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Post-game review

The bidding may be over, but the analysis has just begun. Post-transaction reviews are increasingly de rigueur among private equity firms keen to learn lessons from victory or defeat. By Andy Thomson

Whether a sports team has won or lost will make a profound difference to the changing room atmosphere after the match. The winning team might be instantly identified by the sound of whooping, backslapping and champagne corks popping. The losing team, on the other hand, might either suffer in silence, openly weep, or be on the receiving end of a verbal assault from their coach, during which objects may quite possibly be hurled at perceived under-performers.

Reactions from private equity firms to winning or losing deals may not be quite so extreme, but don't be fooled: the final outcome matters just as much to them as it does to the stars of the soccer pitch or baseball diamond. That's why a majority of investment groups canvassed by Private Equity Managernow conductwhatmay be loosely termed ?post-transaction reviews?, i.e.post-mortems that examine how firms performed when bidding for a particular business, and whether lessons could be learned from the experience.

Steve Darrington, chief operating officer at London-based buyout firm Phoenix Equity Partners, says the type of post-deal review his firm conducts depends on how close it got to winning.?If we got a long way down the path before losing, maybe to a shortlist of two or three, then we would have a formal, structured review. If we lost out in the first round of an auction, we'd have a small, more informal review, probably involving fewer people.?

The formal, structured scenario will involve more rigorous analysis, says Darrington, involving the firm's management committee and key deal executives. If ?we can really learn from the deal? the debriefing might even extend to the entire firm, he says.

But he adds that Phoenix view it as vitally important to document all deals they have seen – no matter how early they were eliminated as a potential buyer. ?For marketing purposes, we want to have a record of every single deal we have seen and whether there were any that slipped through the net and why – and perhaps as a result suggest to intermediaries that a particular deal we never saw could have been shown to us as well.?

Richard Green, managing director at European mid-market private equity firm Kleinwort Capital, says his firm will also conduct reviews to explore why a deal wasn't won and how things could be done better next time. These reviews, he says, will also comprise advisers used by the firm as well as its own deal team.?Itwon't necessarily involve all the advisers we've worked with on a deal – there might not be much point in bringing in the insurance guys for example – but we nearly always involve the lawyers.?

When asked for examples of issues that get discussed during the deal reviews, one phrase crops up regularly:?Every deal is different.? This arguably makes it all the more important that post-transaction reviews are conducted on a regular rather than an occasional basis – the lessons to be learnt can be many and various.

Says Neil Scragg, a director at UK private equity firm Gresham: ?We're currently looking at three or four deals we didn't win to see what we can learn. But every deal tends to be different when it comes to, for example, the attitude of the vendor or the behavior of the competition. There don't tend to be recurring themes.?

This is not to say conclusions are never reached about why the outcome turned out the way it did. Says Kleinwort's Green:?Sometimes, we've put in a bid and we simply couldn't go any higher on price. In that case, we might ask why someone else had the incentive to go higher. Itmight be because they had a special angle on the deal or itmight be because they'd lost the last four auctions and pressure to investmeant they couldn't lose another one. In that scenario, we would conclude that retaining our discipline on price was justified.?

Of course, post-deal analyses are not all about agonising over opportunities lost: sometimes they're about winning as well. But when such a triumph has been chalked up, the review can often be – to put itmildly – a little less formal.?If we've won a deal and done a good job, we might just all go down the pub and celebrate,? says Green. Spoken like a true sportsman.

WHERE DID IT ALL GO WRONG?
We asked a number of private equity professionals what sortof questions get asked following a broken deal. Here are some of their responses:

  • ? Did we offer enough? (One respondent said:?It sounds a stupid question, but we all get comfortable with our own models and maybe ours was wrong.?)
  • ? Why did the competition have the best angle?
  • ? Where did they get that management buy-in candidate from, and why didn't we get them? Why didn't our headhunters bring that person to us? Do we have the right networks?
  • ? What were the other bidders' return criteria? Are their return expectations lower than ours?
  • ? Did our advisers manage their time properly? Did they provide value for money? Did we use the right advisers?
  • ? Did we have the right investment team working on that particular deal?
  • ? Did we respond quickly enough to the opportunity? Should we have done more background work earlier?
  • ? Did we upset anyone on the other side of the table?