Devon’s transaction advisory services are rooted in our proprietary cash profitability metrics and value curves. Devon services include: deal sourcing, divestiture or spin planning, deal structuring, and post-transaction communications strategies.
Devon uses its extensive network of contacts in the public and private equity markets to identify highly value accretive acquisition candidates for our clients. In some cases, when our publicly trading clients have attractive levels of cash profitability, but modest growth prospects in existing markets, we have become an extension of our clients’ corporate development departments with a particular focus on the arbitrage opportunity inherent to the often differing valuations in the public and private markets. In many cases, Devon has identified private equity-owned properties that can be purchased at the upper-end of the private equity owners’ expectations while still generating substantial value for our clients.
In one recent case, a public company client was able to win an auction that added 30% to the company’s share price. Devon’s valuation metrics and extensive experience with the private equity industry made this transaction possible.
When a Devon client decided that the “ask” was too rich on a transaction with substantial “strategic merit”, Devon was able to propose a “carve-out” of a portion of the acquisition target that was, in fact, more value accretive than the transaction as originally proposed by the company’s investment bank. The deal successfully closed because the seller actually valued highly the portion of the business that our models determined would have been a value-destroyer to our client—Devon’s proposed transaction was better for both buyer and seller.
Divestiture or Spin Planning
There is substantial empirical evidence that companies can increase shareholder value by selling or spinning divisions with substantially lower cash profitability than the company average profitability. In some cases, portfolio businesses that actually reduce a company’s consolidated value are valued on their assets, their synergies, or their “turnaround option value” when sold or spun. That said, an important number of divestiture or spin transactions prove that not all of them are value accretive. Devon’s proprietary value metrics allow a client to predict the likely value from a divestment or spin-off before the transaction becomes an expensive waste of shareholder value.
One of our clients discovered in considering a spin of a large division that its three investment banks were in disagreement on the likely value the transaction would generate. The banks acknowledged that their differing views would reflect confusion among investors. Devon’s models predicted a compellingly powerful result, supported by a study of the 40 largest spins undertaken in the last five years. The model and the study were used by our client’s investor relations group and the spin ultimately created the value predicted by Devon.
Another client was contemplating the divestiture of a large division whose industry comparable EBITDA multiples were lower than the company’s other businesses. The Board was pressing the company to go forward with the sale and enjoy the expected expansion in the company’s multiple. Devon’s analysis suggested that the divestiture candidate was a standout performer in an under-performing market segment—the analysis indicated that as a standalone company, the division would trade at a premium to the consolidated company. Further analysis indicated that there were several divisions in the company that were not contributing to the value of the consolidated company and could be divested with certain value accretion. Three years later, the company completed the new list of divestitures and the share price doubled on lower revenue and net income.
In large transformational transactions, most of Devon’s clients use a large Investment Bank to advise on financial structuring and execution as well as to provide a fairness opinion for the Board. Devon always works for corporate management, provides no fairness opinions, and has no financing execution capability. Nevertheless, our clients have often benefited from a second opinion on the value accretion or dilution of the financing strategies proposed by our clients’ banks.
In one case, one of our clients was looking to finance an acquisition with an EPS-dilutive equity offering. While our client’s investment bankers modeled value dilution of approximately $5 per share, our models suggested accretion of the same magnitude. Within a year of completing the deal, the acquisition had created the significant value that our models had suggested.
In another recent case, Devon recommended that a client absorb a 20% prepayment penalty to remove legacy debt because the modeled value accretion from a negotiated acquisition justified the increased transaction cost with substantial cushion. Although the initial reaction of investors was negative, the deal proved highly accretive and was instrumental in setting up the next acquisition that was even more accretive to value.
When transaction activity violates traditional norms—the divestment of an underperforming division for less than the company’s valuation multiples, an acquisition on an EPS dilutive basis, etc., it is critical to communicate the logic and the math of the transaction to buy-side analysts and investors. Since Devon’s value curves are derived entirely empirically from investor behavior, our models are often useful in convincing skeptical investors that “non-traditional” transactions can be highly value accretive on a cash profitability basis.
In a recent case, a client’s investment banks were reluctant to support acquisition strategies because the client’s average profitability was below the cost of capital and the sell-side analysts were urging the divestiture of divisions and product lines that were not ready for optimal divestiture pricing. Devon’s solution was to divide the company into “value” segments and integrate this perspective into the investor relations materials used by the company to explain that the ground rules under which acquisitions would be considered precluded the classic “good money after bad” pattern typically found in acquisitions undertaken by companies with low levels of cash profitability.
A new CEO was determined to change the scale of acquisitions from small family-owned niche companies to larger companies with higher technology content. The push-back from sell-side analysts was annoying, but the concerns of buy-side analysts and investors required urgent attention. Explaining the value accretive math of his acquisition strategy, the CEO bought time. When his first acquisition increased cash profitability by 20%, the CEO spelled out the accretive math in greater detail. The share price responded positively and the company’s value has increased by 20% per year after a dozen value accretive acquisitions.
Working with Investment Banks
The evolution of investment banks from largely advisory to largely capital driven institutions has created the need for “old fashioned” value advise without risk of conflict of interest. Devon works with managements on value advisory projects that are too “raw” and unformed or too sensitive to share with the client’s investment bankers. Over the years, Devon has worked with virtually every major investment bank on Wall Street and the City of London. When ideas emerge from the Devon process for investment bank review and execution, they are well-defined and documented and thus efficient for the banks. To assure that our service is practical for our clients and efficient for their investment bankers, Devon uses all standard valuation methodologies to provide a context in which the valuations generated by our models can be understood and exploited. Such methodologies include, but are not limited to:
- Cost of capital analysis using the Capital Asset Pricing Model (CAPM)
- Discounted cash flow analysis (DCF)
- Trading comparable multiples
- Precedent transaction multiples
- EPS accretion/dilution analysis
- Leveraged buyout analysis
Devon’s clients observe that our services are supplemental, not competitive with investment banks.