takeover of US tech company Sapient Corporation

• Media group Daum Corporation’s US$3.2b takeover of tech business Kakao Corporation in South Korea

The Wired Up survey also revealed that according to sector business leaders, the main driver of the convergence trend is “media companies looking to improve their technology platforms and delivery tools” — identified by 71% of respondents. This was followed by “companies from the media, entertainment and technology sectors looking to become conglomerates” — identified by 65%.

While convergence is by no means a new phenomenon, it is one that businesses cannot afford to ignore. “Convergence

Local knowledge is crucial when investing in the TMT sector, says CVC Capital Partners’ Lorne Somerville.

A t CVC Capital Partners, we have significant investments in cable and broadband media businesses: Arteria Networks in Japan, Hong Kong Broadband Network (HKBN), Link Net in Indonesia,

Operator R in Spain and Sunrise in Switzerland.M&A is increasingly dominated by strategic consolidation plays. PE

is having to be more selective than usual to find a business, and develop a business case, that can generate the right returns in this environment. Regulators have started to be more understanding. So for now, we will see more strategic opportunities.

Strategic cross-sector and in-market consolidation will be particularly prevalent among European corporates in the sector. The healthy deal flow in the US involves significant PE secondary buyouts, with selling firms buoyed by exit multiples. Convergence of technology and content on platforms is a feature of Europe and the US. But, elsewhere, a variety of dynamics are at play.

Hong Kong is a hyper-competitive market, with pricing near the lowest in the world and broadband speeds near the fastest in the world. This presents an immense value proposition. It is definitely an unconverged market and more of a best-of-breed market. The consumer takes broadband infrastructure from one place and content from elsewhere.

We invested in Indonesian cable company Link Net in 2011, which was followed by a period of organic growth through the rapid rollout to customers in Jakarta, Bali and Surabaya. Last year, Link Net listed on the Jakarta stock exchange, and we retained an approximate 30% stake.

Link Net was a huge greenfield company. And rather than look at the usual metrics, we had to get out in the field to see that they could roll the business out. The success of the investment also involved the recruitment of an effective sales team, largely from Citibank’s credit card team.

Understanding local markets is critical. Youngsters’ love of MTV worldwide and the global popularity of the BBC’s wildlife documentaries may imply that the M&E industry is, globally, a level playing field. But each market has idiosyncrasies as to how content is delivered and consumed. This presents an M&A opportunity for PE. You don’t see US corporates moving into these markets and imposing their corporate culture. And that is the opening for PE, as an importer of best practice and great management, combined, in our case, with our local presence.

Viewpoint

Lorne Somerville is Partner and Head of the TMT team at CVC Capital Partners — a global PE firm with US$60b of assets under management.

M&A in the sector is increasingly being dominated by strategic consolidation plays.

Young companies are hungry for capital and they need larger corporates to get where they want to be. And larger corporates want innovation.


is generating a continued drumbeat of buying pressure,” says William Doran, Corporate Partner at Reed Smith. “[This is particularly true] for firms that need to reformulate their strategies to stay competitive. These firms feel the need to acquire because there is often not enough time or ability to develop internally.”

Convergence in the M&E sector is being driven by multiple factors, from rapid consumer adoption of new technology to disruptive innovation. But there are also challenges that need to be overcome,

particularly for companies that are going outside of their comfort zone.

“One major challenge for cross-sector acquirers is understanding a new area of business,” Gregor Pryor, a partner

at Reed Smith, explains in the report. “It’s tough, for example, educating a tech company about music copyrights. Some big music companies may get seduced by the idea that Apple or Google are going to change their commercial paradigm in the next five years. However, for a big tech company, the biggest challenge is understanding the space.”

Cross-border deals Cross-sector M&A is still a nascent trend. But cross-border trading is expected to be one of the major drivers of M&A over the next 12 months to two years.

The Wired Up report revealed that 57% of the technology, media and entertainment (TME) companies surveyed say that their next acquisition is most likely to come from outside their home market. However, challenges persist, including growing regulatory pressures, the European Commission’s view to break down territorial borders, and the regulatory burden on buyers in US deals. One way that companies are trying to tackle these challenges is by exploring possible joint ventures (JVs) or minority stakes.

“Foreign direct investment restrictions in the media are common, and so we see a lot of JVs or partnerships,” explains Connolly. “We are starting to see development of over-the-top services [i.e., the delivery of content over the internet] by Netflix, Google and Amazon. Their original focus was in the US, but they are expanding.”

While it has been a slow start to 2015, the pipeline is now primed, and the four C’s — convergence, consolidation, confidence and cross-border deals — of the M&E dealmaking environment should see the sectors reach the end of the year on a high note.

“The number of these deals is increasing,” says Connolly. “Young companies are hungry for capital, and they need larger corporates to get where they want to be. And larger corporates want innovation. The deals need to be structured so that it works for everybody. The winners will be those that get it right.”


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Media and entertainment M&A, 2010–H1 2015

Deal volume Deal value

Media and entertainment M&A, target countries, 2010–H1 2015

Value:US$129.37b

China

Deals:35

Value:US$44.59b

USA

Deals:71

Value:US$3.78b

UK

Deals:22

Value:US$13.84b

Canada

Deals:8

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76bIn 2014, there were 666 deals in the sector, valued at US$76b(Source: Mergermarket)

US$

26bThe first half of 2015 saw 262 deals, valued at US$26b(Source: Mergermarket)

Andrea Guerzoni is Europe, Middle East, India and Africa (EMEIA)

Transaction Advisory Services Leader, EY.

EY on EMEIA

Andrea Guerzoni

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Deal value for the first half of 2015 is the second highest on record at US$2.27t, just below the H1 2007 value of US$2.59t.

The numbers would suggest that we’re returning to where we were eight years ago.

One striking difference, however, is the percentage share of the deal value originating from Europe. In 2007, Western European companies acquired assets valued at US$1.18t, 32.3% of all global M&A, and only slightly behind the US$1.19t (32.6%) of deals done by US-based companies.

There was a steep decline in acquisitions by both European and US companies immediately following the global financial crisis, but US companies were far quicker to realize that M&A was a strong route to growth during a downturn. In 2015 so far, US companies have acquired assets almost equal to the value of the deals they did in the whole of 2007 — US$966.1b, according to Mergermarket figures. That equates to 42.2% of global M&A.

In contrast, European acquirers accounted for only 17.8% of global M&A in 2015 (US$408b). China, which accounted for 1.6% of global value in 2007 is responsible for 10.1% so far in 2015. In 2007, Western European companies acquired more than twice as much in assets as companies from Asia-Pacific. In 2015, we can expect Asia-Pacific companies to acquire 40% more assets than their European counterparts.

Europe looks set to emerge from the most severe downturn in a century and achieve sustained growth. We should expect companies to re-engage with dealmaking.

This year could become the highest on record in terms of global deal value as the resurgence of M&A has further accelerated in the first half of 2015.

Despite this, according to Oxford Economic Forecasting, growth across Europe is set to be lower than the US, China and the Asia-Pacific region for at least the next decade. Therefore, it’s vital for the future health and competitiveness of European companies that dealmaking is on the agenda. With Western European GDP expected to average 1.7% growth for 2015–24, against 5.5% for China and 2.6% for the US, European companies should look to secure higher growth outside their own region. The search for innovation will also be a significant part of the M&A story.

Europe’s strong historical, cultural and trading relationships with other regions supports dealmaking, but companies are not taking full advantage of that position. The missing ingredient is C-suite confidence. With a respite to the recurring Greek drama seemingly in place, and encouraging economic data, especially in Germany and Spain, confidence should return. As growth and outlook strengthens, that confidence should translate into deals.

Expect to see a resurgence of intra-European consolidations especially in industrials, health care, consumer products and TMT, and bolder moves outside the region, especially into the US and key markets in South America, Africa and Asia.

Relatively speaking, Western European companies have been absent from the deal table in recent years. Given the sustained recovery in M&A we are experiencing, it’s likely that if European executives aren’t buying, companies from other regions will gladly take their place.

Slow but steady for European M&A recovery

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Tech controlSucceeding in the hyper-competitive online space is one of the toughest challenges for businesses, especially for a company that has fallen from grace. Yahoo CFO Ken Goldman explains how he plans to help steer the internet giant back to the top.

Few people have had as much influence over Silicon Valley’s array of technology companies — and for such a lengthy period — as

Ken Goldman. He has worked in finance functions in the Valley for more than 30 years, serving as a CFO for more than 25 of those 30. And his influence spreads far beyond his current company, Yahoo.

“There are probably 15 to 20 CFOs in the Valley at the moment that I hired out of school for me and my companies,” he says. “I really enjoy hiring young talent — whether from graduate or undergraduate schools — mentoring them, promoting them quickly and giving them visibility and responsibility early on in their careers.” Goldman knows about taking on responsibility early. At the age of just 34, he became Chief Financial Officer of VSLI Technology, a semi-conductor firm, taking the company public that year.

Three years into his tenure at Yahoo, he is calling on his vast experience to steer one of the marquee names in tech back to glory. And for Goldman, Yahoo and the

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wider industry, this means refocusing on the fundamentals of finance.

“Frankly, we got away from it,” he says. “In the go-go days of the late 1990s, we got away from the core CFO job. That’s why companies got into trouble.”

Laying foundations When Goldman was hired by the then-new Yahoo CEO Marissa Mayer in 2012, the company had endured a tough start to the new millennium. The dot-com bubble burst and the company’s share price dropped from over US$100 at the start of 2000 to US$16 per share 12 years later. Mayer herself was Yahoo’s fourth CEO in just over three years. Goldman understood the need for calm.

“The last thing the company needed was for me to come in and say, ‘I know it all, and we are going to change a bunch of stuff to suit my needs,’” he says. “I spent the first 90 days getting a sense of the company and understanding things we had to work on.”

After surveying the landscape, Goldman found that his main priority was to establish

clear business processes. “In terms of doing things that could make a difference, one of the first I remember — and it’s something that seems very mundane — was the approval matrix,” says the CFO.

“I’m a detail-oriented individual, so I want to make sure I’m reviewing a number of expenditures. Just making sure we had the approval matrix, spending time on creating it and seeing what each of us could authorize and approve, ensured we managed our processes here.

“We also created our Capital Authorization Review Committee, where all the key players get together and review our capital authorizations on a weekly basis.”

Another priority was to refine revenue measurement processes. “We worked closely on creating better revenue metrics — by product, by region and by advertising product. We created it so that we had daily metrics — we didn’t have those before. Having the daily, weekly and monthly metrics gave us the knowledge on a regular basis about how our business is working.”

Goldman also emphasizes the importance of reviewing revenue and capital, a process that was previously missing. “We collectively created revenue review meetings,” he says. “We also have weekly deal review meetings. So now we have a regimented approach to reviewing deals and partnerships as well as potential acquisitions.”

Tips for successKen Goldman’s top advice to CFOsAvoid complacency. What occurs at a lot of companies is hubris. I’ve been at firms where everything was going up; however, we let hubris affect the team and missed some of the key trends going on. Avoiding disruptions is important.

It’s not about you. Part of the job is giving the CEO real advice. For that, you need to create processes, procedures and reporting mechanisms tailored to the way the CEO wants to run the business. So we’re creating systems here for the way [CEO] Marissa Mayer wants to run it, not the way I want to run it. You have to create the systems and teams that support the industry you are in and the CEO you work for.

Get to the bottom of the business. One thing I remember with the first company I took public is the business model. lt’s vital to get the business model right early. At Yahoo, we thought long and hard about the business model. How do you make revenue? How do you make money? What are the drivers of that? If you don’t understand the fundamentals of the business model, you’ll never answer those questions.

First, we get the right people in place. Second, we drive the right products. Third, we drive the right engagement. From this, we can drive revenue growth.


Key priorities With new processes in place, Goldman was able to focus on growth. And the CFO is clear on what is needed. “I’ve been in technology for going on 40 years, and technology value accretion is all about revenue growth,” says the CFO. “It’s that simple.”

By Goldman’s own admission, Yahoo is still catching up. “We’re not growing as fast as we want, but we’re very focused on

putting the pegs in place so that we can grow,” he says.

How will Yahoo achieve sustainable growth? “It comes down to something I call the wheel of fortune,” says Goldman. “First, we get the right people in place. Second, we drive the right products. Third, we drive the right engagement. And from all of this, we can drive the

revenue growth.” To secure growth, Yahoo is focusing in particular on what it calls “mavens”: mobile, video, native advertising and social. These make up roughly one-third of Yahoo’s revenue, and as Mayer said in an earnings call earlier this year, they are “core to [Yahoo’s] growth.”

Another priority for Goldman is to complete the spin-off of Yahoo’s holding in Chinese online market company Alibaba. Yahoo paid US$1b for 40% of the company in 2005. It sold under half of that stake back to Alibaba for US$7.6b in 2012. And in 2014, it sold a further 8% of Alibaba for

US$5.1b. Yahoo has already announced it is in the process of selling its remaining 15% stake in the company — valued at US$40b.

“We need to accomplish that [spin-off],” says the CFO. “That’s unique to us — a multibillion-dollar asset that we were spinning off once we were able to. ... But the first fundamental, and fundamental to being a tech company, is creating growth.”

Core focus As Yahoo refocuses its growth metrics toward mavens, the wider company’s makeup has also changed. In 2014, Yahoo closed 15 offices and began retiring more than 75 products and services. Goldman believes that such quick rationalizing is necessary in a fast-developing online sector. “Things can happen very fast,” he says. “You have to be able to work around. We have to ask what the core markets are.”

Part of the strategy focused on winding down Yahoo’s ventures in places where there was not a large enough presence to warrant a physical office.

“We looked at offices where, frankly, we don’t have critical mass in terms of people,” says Goldman. “For example, we love Jordan, but it didn’t make sense to have customer service in Jordan for us ... There were a number of places where we just didn’t have critical mass.”

These actions are part of a drive to centralize Yahoo by bringing key talent and core functions closer to the company’s headquarters in Sunnyvale, California.

“One of the things Marissa said last year was that whatever is most important to Yahoo should be brought close to corporate headquarters,” says Goldman. “So in Sunnyvale today, we have the core functions of search and mail and so forth. We wanted to make sure the core functions are close to the center of gravity. We wanted to emphasize what we really are, and what we are is these various products.”

1994 19961995 19991997

Yahoo goes public, raising US$33.8m from its IPO.

Yahoo becomes incorporated and raises approximately US$3m in two rounds of venture capital funding.

Stanford University students David Filo and Jerry Yang set up Jerry and David’s Guide to the World Wide Web in March. They rename it Yahoo in April.

Yahoo makes its first billion-dollar acquisition, buying internet radio service

provider Broadcast.com for US$5.7b.

Yahoo makes its first acquisitions, buying search engine Net Controls in September for US$1.4m and Internet directory Four11 in October for US$92m. Five more acquisitions follow.


Working with shareholders While managing all of these changes, Goldman has had to contend with vociferous activist investors. Last year, investment management firm Starboard Value LP asked the company to combine with fellow internet business AOL.

The CFO emphasizes the importance of allowing investors to voice their opinions. “Sometimes Marissa and I will go visit investors and just listen,” Goldman says. “We don’t have a new story to tell, we just want to do an outreach and ask: ‘What [do] you think about us?’.

“[But] you have to be careful,” the CFO adds. “The most important thing is the work mixture — you have to spend most of your time on the fundamental parts of the business. I will tend to meet with the analysts on an exceptions basis, and we attend a number of tech conferences, do a number of fireside chat Q&As around them, as well as investor meetings.”

Talent spottingGoldman’s strategy of buying companies for their talent, rather than necessarily for the company itself, has helped Yahoo accelerate development in areas where it was lagging. “Frankly, we were behind in mobile. We had very few engineers working in mobile. So what we did was acquire a number of folks through [acquisitions] — what we call talent acquisitions. [These involved] relatively small payments, but allowed us to grab up to 25 people at a swoop, to accelerate the

process as opposed to one-off hiring.” Back in 2013, the acquisitions of start-ups Astrid, GoPollGo, MileWise and Loki Studios saw Yahoo add 22 mobile-focused employees to its payroll.

Product placement Away from smaller talent acquisitions, Yahoo’s M&A strategy is simple: “We only acquire companies, technologies, people or products that are consistent with or complementary to our business.”

Yahoo has recently made three large deals that Goldman says “moved the needle” in terms of size, and were done with mavens’ growth in mind. In 2013, it purchased social media website Tumblr for US$1.1b. One year later, it acquired mobile analytics firm Flurry for US$240m. And later in 2014, it bought video advertising platform BrightRoll for US$640m.

“If you look at the Tumblr deal, that was part of our strategy to drive in social. The BrightRoll acquisition was consistent with our video strategy. Essentially, we look at where the market is going, and we look at acquisitions that would help us to prepare and accelerate our progress into those market areas.”

That acceleration is key. According to internet analytics firm comScore, BrightRoll is the highest-ranked online video advertising property in terms of US population reach, while a May 2015 study by GlobalWebIndex found that Tumblr was the second fastest growing social network, with a 94% increase in active users in 2014.

The CFOKen GoldmanAge: 66

CFO since: October 2012

Educated: BS in Electrical Engineering from Cornell University and an MBA from Harvard Business School.

Previous positions: CFO of Fortinet, SVP Finance and Administration and CFO of Siebel Systems, CFO of Excite@Home, Sybase, Inc., Cypress Semiconductor and VLSI Technology

YahooFounded: 1994

Employees: c.11,000

Countries: offices in 25 countries

Market capitalization: US$30.61b

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2004 2005 2005 2008 2012

Yahoo rejects takeover offer of over US$44b from Microsoft.

Yahoo pays US$1b for a 40% stake in Chinese online marketplace Alibaba.

Yahoo names Marissa Mayer as CEO.

Yahoo drops Google-powered search results and launches its own web crawling algorithm using technology from 2002 acquisition of Inktomi.

Yahoo and Microsoft pursue unsuccessful merger discussions in 2005, 2006 and 2007.


Smooth integrator One challenge posed by acquiring a large number of companies — Yahoo has acquired more than 50 in the last three years — is ensuring that the integration process is as smooth as possible. For Goldman, this means getting the target’s key stakeholders on board, giving them responsibility and ensuring that the target is not pummeled into the acquirer.

“You have to be subtle,” says the CFO. “For example with Tumblr, the thing we did not want to do was destroy the culture and just ‘smush’ them in. You want to make sure that they keep their identity.”

Ensuring that the original owners remain in charge of the target firm helps to keep this identity. “I feel very excited that [founder] David Karp is still running Tumblr. We have the same folks running BrightRoll and Flurry as well. They’re here, and they are all active members of our management team.”

Yet despite ensuring this entrepreneurial spirit is retained, the CFO is also keen, where possible, to spot potential optimization

points in the integration. “In most cases, we’ve kept Tumblr separate, with separate facilities and so forth. But we have recently merged the sales group with our own,” Goldman says. “We believe we can get leverage out of the sales group, which is why we merged it. We are looking at some of the ways we can rationalize back-end costs and data center costs.”

For Goldman, it’s all about finding the right balance. “We want to make sure that the core folks — the product folks, marketing folks, engineers and senior team — are driving the business. We don’t want to lose that entrepreneurial environment, but we want to get some of the benefits [of] integrating those back-end functions.”

Spending wiselyFor Yahoo, capital allocation is based on the potential effect on the balance sheet, Goldman says. The company’s focus on smaller acquisitions helps with this aim. “We look at acquisitions that are what I would call ‘bite-sized,’ so that we can digest them in a

Today’s CFOYahoo’s Ken Goldman outlines his thoughts on what makes a CFO in 2015.There are many roles the CFO has to play today. Part of that is to ensure the sanctity of accounting — you can never forget its importance. You also have to make sure you have the right systems, processes and procedures in place. Alongside that, you have a number of functional roles, making sure you collect your accounting, your quarterly close, your treasury function and so on.

On top of this, the CFO has become more of a leadership position. When I first

started, the CFO might have been some sort of an afterthought member of the team, which it isn’t now. When I went to work at Siebel Systems — and I remember this distinctively — I didn’t tell them what I wanted for compensation, I just said: “I want to be in the top five.” I wanted it to reflect the importance of the role. The CFO now also acts as a good sounding board for the CEO. We don’t have an axe to grind, we don’t have an agenda, so part of the job is calling it how it is.

On top of this, there is much more of an emphasis on the CFO to tell the story of the company — investor outreach has become much more important.

However, while the job has changed in some respects because of its increased significance, some of it hasn’t. It’s still about making sure the accounting, the processes and the budgeting is done right. You cannot delegate any of these things — you have to do them internally. These are critical aspects to the job.

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For the first time since May 2011, Yahoo sites get the most monthly visitors among internet properties with 196.5 million unique visitors.

Yahoo pays US$1.1b for social network Tumblr.

As Alibaba goes public, Yahoo sells a further 140 million

shares in the company, pocketing US$9.4b.

Seven years after spending US$1b on a 40% stake, Yahoo completes its first share repurchase agreement with Alibaba for US$7.6b.

Yahoo rebrands with a new logo and image.


reasonable way,” he says. “The largest one we’ve done is Tumblr, which was US$1.1b. BrightRoll was about half of that. With the smaller ones, it becomes a ‘talent and tuck-in’ approach, which makes them easier to rationalize.”

Yahoo has also been active in buying back its stock, adding US$2b to its share buyback program in March. “From the beginning of 2012, we’ve bought back something like US$10b of our stock.”

The rationale is simple: “We look at the intrinsic value of our stock. And if we can buy it at a price below that, then we’re very interested,” he says. “There was a period when Alibaba was private, and we had to create a value that we thought was fair. We feel very good about the capital allocation in buying back our stock over the last three years.”

Staking your claim The decision to measure revenue based on mavens is indicative of how much the internet has changed. And while Goldman acknowledges that there are companies operating in similar areas, he believes Yahoo represents something slightly different.

“We have competitors in different spaces,” says Goldman. “In sports, we have ESPN, in finance we have Bloomberg. This is what separates us from the likes of Facebook, Twitter and LinkedIn — they are primarily user-generated content-based companies. We have our own content. We have some similarities. Obviously, we have search,

mail — but I think of them as peer companies.”

Yahoo embraces being in various spaces as it continues to invest along the lines of its mavens-driven strategy. For example, in June, it won the rights to partner with the National Football League (NFL) for its first global live stream, due to broadcast in October. This opportunity enables Yahoo to leverage its mobile and native advertising services. “That’s really important to us — it’s video, it’s social, and we’re putting that on mobile,” says the CFO.

The move to mobile represents a key shift away from Yahoo’s dependence on its legacy desktop business. But while the talent acquisitions and conventional M&A have helped, Goldman admits that there is still some way to go.

“We’re roughly about a third of the way down the road,” he says. “Obviously, PCs aren’t a growth market. So the best you can do is to stabilize that while getting new areas, such as video and mobile, growing. We’re making good progress there. Five years from now, it could be two-thirds mobile and one-third desktop, but we’ll see.”

The strategy appears to be paying dividends, as Yahoo’s Q2 2015 results show mobile revenue was up 54.6% year-on-year, to US$252m. Although on the right path, Goldman knows that there is still a long journey ahead for Yahoo if it is to reclaim its place among the top echelons of tech. Yet he believes that through financial organization, controlled acquisitions and strategic realignment, it can get there.

“Yahoo is a [company] that people think highly of, and I felt it was worth a lot of effort to get it back to where [it was]. People really do use us in their daily lives — whether it be sports, finance, news, weather or email. It’s amazing how many people use and see us on a daily basis.”

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Yahoo launches Livetext, a live video texting application.

Yahoo’s stock price breaks US$50 in November, the first time in 14 years.

Yahoo announces acquisition of shopping

site Polyvore.

Yahoo partners with Yelp, Inc. to boost its local search results to better compete with services such as Google.

Yahoo announces it will spin off its remaining 15.4% stake in Alibaba.


Private equity:

A fter breaking the exit record in 2013, PE-backed deals once again surpassed expectations in 2014, raising US$109.9b

across 211 offerings. Thanks to years of rising stock markets, fund managers could sell portfolio investments, returning record levels of cash to investors.

On the fundraising side, 977 PE funds closed in 2014, raising a total of US$486b, according to Preqin. Values are roughly on par with 2013 figures, but commitments are being shared between fewer managers, as investors become more selective.

Managers are now sitting on more dry powder than ever, with research firm Preqin estimating US$1.2t at their disposal. But prices are rising, and 2015 deal activity is slipping. In the first half of the year, PE firms

invested in 247 deals in the US, valued at US$33b, a 26% decline in value compared with H1 2014.

Fewer large deals is one reason for decline — the number of US$1b-plus deals announced in the first four months of 2015 fell 23% compared with 2014. In April, PE firm Permira and Canada’s Pension Plan Investment Board took control of US-based Informatica in a deal valued at US$5.3b, the largest to date in 2015. But PE needs more large-scale deal flow.

“When you have between US$10b and US$20b to deploy, you have to focus on larger deals — and there aren’t many available,” says Jeff Bunder, EY’s Global Private Equity Leader. “So there’s a supply-demand imbalance.”

Competition on all sidesBunder adds that, on top of replenished funds vying for deals, trade buyers have begun to renew their M&A strategies, going head-to-head with PE firms. Also, some investors who would traditionally have committed to funds are now directly acquiring stakes in companies. Canada’s Alberta Investment

facing the

Private equity houses are sitting on a huge amount of dry powder. But tougher regulation and stiffer competition mean firms must evolve to succeed.

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Private Equity acquired risk consultancy Environmental Resources Management from buyout firm Charterhouse for US$1.7b in June. Notably, the sale was made off-market.

“New players, such as sovereign funds, Canadian pension funds and family offices, are jumping into the market and competing with traditional PE players like us,” says Dominique Gaillard, Managing Partner and Head of Direct Funds at Ardian, a France-based PE firm. “Obviously this means there are more investors hungry for deals, and that will push valuations higher still. But it is good for us when we want to exit.”

A hard working futurePE firms of the future will have to work harder to deploy capital reserves prudently,

5

avoid highly competitive auctions and seek new deal structures.

In December, US-based investment firm Bain Capital announced it would finance Virgin Cruises, an expansion of the UK’s Virgin Group. The business will be built from scratch, and while details have yet to be disclosed, the arrangement is a departure from typical buyout models.

Buying smaller holdings will be another way to put investors’ money to work. In June, PE firm Castanea Partners acquired a minority position in US fashion label Proenza Schouler for an undisclosed sum.

“I think we’ll see funds looking to buy smaller stakes in future,” says Bunder. “It offers a different model, making you more flexible and able to put more capital to work in an environment where it’s hard to deploy.”

Five ways PE firms can outperform their peers:

Transformers. Transforming companies will be a key driver of returns. “If we have no clear view of what we can do to implement growth or a new strategy at the company, if we anticipate that the only return can come from deleveraging, then that’s not for us,” says Ardian’s Gaillard.

Hunters. “Firms will need to look where opportunities are in industries that others might be overlooking, and consider those undergoing significant change,” says Michael Rogers, EY’s Global Deputy Sector Leader for PE.

Experts. Sector specialists will have the advantage. “Specialization and the idea that the industry must continue to innovate are ideas I firmly believe in,” says Bob Morse, Co-founder and CEO of Strattam Capital.

Students. “Management teams recognize firms that have done their homework,” says Neil MacDougall, Managing Partner at Silverfleet Capital. “If they detect that you don’t fully understand the company, they won’t want you as a shareholder.”

Innovators. Firms that can access new sources of capital will succeed. “Over the next few years, it’s possible that more funds will go to market in a way similar to that of a mutual fund, possibly even being offered in some companies’ 401(k) pension schemes,” says Rogers. “The challenge is PE’s illiquidity. Once that issue has been solved, you could see the industry move toward the mainstream.”

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With increased competition comes pressure on returns and, in recent years, PE has lost its lead over public equities. In the five years to June 2014, US buyout funds returned an internal rate of return of 19%, matching the S&P 500 on a modified public market equivalent basis, according to Cambridge Associates. For one- and three-year horizons, the index has overtaken PE.

Sector or sub-sector specialism could allow PE to regain its lead. “The returns for specialization are enormous, and you’re beginning to see some research on that front,” says Bob Morse, Co-founder and CEO of Strattam Capital, a PE firm focusing on enterprise software and digital infrastructure companies. “As a specialist, you can compete more effectively and position yourself as the partner of choice for management teams.”

Developing opportunitiesFor the largest fund managers with the resources to invest globally, emerging markets (EMs) are another opportunity. But in recent years, the picture has become more complex.

As competition has intensified in China, funds have looked to Indonesia, Malaysia and Singapore. Blackstone Group and KKR have opened Singapore offices in recent years, and the Carlyle Group has a team in Jakarta.

Once the go-to Latin American market, Brazil’s forecast 1.3% GDP contraction this year is turning investors away. That

said, a weakened real may mean that dollar-denominated funds will choose to buy at discount in a low-competition environment.

More recently, attention has shifted to Sub-Saharan Africa,

which has benefited from strong economic tailwinds, including the growing middle-class demographic in Nigeria and Kenya. KKR made its debut deal in the region in 2014, investing US$200m in Afriflora, an Ethiopian flower exporter.

Global managers are either evaluating deals on a case-by-case basis, as KKR did, or have set up shop in the region. The Carlyle Group has offices in Lagos and Johannesburg and manages a US$700m fund dedicated to Africa.

In addition, PE firms raised US$4.03b in 2014, across 24 funds, to invest in Africa, more than triple the US$1.25b raised in 2013, according to the Emerging Markets Private Equity Association (EMPEA). 2015 has already seen Helios Investment Partners raise the first-ever Africa-focused fund of more than US$1b, and Abraaj Group, a PE investing firm operating in the growth markets of Africa, Asia, Latin America, and the Middle East, closed on US$990m.

In a 2014 EY survey of 106 LPs in 30 countries, 41% said they plan to increase the percentage of PE allocated to EMs over the next two years — an increase of 9% on the 2013 figure. This finding was borne out in last year’s fundraising statistics: in 2014, EMs PE increased 16% to US$45b, according to the EMPEA.

A higher standardFierce competition and the need to think creatively about deal origination are not the only challenges PE faces in the coming years. As the asset class comes under closer scrutiny from both its investors and regulators, the industry will be expected to work on its transparency and reporting standards.

In June, US PE giants KKR agreed to a US$30m settlement after the US Securities and Exchange

On the webFor more on private equity, read the 2015 Global Private Equity Survey at www.capitalinsights.ey.com/PE2015

PE firms are not pulling back from emerging markets — they’re patient. 977

Globally, 977 PE funds held a final close in 2014, raising a total of US$486b. (Source: Preqin)

Reuters


Commission showed that it had misallocated broken-deal fees — a sign that the regulator has more power over PE than ever before.

A major concern is how fees are allocated to operating partners and other consultants who are effectively employed directly by PE firms, in some cases through subsidiaries. EY’s 2015 Global private equity survey found that, when considering all expense allocations, 38% of investors were least satisfied with the transparency of fees to such parties, indicating that this is the area most in need of attention.

The SEC’s heavier touch in the US has been matched in Europe with the introduction of the Alternative Investment Fund Managers Directive, which covers everything from the use of asset depositaries, fund marketing passports, remuneration caps and valuation reporting.

“Regulation is going to massively favor large players,” says Gaillard. “For us, over the last 24 months, we have increased the number of people working on compliance from 4 to 12. There’s so much to think about now that it is much easier for a firm with the resources to cope with that than a small PE house. Regulation is going to be a serious game changer in terms of who is going to be able to cope with this very complex, very time-consuming new workload.”

As the industry standardizes and responds to pressures from its own investors, environmental, social and governance (ESG) issues will increasingly move front and center. Pension funds and other LPs are becoming more aware of the impact their investments have on the world. And GPs are coming to see that improving such standards can even lead to an increase in returns.

“There’s been a move away from looking at ESG as a compliance issue,” says Michael Rogers, EY’s Global Deputy Sector Leader, PE. “I think firms initially saw it as a means of ensuring they were doing everything right with their investments in faraway lands, avoiding causing pollution, treating employees fairly and that sort of thing.

“Now funds are seeing the benefits of moving into EMs and building good

relationships with the governments and committees there. ESG is turning into a competitive advantage in many cases, for those who really know how to do it and do it well.”

Those firms willing to adopt industry-leading ESG and reporting practices will be in good stead in the coming years. But ultimately PE’s success hinges on its returns. Many firms are having to exercise caution in today’s tough dealmaking environment, which favors sellers over buyers. If PE wants to maintain its reputation for market-beating returns, it will have to innovate in its search for new deals and proactively manage its investments as never before.


Silverfleet Capital’s Neil MacDougall says that finding deals others might not be equipped to pull off is crucial.

We try and look for things that are a bit less obvious. The deal that we recently closed in Copenhagen was for Masai Clothing Company, a brand of clothing for more mature women. Retail

is an area where a lot of banks are staying away, and we had enormous trouble financing that deal.

We’ve done a number of similar deals, in the UK, France and Germany, so we know what we’re doing where a lot of other funds don’t, and that was an advantage. So looking at more challenging sectors that you are able to invest in better than others is one way to create an advantage. Sometimes you have to deal with succession issues. With the Masai deal, the founders were a brother and sister. And the brother was completely cashing out. That’s a dynamic that not every investor is willing to finance. Funds can get nervous when they see someone pocketing a lot of cash and disappearing over the horizon — it can be a case of, “What do they know that I don’t know?”

The investment thesis on that deal was partly [based on] the fact that everybody is living longer and, as they say, 50 is the new 30. People are healthier, living longer and they want to stay fashionable. And as a consumer group, [the over-50s] are generally pretty well-off. So it’s an attractive area from a demographic perspective.

Most of [the task] is actually about taking something that is successful in Denmark and exploiting opportunities elsewhere. Masai has a reasonable exposure to the UK market, but it could do a lot more.

Viewpoint

Neil MacDougall is Managing Partner at Silverfleet Capital.

Retail is an area where a lot of banks are staying away, and we had enormous trouble financing.


Rules of attractionPrivate equity (PE) is back and stronger than ever, but how is activity being funded? We look at the return of PE and the future of its funding.

PE fundraising is having a revival. In 2009, the effects of the global financial crisis were felt. Only 962 funds closed, with just

US$319b between them, according to Preqin, making it the weakest fundraising year since 2005.

But 2014 was different, with 977 funds raising US$486b, with more than half closing above their initial targets. And the momentum is continuing in 2015.

At the start of this year, there were 2,235 funds on the road, up from 2,081 in 2014. Funds are also closing more quickly. In the US, the average time to close a fund in 2014 was 15 months, down from 17 months in 2013.

PE managers now have US$3.8t of assets under management and US$1.3t at disposal for investment.

The stars align The recycling of cash back to investors has been supporting the PE industry’s recovery. According to Preqin’s 2015 Global Private Equity and Venture Capital Report, the aggregate value of buyout exits made in 2014 reached US$428b, beating every previous year on record.

“PE’s ability to return capital to investors has been off the chart in the US,” says

Mounir Guen, Chief Executive and Founder of PE advisory firm MVision. “Investors have been impressed by the capital returned in recent years.”

All this has meant that investors have been eager to recycle their capital back into PE, which has sparked huge demand for firms launching their next vintage of funds.

“Much of the fundraising rebound is down to math,” says Kevin Albert, Global Head of Business Development at Pantheon, a PE fund-of-funds manager. “Equities are up, so pension and sovereign wealth funds have to up the quantum of capital to PE to maintain allocation targets.”

A strong run of exits, particularly through IPOs, have supported fundraising, adds Sachin Date, EY’s EMEIA PE Leader. “Companies stuck in portfolios for five or six years have been sold into a resurgent IPO market.

This has created liquidity that investors have had to deploy.”

Many happy returns Indeed, despite some uncertainty over returns, PE has continued to be

popular with investors, according to EY’s Date and others in the industry.

“Attitudes to PE have changed. The reality is that despite predictions of doom and gloom PE has delivered, in relative terms, better returns,” Date says.

“In some ways, you could say that investors have been allocating to PE in desperation,” adds Sven Lidén, Chief Executive and Head of Investor Relations at Adveq, a Swiss-based PE fund-of-funds. “Interest rates and bond yields are

The ability of PE to return capital to investors has been off the chart in the US.

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so low. So you need high-yielding assets, and there are limits on how much of your portfolio you can put into equities. PE is the closest you can get to equities. It is more expensive, but it delivers better returns.”

A mature secondaries market, where PE fund commitments are bought from other investors, has also boosted confidence and provided flexibility in a traditionally illiquid asset class. According to Cogent Partners, US$42b of secondaries deals closed in 2014, a record high. This increased activity has seen discounts on funds stakes narrow.

“There is so much interest in used paper now that commitments are trading at par or in some cases even at a premium,” says Antoine Drean, the Founder of PE fund advisor Triago and online PE marketplace Palico. “Investors can allocate money to PE with more comfort, because if they do want to get out, they know there is a way out.”

Alternative options Preqin figures show that, while 2014 fundraising figures were favorable, commitments were spread across the lowest number of funds since 2009. More and more cash is going to fewer and fewer managers.

“It is never the case in PE that a rising tide lifts all boats,” explains Adam Turtle, Co-founder of placement agent Rede Partners. “Investors like PE, but their appetite for risk is still muted following the financial crisis.“

“Investors with large amounts to commit can’t do it all through a small group of select managers, so they are looking at different structures and ways to access the asset class,” Drean adds. “Alternative funding structures allow investors to deploy more and pay less, and it gives them a greater degree of control over their portfolios.”

Direct investment and co-investment, where investors back companies themselves or alongside PE firms, and separate accounts, where bespoke terms are negotiated with managers, have provided alternative funding structures for those who want to access PE in different ways.

According to Triago, US$113b of commitments were made through non-fund structures in 2014. This represents 26% of total PE fundraising. By contrast, in 2007 and 2008, this type of funding accounted only for 13% of PE fundraising.

Regulatory headaches As well as competing with alternative funding structures, traditional PE managers are finding themselves dealing with extra layers of regulation.

In Europe, the Alternative Investment Fund Managers Directive (AIFMD) has come into force, placing increased reporting, remuneration and depositary requirements on

3.8tPE managers now have US$3.8t of assets under management, a record sum.


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Rod Richards explains the fundraising process of Graphite Capital’s £500m (US$772m) close in November 2013.

We started fundraising for our most recent fund early in 2013, which wasn’t the easiest time to raise money. There were questions about the EU and the UK economy, and we made

things more difficult for ourselves by not having made many realizations in our most recent fund. We had some good assets on our books, but we knew we could deliver better returns by holding on a little longer.

We considered holding off and asking for an investment period extension, but decided to go ahead as we thought a huge advantage could be gained by having a fund to invest when none of our competitors did.

Investors either liked what we were doing, and understood our decision for holding on to portfolio companies, or said they couldn’t give us capital until they had some back. In the end, 80% of the fund was raised from existing investors. Following the close, we made realizations that returned £1.2b (US$1.8b) to investors at an average 46% uplift to their book value at the time of the fundraising, so we believe we did the right thing.

Momentum was key for us. We didn’t want to drag it out with two or three closes, so we set a date and told investors that we hoped to have a first and final close. When there is a deadline, people focus resources and time to looking at that fund. It puts you in a position to get it done quickly. It is a statement of confidence.

Equally, you have to have the track record and performance to back up your fundraising. Investors want to back managers who have a low loss rate and can show realizations or a portfolio of assets that is performing well and will generate returns when the time is right to sell.

Viewpoint

Rod Richards is the Managing Partner of Graphite Capital, a UK-based mid-market private equity house.

There was a huge advantage to be gained by having a fund to invest when none of our competitors did.

managers. A “passport” has also been introduced for all managers seeking to raise capital across the European Union (EU), with the intention of simplifying fundraising in other EU countries by removing the need to gain separate regulatory approvals. In reality, however, firms are still encountering border controls, fees and additional compliance requirements from domestic regulators.

“It’s early days, but AIFMD will raise the cost of doing business and will be especially difficult for small firms. Time will tell whether smaller funds can still operate with the regulatory cost overlay,” EY’s Date says.

New sources Regulatory intervention could aid the industry in the long term. In the US, the Securities and Exchange Commission has increased the transparency expectations of PE firms, an essential step when looking to tap into individual, or retail, investors.

The potential rewards are vast. According to the Investment Company Institute, almost US$12t is sitting in individually managed US retirement accounts alone. But the asset class is complex and illiquid, so resources need to be built up to satisfy regulators.

Managers are finding ways to overcome these obstacles. Carlyle and KKR have partnered with smaller managers to raise money from high-net-worth individuals to invest in PE at arm’s length. Pantheon has set up a feeder fund that will allow credited individuals to invest through its platform.

The fundraising market has matured, and processes are becoming more complex. Investors and managers embarking on the journey should keep the following in mind:

Be organized. A liquid market does not mean a free-for-all. “Investors are demanding. You still need a track record, and you still need to be competitive on fees,” Date says.

Be flexible. If investors can’t access their top selection of managers, they may co-invest or go it alone. “Co-investment tends to be more passive and makes it easier for a PE house to do larger deals,” says Date.

3Stay on top of the rules. “AIFMD is now a real piece of legislation and it has an impact. There is a lot of extra compliance. For the big brand managers with the scale and infrastructure, it is manageable, but for smaller managers it can be more burdensome,” Rede Partners’ Adam Turtle explains.

Retail detail. ”Raising capital from retail investors is a huge opportunity for PE. There are high hopes, but the reality is that it will take time to meet the governance and regulatory requirements when targeting retail investors,” says Drean.



How social media is changing M&A

How social media is changing M&A

The use of social media has increased rapidly over the last decade. But how is business responding? How are companies using these tools?

And how effective can social media be in deal situations?

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Business leaders are scratching their heads about how to take advantage of one of technology’s biggest opportunities: social media. The ability to share information, build brand awareness and create special-interest groups is changing the way many

companies do business. Retailers including Marks & Spencer, John Lewis, Toys R Us and

Kmart have harnessed social media channels, such as Twitter, Tumblr and Facebook, to launch advertising campaigns and to create a buzz around their brand. But it’s not just consumer-facing businesses that can benefit from social media. Tools such as LinkedIn are helping businesses and executives connect, share ideas, make new contacts and keep in touch.

By bringing together communities that share the same values or aims, social media can also be used to achieve specific goals. One example of this is Wessex Water. The UK utility company has signed up to Neighbourly, a platform designed, in the words of Neighbourly’s Executive Chairman Luke McKeever, “to allow organizations with a conscience to donate time, money, surplus food, etc, to charities that need help,” he says. “The idea is that we can match available resources to need.”

In Wessex Water’s case, the aim is to protect and improve the water environment around Poole Harbour in the UK. The company uses Neighbourly to connect with local businesses, councils, residents, charities and associations and to attract funding and organize volunteer support.

Barak Ravid, Co-Leader of Technology, Parthenon-EY, says the impact of social media on business process has accelerated rapidly: “To realize how pervasive [social media] is, all you have to do is look at the major software

of Fortune 500 companies had corporate blogs.

31%

had a Facebook account — up 10% on 2013.

80%

had Twitter accounts with a tweet posted in the last 30 days — a 6% increase on the previous year.

83%

Source: 2014 report from the

University of Massachusetts

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Research

More than 55% of dealmakers use an online deal network to help with deal sourcing.

55%

Source: Intralinks

Bloomberg/Getty images

Investing


and Enterprise Resource Planning players: all have social media analytics platforms built into what they are doing. Some of the earliest cases are around customer relationship management, monitoring customer behavior and reacting to that, but now it’s grown broader, moving more into operations and compliance, and obviously marketing.”

Who is using social media?Just how pervasive social media has become was highlighted by a 2014 report from the University of Massachusetts Dartmouth Center for Marketing Research. It revealed that 31% of Fortune 500 companies had corporate blogs; 83% had Twitter accounts with a tweet posted in the last 30 days — up 6% on 2013; and 80% had a Facebook account — up 10% on 2013. The survey also revealed increases in the use of local search and recommendation website Foursquare (up by 42%), content-bookmarking website Pinterest (an increase of 27%) and photo-sharing website Instagram (which rose by 12%). Ninety-seven percent of the Fortune 500 have a LinkedIn account.

One development of the social media phenomenon that is taking corporate finance by storm is crowdfunding. Although not all companies have been successful, some have raised significant amounts.

Earlier this year, US-based WobbleWorks, which developed the world’s first 3D-printing pen, the 3Doodler, raised more than US$1.5m in just weeks.

“[Crowdfunding] has come into its own in an environment where companies are seeking out alternative financing to bank funding,” says Simon Toms, Corporate Finance Partner at UK-based law firm Allen & Overy. “[It] opens up new pools of capital and provides a platform for companies to access capital from a wider range of investors.”

How is social media affecting M&A?Social media is being employed by companies to help plan and execute their M&A strategies. According to a 2013 survey by global technology company Intralinks, more than 55% of dealmakers use online networks for deal sourcing.

The survey also found that among those using such services, half on the buy side and 40% on the sell side had closed a deal sourced on an online network. The survey’s respondents ranked Twitter and LinkedIn as the top two platforms for use in M&A — both on current use and on expected future use.

One such deal network, Intralinks DealNexus, currently has 7,000 registered dealmakers. The idea, says DealNexus Director Tony Hill, a former investment banker, is to provide a matchmaking service between buyers and sellers of companies, and so improve the efficiency of deal sourcing. DealNexus also provides a dealmaker network that allows them to keep in contact and share information securely.

“The sourcing [of deals] can be incredibly inefficient,” says Hill. “Previously, you had to scour all sorts of databases to find out what opportunities there were out there. Online deal sourcing helps create intelligent deal flow.”

Top five social networks worldwide by user numbers

1.35bFacebook (as of Dec 2014)

629mQzone, China

343mGoogle+

332mLinkedIn

300mInstagram

Mandel Ngan/Getty images

Source: Statista


How can social media help due diligence?The wealth of information now available via social media is changing the way that due diligence information is gathered.

John Hopes, Economic Advisory Partner and Global Business Modeling Leader at EY UK, believes that social media can change the M&A landscape. “Dealmakers are starting to use social media — for example, using data on Twitter to understand the market sentiment toward a target company. This adds insight to the commercial due diligence on the deal.”

Toms agrees: “Nowadays in the M&A process, due diligence also needs to examine how employees use social media, what company policies exist and how they are enforced,” he says. “However, in many instances, social media can be used to look at what employees are saying about their company and how the brand stacks up against competitors. While social media won’t tell you everything, it can be used as a sense check for the information you already have.”

Can internal social media help M&A?Intranets are also increasingly being used by companies in deal situations, according to Nigel Danson, CEO of intranet software company Interact. His company provides an “intelligent social intranet platform” for organizations to engage in “purposeful collaboration.”

“Social tools don’t tend to work in organizations unless [those tools] have a context and purpose,” says Danson. “So if companies are going to use an intranet, it has to be with the idea of, say, increasing productivity or employee engagement. These tools can really come into their own in a deal situation.”

According to Danson, collaborative features, such as calendars, in a secure environment can improve efficiency and transparency pre-deal. “You can set up a deal room that’s [only] available to certain individuals,” he says. “This allows

those involved to communicate without email, which is not secure.”

Intranet-based social media can be effective post-deal, says Danson. “It can be used very effectively to help create cultural unity between two merged entities. Questions can be answered quickly, CEOs can post blogs explaining changes, staff can be encouraged to post ideas, and knowledge can be unlocked.”

“Often it can take a long time for information to be shared between the two merged companies. If documents and ideas can be posted via the company intranet, the

benefits of merging can be realized much more quickly.”

What are the risks? While social media can increase the efficiency of the deal processes,

there are also associated risks to be managed. One is the potential for leaks: “The issue with social media is that it is meant to be a spontaneous and unstructured form of communication,” says Toms. “Yet any statements put out by a company need to be carefully monitored especially during reporting periods or during transactions. So if a company is embarking on an IPO, for example, there have to be the right protocols and guidelines in place to make sure that any public statements, including tweets, are compliant.”

A less obvious risk is that a surge of page views could tip off employees about a potential deal, as this activity is easily tracked. “If you think about LinkedIn profiles, for example, you know when someone has viewed your profile,” says Aaron P. Rubin, a partner at Morrison & Foerster. “Social media profiles can be a great source of information in due diligence, but you have to review that data in such a way that it doesn’t reveal confidential information.”

All companies, whether they are in a deal situation or not, should have policies for social media use to help manage the risk of sensitive material becoming public.

But whatever the risks, the rise of social media as a business tool seems unstoppable. If we take deal-sourcing platforms as an example, increased usage could well lead to an increase in M&A activity.

“As more people use this technology, more deals will come to market, because it becomes easier to find a buyer who will pay the expected value,” says Hill. “In addition, cross-border and smaller deals will become easier to do, as there is less reliance on little-black-book-type contacts.”


Social tools don’t tend to work in organizations unless [those tools] have a context and purpose.

50%on the sell side and 40% on the buy side have closed a deal sourced on an online network.(Source: Intralinks)


When a deal is under discussion, tax is a crucial boardroom issue. Capital Insights explores the opportunities and challenges that transaction tax can present.

M&A values are heading up, and dealmakers haven’t been this busy since the heady days prior to the financial crisis of 2008.

That crisis has, however, had at least one lasting effect on the transaction process: it has increased the pressure on businesses to be more transparent about tax.

One example of this growing pressure came last year when it was suggested that Walgreen’s may move its headquarters to Europe in order to secure a lower tax rate.

Though Walgreen’s stayed in the US, and subsequently said that a switch was never seriously considered, it suffered damaging media attacks over the affair.

Many C-suite executives have realized that tax considerations can add significant value to a deal, or have the opposite effect. In an EY study on global M&A tax, 84% of tax directors at 150 of the world’s largest companies said that they were under increasing pressure to find tax efficiencies to reduce the cost of deals or to improve returns on them. And 64% said that their deals were being subjected to greater scrutiny from tax authorities.

Torsdon Poon, Americas Transaction Tax Markets Leader at EY, argues that if businesses are to maximize tax advantages, they must give their tax functions a seat at the table alongside M&A strategy. “Tax is sometimes seen as an event-driven function that is reactive, but the need for more strategic integration has never been greater,” he says. “Tax has to know where the organization is heading, because it’s just not possible to plan effectively for tax if you’re only called in at the last minute.”

OpportunitiesDeals are rarely done for the sake of tax planning alone. However, many deals offer opportunities for effective tax planning to improve returns on investment — assuming that the tax function is given the chance to advise on and realize those gains.

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Move early. “Lost opportunities arise when tax isn’t involved early enough,” warns David Sreter, Global and Americas Transaction Tax Leader, EY. “Have tax as a checkpoint as the business develops its deal strategy.”

That approach may enable the business to boost earnings per share too, according to David Petrie, Head of Corporate Finance at the Institute of Chartered Accountants in England and Wales. “You’re looking at the extent of the liabilities of the target company which will usually, but not always, fall on the current shareholders until the point of sale,” he says.

Widen your remit. International tax planning opportunities should be considered. Many countries, particularly in the developing markets of Asia and Africa, offer generous tax incentives to encourage foreign investors.

Other markets will have more specific opportunities. For example, a business making a divestment in the US will find it more tax efficient to spin off the unit prior to sale. Involving the tax function in strategic discussions around such transactions early can result in early advice on what the opportunities are, and even start positioning the business to take advantage of them.

Look ahead. The political controversy around the Walgreen’s transaction, for example, was part of a wider backlash against US businesses “inverting,” but when a business’s international profile changes significantly, it is legitimate to discuss relocation.

US pharma business Mylan last year bought UK-based Abbott Laboratories Established Pharma Developed Markets Business in a deal that had numerous tax advantages. “We would not do a deal simply for tax reasons,” Heather Bresch, CEO of Mylan, said. But she also stated that without the tax savings, the Abbott Laboratories transaction “could have been for a different price and with a different structure.”

ChallengesTax may rarely make a deal, but it can certainly break one. Businesses that fail to bring tax into the discussion early on in the M&A process may be stymied by last-minute problems or they may encounter difficulties following the transaction.

Do your diligence. A first priority should be to identify hidden risks and dangers. “You need to understand the tax profile of the target company — the positions it has taken on previous returns, for example,” says Sreter. “Are there disputes with regulators you should worry about, or aggressive tax planning that might pose reputational risk?”

Watch the capital flow. The business should be structured in the right way for the transaction itself, particularly where there is an international element to the deal. Settlement will involve the transfer of cash, equity or other types of

consideration across borders. So ensuring that these flows of capital happen in the most tax-efficient way is crucial. Any debt involved will be an important part of that consideration.

Keep tax in the team. The tax function must not operate in isolation, since the best outcome from a tax perspective may not necessarily be the best outcome for the company. In some cases, businesses have set up intricate global structures to deliver the best solutions from international transfer pricing regulation, only to discover their accounting software isn’t capable of dealing with the complexity.

Make tax a business partner. Forward-thinking businesses are increasingly realizing that tax needs permanent representation in discussions about corporate strategy — not to put up barriers to M&A activity, but to advise on how best to achieve the business’s ambitions from a tax perspective.

Take, for example, US pharmaceutical company Horizon, which bought Ireland’s Vidara Therapeutics last year. It was previously paying corporate tax in the high-30% range but is now aiming for the low twenties. That reduction has enabled Horizon to be more aggressive in subsequent M&A strategies.

“It’s crucial to align tax planning and transaction strategies, to determine how best to acquire and integrate,” says Sreter. “But don’t leave it to last. The thing about tax is that it’s easy to forget, but impossible to ignore.”


The thing about tax is that it’s easy to forget, but impossible to ignore.

84%of tax directors at 150 of the world’s largest companies said that they were under increasing pressure to find tax efficiencies to reduce the cost of deals or to improve returns on them, according to an EY study.


Deals down under

After a stellar 2014 for Australian M&A, 2015 has continued the upward trend. Capital Insights explores the dealmaking landscape in the great southern land.

For businesses across the US and Europe, the eucalyptus and red dirt of Australia are about as far away as you can get. However, with M&A

activity heating up down under, this distant destination is climbing the list of target countries for foreign buyers, and with good reason.

Last year saw the Australian market reach its highest volume in four years (532 deals) and its highest value since 2011 (US$68b). This year has proven that these 2014 figures are no one-off, as H1 2015 value (US$44.9b) is up 17% on the corresponding period last year.

“The Australian economy has been performing consistently well against comparable markets over the last decade,” says Yasser El-Ansary, Chief Executive Officer of the Australian Private Equity and Venture Capital Association Limited (AVCAL). “We have had more than 20 years of uninterrupted economic growth, and we have benefited from our proximity to the exponential growth and expansion through large parts of Asia.”

According to Gary Nicholson, Oceania Transaction Support Leader, EY, the current economic and business environment in Australia is ripe for deal activity. He outlines five key drivers for increased M&A in 2015 and beyond. Jo

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1. Benign domestic growth coupled with corporates’ growth aspirations, creating demand for domestic and global acquisitions;

2. Global demand for infrastructure;3. State and Federal governments’ privatization programs

which are generating capital; 4. Private equity (PE) interest;5. Many Australian business owners are looking to

retirement, requiring a succession plan to provide them liquidity in the capital they have created.

Australia is in the midst of its fourth M&A cycle in 20 years, according to new research as reported in the Australian Financial Review. This research indicates that the nation is only halfway through its current cycle. Previous M&A cycles have peaked with the Australian M&A-to-market-cap ratio between 19 and 24% with an average of 22%. At the moment, this ratio is around 10%, and if history repeats, Australia can expect a further AU$350b worth of deals over the next 12 months before 22% of Australian market cap is reached.

Financial services firm Macquarie Group is currently the top facilitator of M&A listed on the Australian equity market, holding 24% of Australian M&A advisory market share, having advised 65 deals with a combined value of AU$63b (US$45b) since the beginning of 2015.

Robin Bishop, Australia Head of the corporate advisory arm, Macquarie Capital, says: “The trends from the last few years continue to drive the Australian market. Primarily, the drive for yield, industry consolidation, globalization and liquid funding markets across both equity and debt.”

Commodities holding up According to the Australian Trading Commission Austrade, the five sectors expected to drive future growth are agribusiness, education, tourism, mining and wealth management. This is borne out by Mergermarket figures, particularly in two sectors. The first half of 2015 saw business services dominate the volume charts with 44 deals, while energy, mining and utilities (EMU) took the lion share of value with US$18b-worth of deals.

The EMU sector has been significant over recent years, with the sector representing the largest proportion of M&A deals in 2014 at 49% — but while this is a decline, activity in the sector has not ground to a halt.

“While the commodity cycle itself has come off significantly, the overall M&A activity in the metals and mining sector has not contracted to the same degree,” says Bishop. “Opportunities remain in the areas of exiting non-core assets (including demergers), distress situations, certain commodities such as gold and with those taking a countercyclical view. Consolidation options are also still available — providing both buy and sell side opportunities.”

Asset sale initiativeOne growth area for Australian M&A is via privatizations. The Australian Government is planning the long-term lease or sale of a number of quality assets over the next two to three years as a means to fund major economic and social infrastructure projects.

A catalyst for these transactions is the Federal Government’s AU$5b (US$3.6b) Asset Recycling Initiative. This initiative provides incentive payments to States and Territories for the proceeds from these transactions that are reinvested in infrastructure, explains David Clanchy, NSW Managing Partner, Transaction Advisory Services, EY.

“On the back of that, the states lined up significant asset sales or leases to the extent of probably AU$100b,” says Clanchy. “Some of those fell away, but pushed other assets on to the market and brought enormous interest from Asian pension and infrastructure funds. In addition, the critical mass of assets brought to market

has tended to focus international investor attention and once they look at those assets and they look at that class of assets, they start to look at other things as well.”

An example of one major asset up for

grabs is the New South Wales electricity transmission and distribution network, where the State is considering a 99-year lease over 49% of the network. The proceeds from this will fund a US$14b

Australia in numbers Population

23.8 million (as of 4 July 2015)

GDP

US$1.45t (2014)

Real GDP growth

2.7% (2014)

Real GDP growth projection

2.8% (2015)

Top inbound deals H1 2015

1 Japan Post Holdings Ltd bought Toll Holdings Limited for

US$6.2b

2 Just Eat Plc bought Menulog Pty Ltd for

US$678m

3 Recruit Holdings Co Ltd purchased Chandler McLeod Group Ltd for

US$327m

Top outbound deals H1 2015

1 Industry Funds Management Pty Ltd bought ITR Concession Company

for US$5.72b

2 Slater and Gordon Limited bought Quindell Plc for

US$943m

3 IFM Investors bought (25% stake) in Circuito Exterior Mexiquense

for US$601m

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The Australian economy has been performing consistently well against comparable markets over the last decade.


investment program. Victoria is divesting Australia’s largest container port, Port of Melbourne — one of only two Australian major container ports yet to be privatized.

There are also a number of greenfield assets and social infrastructure projects in the pipeline, with Queensland expected to target the private sector aggressively for public-private partnership (PPP) deals.

This asset pipeline is gathering keen interest from across the globe but especially Asian countries, including China.

Mid-market mattersWhile privatization could provide a significant boost to Australian M&A in the coming months, a report by Mergermarket and Pitcher Partners entitled, Dealmakers: middle market M&A in Australia 2015, showed that the middle market is the sector to watch in 2015. The report reveals that mid-market deals, defined as transactions valued between US$10m (AU$12.8m) and

US$250 million (AU$320m), have historically accounted for a majority of M&A activity in Australia since 2009. And in 2014 alone, these transactions accounted for 68% of all M&A, with the US$10m to US$50m (AU$64m) range accounting for two in five transactions. “Confident and with ample cash reserves, corporate boardrooms and financial sponsors are ready to pull the trigger on a new round of deals,” the report said.“Bankers and investors also agree that low interest rates and government privatizations are creating excellent conditions for savvy business operators to pursue growth through M&A.”

In the past 12 months, almost 70% of all PE deals have been in the mid-market segment, involving enterprise values between AU$10m and AU$250m (US$7.2m and US$180.2m), according to El-Ansary.

“Our small- to medium-sized enterprise (SME) segment has always been the engine room of our economy,” he says. “While there has been a lot of media focus on the EMU sector over recent years, the fact of the matter is that resource trade accounts for a relatively small part of our overall economy. Australia is predominantly a services-based economy, that’s where we have significant

Top five tips for doing business down underRachael Bassil and Peter Cook, Partners in the M&A team at Australian law firm Gilbert + Tobin, give their tips for those looking to do deals in Australia.

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Work through your strategy to secure an edge. Whether trying to engage with the board or a vendor, the market is pretty competitive. Having a strategy, whether it be having a stake, putting a good price forward or having a seat at the table when engaging with the board can be important. Understanding those strategies early on is going to stand you in good stead.

Understand the regulatory environment. Australia’s regulatory environment is stable, but there are specific to the country. Do your research to discover what considerations need to be made well ahead of time to make the deal process smoother.

Be prepared for the press. One feature of the Australian market is that there is a lot of press coverage of M&A, so companies need to be prepared for media coverage on the deals they are doing. Whether they get on the front foot or are just ready to react, it’s important. One of the traps that we often see foreign bidders falling into is not understanding our truth in takeovers laws. It’s important that comments made to the press are very carefully considered, and that the consequences of those comments are considered, because it can restrict options for the bidders down the track. For example, it could prevent an offer increase, or the ability to waive conditions to a bid.

Speak to regulators early. Develop a good relationship with them and understand the way they’re viewing the transaction and what is going to be required. That way, you can address their demands as part of the transaction structure, strategy and timetable.

Make sure you are up to date. Foreign investment laws are changing. There are proposed changes that will impact how foreign M&A transactions are carried out. So make sure that you are up to date with any new laws and regulations.

68b2014 saw the market reach its highest volume in four years (532 deals) and its highest value since 2011 (US$68b).

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competitive advantages, and naturally, that’s where the bulk of our SME segment operates.”

Booming neighborhoodAlongside a strong middle-market, inbound investment down under has continued to grow. Australia’s favorable geography has seen offshore investors consider the Australian market as an attractive proxy for exposure to the rapid growth and expansion into Asia — China and Japan, in particular.

In 2014, foreign investment stock totalled AU$2.6t (US$1.87t) and Australia’s inward foreign direct investment (FDI) stock reached AU$630b (US$454b) in 2013, up 40% from 2008 figures.

According to Dealogic, Japanese companies have announced US$50b of offshore acquisitions this calendar year to date, almost the total amount for 2014.

While the country’s proximity to Asia, and in particular China, is a draw for investors, Australia’s location can also be a deterrent, adds El-Ansary. “Our geographic isolation is one of the most problematic issues for some offshore investors looking at our market,” he says. “Our time difference makes things difficult, and the fact that we are a 24-hour plane journey from the east coast of the US, and 15 hours from the Middle East, compounds the challenge.”

The China-Australia Free Trade Agreement, signed in Canberra on 17 June 2015, opened a raft of opportunities for Australian and Chinese businesses. There is hope that this agreement will help open up more non-mining investment opportunities, reducing the reliance on mining-led economic growth.

Clanchy says this is already the case, with Chinese investment focus moving away from commodities. “The Chinese are starting to expand out of those clichéd sectors you expect to see them in such as commodities,” he says. “They are getting into other areas and particularly into commercial industrial real estate, including five star hotels.”

Australian companies are also looking to use the agreement to gain a foothold in Asia. Ramsay Health Care, for example, announced a new joint venture in China and many already have a presence there (such as national bank ANZ and Lendlease). Indeed, many businesses in construction, property, shipping, telecommunications and elderly care are expecting more M&A activity between China and Australia.

“The China-Australia free trade agreement is still very new, but the early signs are quite encouraging,” says El-Ansary. “The new agreement will allow for much greater

market access for Australian financial services institutions wishing to operate and trade in China. There is also scope in the free trade agreement for greater PE investment into China by Australian funds. This hasn’t been a traditional area of focus historically, so the introduction of the new agreement is opening up the

potential for new channels of investment.”Philippa Stone, a partner at law firm Herbert Smith Freehills, who

is advising Brookfield Infrastructure Partners on its proposed US$6.3b acquisition of Australian logistics firm Asciano Limited, says that this

Our small- to medium-sized enterprise segment has always been the engine room of our economy.

Yasser El-Ansary, CEO of AVCAL, explains why M&A is on the rise following the PE IPO frenzy.

The 2013 and 2014 period was the busiest on record for private equity (PE)-backed IPOs in Australia. In that period, there were 23 PE-sponsored IPOs in Australia, and the analysis of the

equities market performance post-listing tells us that PE-backed listings performed better than non-PE-backed listings in the same period.

The strong pipeline of IPOs in the last two years has had a range of positive implications for the industry. The first is that it has allowed PE sponsors to sell down their interests in businesses that they invested into a few years ago, and the result of that is that they can return capital back to the fund’s investors with a healthy margin on top.

The second implication is that it has allowed PE managers to raise new funds which can then be invested into new opportunities. That’s part of the reason we are starting to see a pick-up in Australia’s M&A activity and the number of deals being completed in the past year has increased.

The PE industry is all about long-term investment and creating value for the businesses into which they invest. With that in mind, putting runs on the board through investing well, adding value, generating strong returns and recycling that capital into new opportunities is key to its success. The track record of the Australian industry over the past two decades is exceptionally strong, which is part of the reason why offshore institutional investors have been attracted to our PE industry. But we need to keep challenging ourselves, because it is a highly competitive global marketplace that we operate in.

Viewpoint

Yasser El-Ansary is Chief Executive Officer of the Australian Private Equity and Venture Capital Association Limited (AVCAL).

The track record of the Australian [PE] industry over the past two decades is exceptionally strong.


megadeal is a clear sign that foreign companies are still prepared to invest significant capital into Australia for the right assets.

“Foreign investors do still have a strong interest in Australia due to low interest rates, the low Australian dollar and the continuing availability of high quality assets, particularly in the infrastructure and energy sectors,” Stone continues.

But inbound deals are not only coming from Asia. “Just in the last months, you’ve seen Canada’s Brookfield Asset Management submit a powerful 32% premium on Asciano, which is both the rail and port provider,” says Clanchy.

The London Stock Exchange-listed Just Eat Plc bought Menulog Pty Ltd for US$678m and the pending US$4.6 billion acquisition of GE Capital Finance Australasia by an investor group including KKR & Co. and Deutsche Bank AG is the second-largest cross-border deal for 2015 so far.

A significant contributor to this inbound activity shift is the fall in the Australian dollar, Clanchy says. In 2013, the Australian dollar sat between 90 and 95 US cents, and prior to that, near parity.

“What you’ve really seen here over the past six months is a significant devaluation in the Australian dollar against the US to now dip down to approximately 70 cents. As late as July last year it was 94 cents. Before that, the lack of inbound investment into Australia had been noticeable, but in the last six months it’s fair to say that it’s exploded.”

Outlook for the futureWhether we are looking at inbound, outbound or domestic M&A, the Australian market is currently on a par with the global picture — and could be headed for a record year — certainly in terms of value.

The wave of privatization, a robust middle market and interest from Asian neighbors are all positive signs that M&A down under is on the up. However, dealmakers should be wary of the differences in regulation, the geographical challenges and high media scrutiny, says Nicholson.

That notwithstanding, the market looks set to flourish in the next six months — and move beyond the traditionally strong mining/commodities sector. Those in service businesses and beyond should keep the great southern land very much in their sights. For further insight, please email [email protected]

There is also scope in the free trade agreement for greater private equity investment into China by Australian funds.

Australia in numbers

Top five sectors H1 2015

Australian M&A, 2010 – H1 2015

Australian PE buyouts, 2014 – H1 2015

Australian PE exits, 2014 – H1 2015

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44 deals (worth US$3.9b)

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John Hope is Asia-Pacific Transaction Advisory Services Leader, EY; Charlie Alexander is Head of Financial Services Transactions, Asia-Pacific, at EY; Marc Entwistle is an IT Advisory Manager, Financial Services, at EY; Janos Barberis is Founder of FinTech HK and sits on the advisory board of the World Economic Forum FinTech Committee.

EY on Asia-Pacific

John Hope

© Kenneth Lim

Under the radar,

John Hope, Charlie Alexander and Marc Entwistle from EY, and FinTech HK’s Janos Barberis discuss the fintech industry in Asia Pacific.

F intech in Asia-Pacific is a hot topic for financial services (FS) strategy and corporate development teams right now.

While Asia has been slow to grasp the fintech agenda, there is now a hive of activity, which will ultimately drive more disruption, M&A and further investment.

Unlike in Europe or the US, the growth of the fintech sector in Asia is driven by governments because of the necessity of instituting financial market reforms. Additionally, there is also increasing cross-border activity, with investment coming in. Four markets in the Asia-Pacific region are of particular interest.

In under a year, Hong Kong has emerged as a major global fintech center. Activity was initially driven by the private sector and then amplified by the government budget spend in February, making fintech a strategic focus. Hong Kong is the gateway to mainland China, the world’s largest opportunity for fintech development. This in itself gives Hong Kong an unfair competitive advantage compared to any other cities.

China is a perfect illustration of the exponential growth of the Asian fintech sector. The country already has more peer-to-peer lending platforms than the rest of the world combined. Its alternative finance industry is also growing rapidly, with more

than 1,500 platforms today, compared with just 20 in 2011.

Singapore is representative of the effect of government top-down planning. The city state saw the creation of three fintech accelerators in less than a year, giving it one of the largest concentrations, on a per capita basis, of accelerators in the world.

Australia is also growing its fintech sector fast: a dedicated fintech co-work space by Stone and Chalk in Sydney received more than 300 applications for just 150 available spaces.

The speed of market growth is due to multiple factors. On the institutional side, IT spending by banks has been lagging behind levels in Europe and the US. This is because of the less competitive nature of the market, still heavily controlled by state-owned banks. On the public side, there is both a lack of behavioral legacy and lingering distrust in the state-owned banking system due to past corruption and inefficiencies. This encourages the public to look favorably on alternatives provided by private, non-financial companies.Mobile-based financial services represent the most cost-effective way to reach individuals. Particularly for the region’s large, young, media-savvy population and the growing middle class.

Asia’s fintech sector also faces a unique opportunity to address the 1.2

billion-strong unbanked population. This represents a goldmine for fintech start-ups. While commercial banks struggle to offer services to those with low incomes, fintech companies leverage their competitive advantages, such as lower costs and simpler management decisions, to create economically viable solutions for this new wealth of clientele. The region’s chronically underserved small and medium-sized enterprises (SMEs) present another opportunity for fintech, especially in credit market access — with the credit gap estimated at US$300b.

The future for fintech in Asia is bright, with prospects far exceeding those in the US or Europe. Investment levels are pitted to catch up rapidly, especially as the sector grows, and financial innovations are sure to explore export potential. Asian banks and insurers are keeping a close watch on the fintech sector, hoping to be a part of the disruption rather than be the disrupted.

ahead of the curve


As family businesses continue to thrive across the globe, Capital Insights looks at what public businesses can learn from them.

successRelative

A photo of Sam Walton and family, decades before his heirs became the wealthiest dynasty in American history, hung in the Walmart Museum in Bentonville, Arkansas

The phrase “family business” often conjures images of a friendly corner grocer, but in fact nothing could be further from the truth. According to EY’s 2015 Family Business Yearbook, the world’s top 500 family businesses contributed US$6.5t to global GDP in 2013

— more than the French and German economies combined. In the same year, they employed 20.9 million people, larger than the South African workforce.

Indeed, multi-generational family ownership has had something of a renaissance in recent years. Family-run firms as varied as L’Oréal, IKEA and 21st Century Fox are hugely successful. In America, family-owned businesses include giants such as Ford, Walmart and commodities firm Cargill. South Korea’s economy is dominated by its family-run chaebols, which include Samsung, LG and Hyundai. Elsewhere, Germany’s Mittelstand of manufacturing firms is dominated by family-owned companies, and in

Gilles Mingasson/Getty images


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Walmart Stores, Inc. (Walton family) Founded: 1962

James and Rupert Murdoch(21st Century Fox) Founded: 2013

Ford Motor Company (Ford family) Founded: 1903

IKEA Group(Kamprad family) Founded: 1943

Brazil, 6 of the 10 largest conglomerates in the country are family-controlled.

In Asia, family-owned firms account for 85% of all businesses and employ 57% of people at listed businesses, according to EY’s Yearbook. The top 10 family-owned businesses in Europe employ 2.5 million people, with revenues of over US$1t. And according to a recent study by The Center for Family Business at the University of St Gallen, Switzerland, in partnership with EY, family firms make up to 80-90% of businesses worldwide.

The same but very differentFamily businesses are defined by Peter Englisch, Global Leader of EY’s Family Business Center of Excellence, as firms where a family has “control” and “dynastic will,” but this simple formula covers a range of different companies. “Family businesses are so diverse, and some of the differences are cultural,” says Englisch. “For example, in Mediterranean countries they believe that the only people you can trust are family members, and they strive to get as many family members into management positions.” Similarly, in China, the concept of guanxi also sees outsiders less trusted than family members.

There are even different approaches within countries. In Germany, some firms strive for more professional management, and others for family exclusion, Englisch explains. Illustrating the former is Italian cement-maker Buzzi Unicem, which strives to have as many family members in management as possible, while Haniel, a

250-year-old family-owned investment company, excludes family from management to avoid overburdening them.

Much like their non-family counterparts, family firms have a variety of structures; they can be private, floated or a combination. In Japan, there is a tradition of a son-in-law being adopted by his wife’s family, taking on the family name and running the business for them. Suzuki is currently in its fourth generation of adopted sons. Interestingly, a similar trend can also be seen in the US, where Greg Penner, the son-in-law of current Walmart boss Rob Walton, will be the company’s next chairman. “This transition demonstrates Walmart’s commitment to long-term succession planning and keeping high-caliber, capable leaders at the head of our company,” Walton has explained.

Family firms have a number of differences, says Shaheena Janjuha-Jivraj, an Associate Professor at Henley Business School. They “focus on opportunities that have a longer-term return on investment” and the CEO and board ensure their career ambitions are aligned with the business’s performance. Second, emotions are on the table. Family members are “more aware and therefore more prepared for it, in contrast to non-family firms, where emotions still need to be addressed or are ignored.” And, “the family name is on the door ... creating a community stakeholders are committed to.” Not all of these advantages can be replicated at non-family firms, but what lessons can they learn?

Smooth out earningsResearch by the Harvard Business Review (HBR) found that across business cycles from 1997—2009, “The average long-term financial performance was higher for family businesses than for non-family businesses in every country

2.5mThe top 10 family-owned businesses in Europe employ 2.5 million people and have revenues of more than US$1t.Source: EY’s 2015 Family

Business Yearbook

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examined.” The researchers concluded: “Family businesses focus on resilience more than performance.”

According to another HBR paper, Why family businesses come roaring out of recessions, they tend to do three things differently. They launch new products, no matter the state of the economy, while other firms cut new product launches by nearly half; they keep spend at nearly the same level; and they keep up their social responsibility programs.

Show some steelAccording to a recent study of British businesses, Family business survival and the role of boards, family-owned firms were less likely to go bust during the downturns of 2007 and 2010. Using a dataset of 700,000 medium and large private family and non-family firms, the study found that family firms were 27% less likely to “fail” during the recession.

Diversity worksRecent research by MSCI found that firms with diverse boards containing more women than the industry norm, or mandated by governments, had less bribery and fraud and fewer shareholder battles. EY’s Women in leadership – the family business advantage, found that at the world’s largest family firms, 16% of board members are women, compared to 12.7% globally (at the end of 2013).

“Women are a really strong component of leadership in successful family firms,” says Janjuha-Jivraj. “Because family businesses have a strong sense of continuity, they often adapt to people as they transition through life stages,” she adds. Members of older generations never properly leave the businesses, either. Their ongoing presence stops younger generations reinventing the wheel or

repeating mistakes, she explains.

Look long term “It has become conventional wisdom that their long-term orientation is the differentiating factor

for family businesses,” says Englisch. “One consequence of this is that family firms take more of their shareholders’ concerns into consideration, and take longer to make long-term strategic decisions, so they become more conscious decisions, rather than following current trends,” he explains.

This long-term view leads to more intense shareholder interaction and a more balanced decision-making process, which takes criteria beyond just the financial into consideration.

Focused on values “In family firms, the goals are not only economic, but there are non-financial goals, not only to increase profits or grow the company, but to keep harmony within the family, or keep control in the family, or to raise the reputation of the family in the community in which they operate,” says Alfredo De Massis, Professor of Entrepreneurship and Family Business and Director of the Centre for Family Business at Lancaster University Management School. “These are meant to create long-term value, not necessarily high profits.” This builds trust among stakeholders and takes the focus away from short-term profits so that these firms have a different approach to risk-taking, making them more stable.

In family firms the goals are not only economic, but there are non-financial goals.

Estée Lauder Cos., Inc.(Lauder family) Founded: 1946

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David Murray of Murray Capital discusses the importance of roots, close networks and loyalty.

Murray Capital is the family office that invests the money originally made by the steel and mining businesses my father set up. When it comes to investments, we primarily look to the

industrial sectors, such as manufacturing and oil and gas. Where we have been successful, and will continue to concentrate, is firms in the same sector, or with a similar theme.

As a family business with a strong Scottish heritage, we have kept our roots in Scotland, and this helps with deal origination. In terms of sourcing, a lot of the deals come via our network of corporate advisors, banks and people in the sector who know we’ve got cash to invest – this is sometimes from other families. There’s no set formula; it’s very opportunistic for us. But people know we are an entrepreneurial family and approach us through reputation.

Networks are very important in our industry, and it would be a surprise if someone mentioned a company we didn’t know. This knowledge gives us a sense of whether or not it’s a good firm to invest in.

As is typical of many family firms, when it comes to selling businesses we look beyond the bottom line. For example, I regret that one firm we sold to a private equity firm then went into administration.

On the back of that, when we sold another, we built into the deal that there wouldn’t be any net job losses, because we knew they were going to consolidate and it was geographically close to us. We didn’t want to see people lose their jobs.

Viewpoint

David Murray is the Director of private investment company Murray Capital.

As is typical of family firms, when it comes to selling businesses we look beyond the bottom line.

Financial prudenceFamily businesses are often financially conservative, preferring to fund growth with earnings or unleveraged bank loans, often from banks with which they have a relationship. The research published in Harvard Business Review found that debt accounted for 37% of capital on average at large family firms, but for 47% of comparable non-family firms’ capital. This lowers risk but also means that they can raise capital without losing control.

Due to this, during downturns, family businesses’ balance sheets are often stronger, according to Jeff Boykins, Partner, Transactions Advisory Services at EY. “They are very prudent about how they invest. Typically they go into transactions with a rigid mind-set and say a deal has to fit with what they are doing not just from a financial standpoint, but culturally as well,” he adds. This way of funding can limit growth, but it does mean that families approach potential M&A more coolly, without the “deal fever” that can afflict bottom-line-driven buyers.

Succession planningA survey of public firms by InterSearch Worldwide found that just 45% of respondents had CEO succession plans. For firms with revenues under US$50m, the figure falls to 17%. Succession is a huge issue for family businesses. But public companies should take note as a well-managed succession plan provides continuity and helps allay shareholder’s fears.

Many families manage succession very well. For instance, Abigail Johnson’s ascension to the CEO position at Fidelity Investments in late 2014 was smooth, having worked in the firm since 1988. And at French firms, luxury goods maker Hermès and drinks group Pernod Ricard, an interim non-family CEO took charge while the next family head prepared for succession.

Innovative thinkingFamily firms are reputably conservative, but many are fantastically innovative. Fanuc, a Japanese maker of industrial robots, is the leader in its field, while Germany’s Otto Bock manufactures cutting-edge bionic prosthetics. Research published in the Academy of Management Journal shows that family firms invest less in research and development than others but have more successes. Another study by INSEAD Business School found that family firms applied for 11% more and received 12% more patents.

Family firms concentrate their innovative efforts on narrow areas and are also more careful with money than other businesses — two lessons everyone can learn from. But their innovation success is also cultural. De Massis says that family firms — such as 500-year-old Italian gunmaker Beretta

— are often able to take advantage of their long heritage and persuade employees that they are carrying on a proud tradition of innovation.

Family-controlled businesses are by no means perfect. They can suffer from nepotism or be torn apart by feuds. But if they can overcome these potential pitfalls, the best family businesses will remain profitable for hundreds of years. Their stories contain valuable lessons for the wider business world. They might not get as many headlines as the Silicon Valley tech firms, but a long-term outlook and a vision that goes beyond the bottom line clearly has its virtues.



Capital citiesAs urbanization spreads rapidly across the globe, Capital Insights explores how corporates need to rise to the challenges it presents for the world’s infrastructure.

From Anchorage to Zanzibar, urbanization is potentially the most transformative force of the past century. The United Nations (UN) reports that more than half of the world’s population currently

live in cities. And by 2050, the report suggests that this proportion will increase to 66%.

In addition, the world’s 750 biggest cities account for 57% of global GDP — set to rise to 61% by 2030.

The “urban world” is also one of six global forces that will define the future and have a powerful effect on business, economies and individuals, according to EY’s 2015 report Megatrends: Making sense of a world in motion.

“What we are seeing in emerging markets (EMs) is the continued move from rural to urban, and therefore greater concentrations of people in cites. In mature markets, the process is slightly different. We see more urbanization around city centers, more apartment complexes and a greater intensity in the use of infrastructure,” says Bill Banks, Global Infrastructure Leader, at EY.

As cities expand, the idea of urbanization as a business opportunity is rising up the boardroom agenda.

“Companies are recognizing the opportunities and rethinking their business models to take advantage of urbanization,” says Peter Engelke, a Resident Senior Fellow with the Atlantic Council’s Strategic Foresight Initiative.

“There are a few companies that are doing very well at framing their business model around the idea of making money from selling services and products that are directly related to urbanization itself.”

The demand for new infrastructure to support urbanization will also create a wealth of opportunities for businesses, says Banks: “In EMs, domestic construction companies are usually fairly small, but they have in-country experience, and good connectivity with government and other key stakeholders. That should furnish acquisition opportunities for international companies looking to get exposure to urbanization dynamics.”

Indeed, urbanization is putting a significant strain on existing infrastructure. “Businesses that have to rely on that infrastructure are finding the usability becoming a challenge, and more costly. Businesses now need to think much more carefully about where they locate themselves — ensuring that they have good access to public transport and social infrastructure,” says Banks.

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Young vs oldIn terms of demographics, “young” and “old” cities will emerge. According to the Megatrends report, the largest urban explosion of young people will be in Africa — and around 90% of the 0–14 age group residing in cities on the top 750 city list will live there by 2030. This gives companies a more tech-savvy labor pool to recruit from.

2Emerging mindset Growing urbanization in EMs will mean that corporates will have to change their way of thinking.

“Corporates must deal with the challenges that urbanization in EMs is creating,” says Tim Campbell, Chairman of the Urban Age Institute. “In the developing world, we see that companies, big and small, will have to chip in — for example, buying electricity generators if they can’t rely on the grid for power 24/7.”

The eight challenges of urbanization

3A connected workforceAs cities spread out, the connection between a business and its workforce will be stretched. Issues of transportation and infrastructure will challenge both companies and local authorities. “The model is changing and people are living closer to city centers, which entails significant new transportation challenges,” says Banks. “Companies must think more carefully about where they position their headquarters in future.”

The new namesToday’s megacities — with a populus in excess of 10 million — aren’t growing as fast as they used to. The growth is spilling over into secondary cities — Ankara in Turkey, Phoenix in the US, or Chongqing and Shenzhen in China. “It’s the cities whose names we don’t yet know where the growth is being registered,” says Campbell.

Attracting talentPeople relocate because they are attracted to the location or city, rather than for jobs. Businesses must wake up to the reality that they will have to move where the talent is. In east-central London for example, the emergence of a tech-savvy population led to the growth of the Silicon Roundabout district, which in a decade has seen around 3,000 tech firms formed. Google’s decision to build its UK headquarters in the heavily urban King’s Cross area underlines the trend for large corporates to move where the talent is, rather than pull them to out-of-town areas.

Sustainable cities “Green” and “smart” will be key features of the sustainable city. Indeed, urban dwellers and employees will increasingly demand these as standard. Green cities will have to have energy-efficient buildings, reduced waste, rely on renewable energy sources and energy-efficient transportation systems. “It’s something that firms will have to come to terms with,” says Engelke. “They will have to help urban authorities build cities that work properly and are decent places to live — and that are not ecological catastrophes.”

Knowledge is powerCities are more likely to be forged in the white heat of the knowledge economy. For businesses, that means rising to the challenge of creating urban areas that are pleasant and inspiring to live in, with the right amenities. “Companies are part of the cities in which they make their fortunes,” says Campbell. “They know they have to become more engaged than in the past, by having a long-term commitment to making these good places to live and work. That means having strong transportation facilities, good access, and above all, a tolerant ethos.”

1Mobilizing the massesAs cities grow, the need for quality infrastructure expands exponentially. According to the B20 Infrastructure and investment taskforce policy summary, rapid urbanization will require US$60–70t in investment over 2012–2030. However, there is a funding gap. Under current conditions, only US$45t is likely to be realized.

Local authorities and businesses need to work together in public-private partnerships, in an environment of trust and dual responsibility. When the likes of auto giant Chrysler comes to Turin, the city needs to be ready.

“Companies looking for an advantage will be looking increasingly at access to infrastructure,” says Banks. “While local governments have to be smarter in how they procure infrastructure, which will clearly involve the private sector, businesses will be looking closely at how they can best locate themselves so that physical and social infrastructure is not a challenge.”


In defense offinanceIn this series, expert columnists from the world of business, finance and beyond, discuss key issues affecting business today. This issue: banks’ reputations.Philanthropy typically reveal a concentration of financial institutions in the top 10, and the Conference Board’s most recent edition of Giving in Numbers shows the financial sector leading all others for cash donations as a percent of revenues donated in cash and as a percent of pre-tax profit.

And while banks are often criticized for not lending enough or charging high rates, this is in part due to the regulations that are, arguably, impeding banks’ ability to take prudent risks in lending. Consider Dodd-Frank in the US, or the pending 2016 requirement for all European Union banks to comply with “minimum requirement for own funds and eligible liabilities” set by the European Banking Authority.

Banks, by nature, want to make loans at attractive rates; given competition from non-banks on other financial service fronts, including unregulated “shadow banking,” it is one of the few businesses they have left — and they demonstrate commitment to it in good times and bad. For the past few years interest rates have dropped on a global scale, making it more difficult to create loans that are both competitive and profitable. Yet a June report from the Bank of International Settlements notes that in the last quarter of 2014, worldwide cross-border bank lending to non-banks grew by US$190b.

Just as businesses need effective banks to thrive, so do nations. National credit

policy is one of the areas measured in think tank Cato Institute’s annual list of Economic Freedom of the World, showing the correlation of economic freedom and social wealth. Cato gives lower economic freedom rankings to countries with heavy regulations and a high tax burden, and higher ratings to countries with strong private banking.

For Cato’s most recent list, nations in the top quartile had an average per capita GDP of US$39,899, compared to US$6,253 for nations at the bottom quartile. And more strikingly, the average income of the poorest 10% in the most economically free countries in 2012, US$11,610, was almost double the overall average income in the least-free countries. In the words of financier Dr. Henri-Paul Rousseau, spoken in January 2015 at the 10th anniversary of the Collège des Administrateurs in Montreal, Quebec: “You can eliminate risk from an economy, but everyone will be poor.”

So while there will always be individuals who tarnish the reputation of banking, and critics who seize upon those negative examples to blame the financial sector as a whole, the fact is that banks do not cause poverty; they are one of the solutions for reducing it. They may also be the key to continued prosperity.

The reputation of financial services has taken a kicking over recent years — with some even accusing banks of causing

poverty on a global scale. Accounts of the Greek “oxi” vote against financial creditors, complete with images of bank runs, has not helped.

But is this fair? Certainly, no one likes scandals, much less austerity, but it should also be remembered that there is a direct link between financial institutions and the liberty and prosperity of the world’s leading nations. People may be able to forge their destiny by starting a business and building it through use of capital, but in most cases, these actions require the human and financial capital of banking institutions.

By loaning funds to businesses, banks enable them to survive and grow. Surveys by the National Federation of Independent Businesses (NFIB) in the US indicate that the majority of small businesses (85%) depend on banks for credit.

In April 2015 alone, US banks loaned US$1.86b, according to the Federal Reserve Bank of St. Louis. Significantly, only 2% of small businesses surveyed in early 2015 by NFIB identified bank credit as their main problem; regulation (23%) and high taxes (22%) took that honor.

Banks also help communities. Annual corporate giving lists of the Chronicle of


Alexandra Reed Lajoux is the lead co-author of The Art of M&A book series and Chief Knowledge Officer of the National Association of Corporate Directors (US).

The last word

Alexandra Reed Lajoux

www.capitalinsights.info | Issue 8 | Q4 2013 | 51

Capital Insights on the move

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Cash on prescriptionEY’s latest capital management report looks at the rapid evolution of the pharmaceuticals industry in 2015 and beyond.

Whistleblower hotlines and the role of the audit committeeEY’s Center for Board Matters looks at how corporates should respond to whistleblowers.

UK attractiveness surveyAfter another strong year attracting foreign direct investment in 2014, EY’s attractiveness survey looks at the UK’s market power.

Further insights

Thought leadership and capital-agenda focused reports are available at capitalinsights.ey.com

The 2002 Sarbanes-Oxley Act (SOX) called on audit committees of US publicly traded companies to create formal procedures to collect, track and process hotline claims received by the issuer related to accounting, internal controls or auditing matters. Additionally, SOX held audit committees responsible

anonymous concerns regarding questionable accounting or auditing matters through the whistleblower hotline. However, the legislation did not provide prescriptive guidance for establishing effective whistleblower programs.

As the Securities and Exchange Commission (SEC) has indicated, because the audit committee is dependent to a degree on the information provided to it by management and internal and outside auditors, it is important for the committee to cultivate open and effective channels of communication. Because the SEC has not

plays a critical role in determining the processes appropriate for

respect to whistleblower hotlines, below are some considerations

Step 1: Communication and receipt of hotline claims

First, audit committees can work with management to discuss ways to inform employees about the hotline and make the hotline easy to use. Depending on the circumstances of the company, audit committees and management can consider the operating

hotline available at select times or days or every day at all hours) as well as the mechanisms used to receive the hotline reports (e.g., telephone, web-based application, fax).

It is often helpful when audit committees encourage management to foster a culture where employees know that they can submit issues anonymously and the reported incidents are kept

reports, organizations might consider using a third-party vendor to assist with the receipt of hotline claims.

When gathering information from a hotline reporter, the organization should consider what facts it will need to evaluate the report.

Step 2: Analysis and investigation of claims The audit committee and management should also determine an appropriate review process for each claim which examines both the merit of the reports (credible and not frivolous) and whether those

and related disclosures. Audit committees should consider what criteria will be used when evaluating reports, which might include both quantitative considerations (e.g., prescribed dollar and/

such as reputational risk, potential breach of covenants or other contractual agreements, regulatory or compliance risk, potential violations of laws and regulations, etc.

Some organizations use a screening committee to ascertain which claims warrant investigation. The screening committee could include an audit committee member, legal counsel and representatives from internal audit, human resources and compliance or risk management functions.

Establishing a well-vetted screening and investigation process for claims is an important consideration for audit committees. Audit committees should consider whether there are predetermined methods to determine which claims should be investigated and ultimately reported and reviewed by the board. In addition, audit committees should consider the need for procedures and protocols for investigations, which could include criteria for evaluating the merit of allegations as well as personnel involved in the investigations.

The approach taken by audit committees to monitor hotlines varies. In some organizations, the audit committee chair has direct access to hotline reports. In others, the chair is copied on whistleblower emails or calls at the same time as others in the company, such as the general counsel. Some audit committee chairs may choose to receive the entire log of reports, while others will review matters selected by an appropriate designee (e.g., internal audit or general counsel) who was charged with monitoring whistleblower reports and informing the audit committee about certain reports, such as those that could have

consider whether reports regarding senior management should be

EY Center for Board Matters

May 2015For more articles like this, please visit ey.com/boardmatters

Whistleblower hotlines and the role of the audit committee

Cash on prescriptionPharmaceutical companies and working capital management 2015

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