Mergers and Acquisitions

Markets

Strategy

Finance

Deals

Bucking trends

In for the kill

Show me the money

Make it work

Which firms weathered the stormy

Plotting the path to identify, target

Dealmakers are resorting to cold,

The best and the worst mergers

seas of 2011? | Page 6

and takeover | Page 9

hard cash | Page 10

in history | Page 13

business-reporter.co.uk

December 2011

Distributed within The Daily Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents

Hope and prey Are cash-rich investors waiting to pounce?

A report on mergers and acquisitions in 2012

Business Reporter · December 2011

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions – in this issue

Happily ever after?

From optimism and action to uncertainty and caution, the highs and lows of 2011 are giving way to a mergers and acquisitions market that’s reshaped for an even stronger future What a difference a year makes. At the end of 2010, everyone buying, selling or advising in the field of mergers and acquisitions (M&A) was looking forward to a bumper period, one that would finally banish the horrors of the earlier recession.

This year’s global narrative, however, has been the struggle of not merely banks but whole countries to reduce their exposure to debt. Many are waiting to see what happens next and this is never good for M&A transactions – uncertainty simply means paralysis.

Look beneath the dramatic headlines, however, and you see that the M&A market still has some healthy indicators. Not only are some deals still being made, but there are plenty of domestic businesses building up piles of cash for the day when uncertainty becomes stability, with many more predators from overseas eyeing goodvalue purchases in the UK market.

For these businesses, not only is cash king, but raising more debt on the back of it is not the challenge it is often reported to be. Those who are struggling to raise finance are not the major UK and foreign blue chips, but the expanding number of AIM companies and private equity houses that have been heavily dependent on leveraging debt to make the deal.

Funding conditions are tougher overall, which makes identifying, funding and delivering value from M&A ever more important. Finding the right target for takeover is both a science and an art: a science because a business has to be forensically clear about what it wants and then be prepared to dig deep for detail on the target; and an art because it needs a clear vision for creating value from the newly acquired business. And as important as finding the right target is finding the right advisers to help find sources of finance – it pays to know why you should trust one adviser above another.

Once the deal is done and the target captured, the story is far from over. Many M&As, we are often told, fail to create any value whatsoever for shareholders. Much thought needs to be given to what makes a merger or acquisition work in practice, particularly in setting the tone in the all-important first 100 days. There are important lessons of leadership, transparency and delivery, all to be learnt without ever losing sight of the customer.

After a year of uncertainty in 2011, it may well be that in 12 months’ time there will be a slightly happier story to tell. When the level of M&As eventually picks up, it could be through deals conducted more sensibly for the long term, without the burden of highly leveraged debt. If a year makes a big difference, then a sensible and steady M&A market by the end of 2012 may be no bad thing at all.

Contributors

Supporters

By Trevor Merriden Publisher Bradley Scheffer brad@lyonsdown.co.uk Managing Editor Lucie Carrington lucie@lyonsdown.co.uk Editor Trevor Merriden Creative Director Martin Nolan studio@lyonsdown.co.uk Sub Editor Amy Dickson amy@lyonsdown.co.uk Journal Assistant Natalie Luketic natalie@lyonsdown.co.uk Project Manager Emmanuel Arthur emmanuel@lyonsdown.co.uk For more information on any of our supplements please contact us: Telephone 020 8349 4363 Email info@lyonsdown.co.uk Online www.lyonsdown.co.uk

Trevor Merriden was deputy editor of Management Today and editor of Human Resources magazine and has written several well-received business books.

Marc Beishon is a technology, science and business journalist and editor covering IT and telecoms, sales and marketing, healthcare and general business for corporate audiences and consumers.

business-reporter.co.uk

Nick Martindale is a business journalist who writes for national media and trade titles. He is a former editor of New Business magazine, a quarterly magazine for entrepreneurs.

3

£6.7bn is the cost of the biggest UK acquisition of 2011 P6

170

is the number of branches at Brandon Tool Hire, up from eight following buying spree P9

91%

of UK mergers and acquisitions were cash deals between July and September P10

2009

is the year AOL and Time Warner parted company, after arguably the worst merger in history P13

Business Reporter · December 2011

4

an independent report from lyonsdown, distributed with the daily telegraph

Industry view

The value of new markets Broaden your company’s horizons and you could cash in. Cross-border deals can offer real value – and a way to get ahead of the competition There’s a popular myth that merger and acquisition deals destroy value. However, the right strategy can bring superior returns, according to Ernst & Young partner Robin Jowitt.

“We found that over five years, organisations which undertook a series of cross-border transactions beat the market return by 67 per cent – a clear sign that mergers and acquisitions (M&A) transactions added value,” says Jowitt.

Serial deals limited to the domestic market beat the market by 24 per cent, according to Ernst & Young’s forthcoming study: Rise of the Cross Border Transaction: The Serial Transactor Advantage.

Frequent cross-border deals boost the chances of good returns, Jowitt says. But he adds: “Most managers have yet to realise this so businesses that take the lead can benefit from the ‘serial transactor advantage’ to deliver stronger returns than either transacting domestically or just sitting on ever-growing piles of cash – providing they have the right skills and processes.”

Many corporates are hoarding cash – Ernst & Young figures show that total cash balances of the

1,000 largest listed companies worldwide have grown from around $450 billion (£280 billion) in 2006-07 to circa $800 billion (£506 billion) in 2010-11. “Now may be a good time to get into the market, before cash-rich buyers push prices up,” says Jowitt.

Corporates need to act sooner rather than later, though – a quarter of this years’ deals have been cross-border, and Ernst & Young’s October Capital Confidence Barometer survey of 1,000 business leaders shows that 41 per cent intend to make acquisitions in the next year, up three per cent on six months ago.

But which markets offer the greatest opportunity with least risk? With Cass Bu si ne s s Sc ho ol, Ernst & Young has analysed markets to come up with an “M&A mat ur it y score” based on economic, financial, political, regulatory, sociocultural and technological factors.

As expected, the results show that Canada, the UK and the US are the most mature markets. “But some of the ‘riskier’ countries further down the table offer surprisingly

good prospects,” says Jowitt.

These include Israel (boosted by technological factors), Chile (political maturity), the Czech Republic (sociocultural factors) and Malaysia (economic factors).

“Sav v y buyers have already realised the potential for acquisitions in these markets,” says Jowitt.

China beats Brazil, India and Russia, largely because of its technological maturity, though regulatory and political issues have hindered progress. Brazil is strong in technology, but is held back by the same factors as China. Russia shows a strong sociocultural performance but a weak political score. India shows strong technological and financial scores but weak regulatory, political and socialcultural factors.

A low score offers challenges that, when overcome may offer significant opportunities, says Jowitt. For instance, dealing in a county where stability is low and corruption rife may be rendered less risky by due diligence and local knowledge. “This could bring the potential to

What’s the deal on IT? Don’t count the cost of ignoring IT when it comes to mergers and acquisitions. It’s more important to success than many businesses think When it comes to mergers and acquisitions, failing to take IT into account can threaten the viability of the whole project.

“IT underpins all business functions from HR to operations and finance, yet executives too often fail to focus on IT adequately,” says Tony Qui, head of the IT transaction services practice at Ernst & Young. “It commonly leads to higher than expected costs and, in some cases, deal failure.”

Ernst & Young’s recent report IT as a Driver of M&A Success shows the extent to which IT is critical to successful mergers and acquisitions (M&A) transactions. Whether the transaction is driven by the need to consolidate product ranges,

A combination of strategy and knowledge can lead to success

complement existing products, increase market share, gain new customers or enter new markets, IT will be involved.

“When you are expanding into Russia or China, for instance, you must understand the risks, especially in regulatory compliance. IT allows you to monitor that,” says Qui. Yet IT is often overlooked in M&A transactions.

Ernst & Young’s survey showed that only 38 per cent of corporates and 22 per cent of private equity respondents said they put significant emphasis on IT in their approach to transactions.

“Not surprisingly, the results show that IT often proves to be a costlier and more time-consuming

part of the transaction than expected,” says Qui. So what’s the solution? Qui and his team have a number of suggestions. First, give IT a seat at the table from the beginning. “Often IT is not involved in the M&A process early enough,” says Qui. Only half of survey respondents said that IT managers were typically involved in the transaction process. It’s no surprise, then, that inaccurate cost estimates and timelines – and subsequent overruns – are common.

Next, understand the strategic value of IT. Whatever drives the M&A activity, the business will need reorganisation – which is always underpinned by IT. Understanding

A quarter of deals in 2011 have been cross-border

grab growth opportunities that competitors are unaware of or unable to take,” he adds.

Of course, cross-border deals present numerous challenges. Over a third of the respondents in Ernst & Young’s What lies beneath?

The hidden costs of entering rapid-growth markets survey said the costs of investing in rapid-growth markets were higher than expected, and 43 per cent said time overruns were an even bigger problem.

But given the clear potential for higher returns it may be a price worth paying.

For more information, visit: www.ey.com/uk/transactions

the drivers behind the transaction will help focus the IT transaction efforts. “Missing the depth and breadth of the IT business needs could negatively impact the overall strategic objectives,” says Qui. The next tip is to plan for day one with a view to day 100. Forty per cent of respondents to the Ernst & Young survey said they encountered post-deal IT problems, often with business continuity and data migration, that were not detected during due diligence.

A long-term view is essential to spot which IT systems need upgrading and which need replacing. “Pre-planning allows you to move from integration to innovation more quickly,” says Qui. Finally, honestly assess the skills needed to deliver the deal. A combination of strategic planning and detailed IT knowledge can equate to a higher rate of deal success – but do you have that combination in-house? “Often the combination of strategic approach and detailed system knowledge are not present in the company’s internal IT team,” says Qui. “Added to that, they may have no experience of M&A transactions.”

Almost half of respondents to the survey engaged third-party IT advisers to help with pre-deal due diligence, and 55 per cent used them after the transaction. Qui points out that his team combines the strategic vision of former corporate chief information officers with the in-depth technical knowledge of IT operations managers, and has combined experience of over 300 M&A transactions.

Whatever you do, engage IT staff with the transaction early on. “You simply cannot afford not to,” says Qui. For more information, visit: www.ey.com/uk/transactions

Business Reporter · December 2011

an independent report from lyonsdown, distributed with the daily telegraph

Industry view

The flight to infrastructure

Infrastructure-related mergers and acquisitions are growing, but one company believes buyers must understand how these complex assets operate to maximise returns

Green ideas: utility companies are selling electricity and gas distribution assets to enable investment in renewable power generation

Despite the economic crisis and the continued debate on the availability of finance, the infrastructure mergers and acquisitions market continues to thrive. Deal values have held up in 2011 and look to remain steady into 2012, making infrastructure an attractive prospect for investors. Arup has advised on more than $35bn of transactions in the past two years, giving it a unique insight into the dynamics of this market.

Infrastructure transactions are currently being stimulated by three key drivers. Firstly, highlygeared infrastructure contractors and operators are looking to refinance through disposal of assets. For example, utility companies such as EDF Energy and E.ON are disposing of gas

and electricity distribution assets to reduce gearing and allow investment in power generation. In a similar vein, it is anticipated that a number of highway and airport portfolios will come to the market, particularly in Spain and Portugal.

Secondly, regulation is increasingly playing a part. Large groups such as Gas Natural and Vattenfall are being compelled to sell assets in order to comply with EU directives to liberalise the energy market and break-up powerful, vertically integrated utilities. Similarly, competition regulation is driving transport activity, as demonstrated by the requirement for Ferrovial to dispose of Stansted and Edinburgh airports.

Thirdly, governments are under pressure to reduce debt. Large infrastructure investment is seen as a way to stimulate economic recovery and privatisation of infrastructure assets can yield significant proceeds of sale. As a result, governments in Spain, Ireland, the UK and elsewhere are looking at privatisation in sectors such as transport and utilities, and massive amounts of capital has been set aside for investment in infrastructure assets via pension funds, infrastructure funds and sovereign wealth funds.

Investors are attracted to many of the features of infrastructure as an asset class: monopolistic markets, economic regulation providing revenue

protection and predictable returns on capital.

This encourages investors to invest long term and to accept relatively low but stable yields.

However, infrastructure assets are often large and complex, and can be very expensive to own if they fail to operate. In addition, economic regulation, while offering protection, can be a minefield if approached without experience.

It is increasingly important that investors appropriately evaluate a spectrum of risks and opportunities when deciding to invest in infrastructure. The ability to drive operational efficiencies, manage the impact on future operating costs arising from large capital expenditure programmes, and optimise the timing of major asset end-of-life replacement, can all be critical to achieving required returns.

It should also be noted that many infrastructure mergers and acquisitions involve the separation of operating divisions from large integrated conglomerates or public sector bodies, and therefore need transition and post-transaction planning, and management team development, in order to realise anticipated benefits.

Assessment of the opportunities and risks inherent in large infrastructure assets requires a combination of technical, financial and strategic insight, which is why Arup’s deal advisory teams are drawn from each of these disciplines.

Increasingly, infrastructure dealmakers are seeking to get to grips with operational issues and how to drive improved performance and return from the assets they invest in. As a result, they are looking to advisers such as Arup who can translate technical issues into financial analysis and fully evaluate the opportunity.

Steven Lloyd is global leader of Arup’s transaction advice business. Call 020 7636 1531 or visit www.arup.com/Services/Transaction_Advice

The Leading M&A Advisor in B2B Information Over $1 Billion in 2011 Cross-Border M&A

16 May 2011

has been acquired by

5 May 2011

has been acquired by

5

1 November 2011

has been acquired by

For further information, contact Richard R.S. Northrop, Managing Partner at +1 203.661.7702

Business Reporter · December 2011

6

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions

There’s life left in the market A hike in merger activity could be just a heartbeat away.

But what will trigger the blood flow?

By Nick Martindale

Duffy: success through adversity

Global gains

At the tail end of 2010 all the talk was of how merger and acquisition activity in the UK was set for a recordbreaking year. And despite concerns over the economic landscape – and levels of US and European debt in particular – which saw activity decline drastically, as both potential buyers and sellers wait to see how the economy performs while the availability of finance comes under pressure, some businesses bucked that trend.

Sellers need to sell and on the buying side, private equity is still active if diminished. Whatever the sources of finance, it remains true that acquisitions represent the quickest route to growth for some in the current climate.

Take Western Union’s acquisition of Travelex, which was completed in November for £606m, for example.

According to Raj Agrawal, president of Western Union Business Solutions, the purchase was simply a case of the right opportunity at the right time. It offered Western Union the chance to acquire a competitor which would give it a firmer base from which to make an assault on the global business payments market, which remains heavily dominated by the banks.

“For us it’s not about the economic conditions in a particular area but the long-term growth opportunities,” he says. “It was something we would have done last year or next year. It was the fastest way to gain scale and the right strategic opportunity for us.”

Long-term strategic thinking is easier if you have deep pockets in the current climate, but for others, opportunity has come through adversity. The recent sale of audio and web conferencing business MeetingZone to private equity house GMT Communications Partners was sparked by the decision of its previous venture capital backer to realise its investment after ten years of growth.

It allowed Tim Duffy and his fellow co-founder to dilute their stakes.

“Once you create quite a lot of potential value in terms of the equity in the company, the longer that goes on the bigger proportion of your own financial stability is tied up with it,” Duffy says.

“We decided it was time to de-risk our own personal

holding because we were becoming risk averse.”

Selling the business took about two years from start to finish, but it was completed in August, before the recent market wobbles. “Even today I think we’d still rank as a good, bankable prospect,” he says. “But it’s certainly a relief to have it done before the turbulence.”

Duffy is one of the fortunate ones, however, as private equity has not been quite as prolific this year as the industry would have liked. Darryl Eales, chief executive of mid-market specialist LDC, says deals in this sector – defined as transactions between £5m and £250m – slumped from 161 with a value of £6.2 billion in 2010, to 142 with a value of £5.4 billion over the 12-month period to November 2011.

“It is hardly the ideal time to buy or sell businesses,” he says. “Valuations are much more problematic and need to be more carefully thought through given the markets’ higher volatility. But companies with strong growth and predictable cash flows can still command very significant premiums.”

That is something to which Sam Ferguson, group chief executive of information management provider EDM Group, can testify. At the end of September, his business merged with a smaller competitor, Sala International, in a £52m transaction backed by LDC, with support provided

by Lloyds Bank Corporate Markets Acquisition Finance.

Ferguson feels his own good track record in the sector, alongside impressive growth figures of 20 per cent a year for the past three years, made the business an attractive proposition, but even he questions whether he would get such support today. “Banks are just like any other business; if confidence levels are low their confidence levels are low,” he says, before adding ominously: “In recent weeks, it’s got even worse.”

However, there are still niche opportunities. Jason Purcell, chief executive and co-founder of FirstCapital, says the technology market remains healthy, with significant opportunities in sectors such as mobile internet, e-commerce and digital media. “I’d expect to see 2012 as a pretty solid year from a European perspective,” he says.

Other sectors where strong interest in mergers and acquisitions remains include energy and utilities, financial services (see box), manufacturing, healthcare

and specialist engineering. “Where it’s much thinner is anything around the consumer sector, so retail or leisure,” suggests Rob Donaldson, head of mergers and acquisitions and private equity at Baker Tilly. “There’s just no sense in going to market on those at the moment.”

Mark Spelman, global head of strategy at Accenture, suggests it is the uncertainty around policy that is giving

Whether it’s China, India or South America, emerging markets offer new opportunities

With growth over the next couple of years in western economies likely to be sluggish at best, UK companies need to act fast to take advantage of opportunities for mergers and acquisitions in Asia and South America, says Patrick Groarke, partner at Livingstone Partners.

“British services, branding and engineering remain highly sought-after and UK businesses in areas such as oil and gas have already been very successful at developing a global footprint.

Other sectors need to follow suit as the window will close in time,” he says, as countries such as India and Brazil attract international competitors for UK businesses.

India, in particular, presents a compelling proposition, with a relatively young population and strong cultural links with the UK,

while no global business can ignore China, Groarke says. “But South America now offers major opportunities in sectors such as automotive, energy, finance and services to the developing middle classes.”

As well as buying into stronger economic growth prospects, emerging economies can also offer more favourable business environments than the western world, suggests Darryl Eales, chief executive of private equity firm LDC. “Companies are often buying into a leaner corporate culture and lower production costs, allowing them to streamline supply chains and source more inexpensive manufacturing and production, which can boost margins,” he says.

These days, though, the traffic is anything but one-way.

We are just as likely to advise Chinese investors looking to snap up opportunities in Europe as Western corporates seeking to invest in China, says Melvin Glapion, business intelligence practice leader at risk consultancy, Kroll. “We see a lot of Asian investors looking at western retail, FMCG and technology companies,” he says.

Chinese companies in particular are becoming increasingly influential. “China’s mergers and acquisitions activity is still in its infancy but has been relatively steady over the past five years,” says Phil Burns, managing director at Clearwater Corporate Finance. “The rise of outbound mergers and acquisitions is mainly driven by China’s economic strength, following ten years of consistent

Which countries will be the most active M&A target markets?

48% 51%

China 39% 39%

India 35% 35%

USA 29% 31%

Brazil

2012 Over the next five years

22% 23%

Russia 12% 13%

UK 0

10

Percentage of respondents

8 per cent GDP growth annually.”

In the UK, though, the spread of Chinese influence has tended to be relatively subtle, with companies buying into supply chains rather than big-name

20

30

40

50

60

Source: A Netjets Europe study of European M&A

brands, says Mark Spelman, global head of strategy at Accenture.

The UK, however, is increasingly competing with other emerging markets for such

investment, and he adds: “We need to recognise that with the higher growth rates of emerging markets, it’s not totally obvious that we will be an attractive destination.”

Business Reporter · December 2011

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions

7

Trading places Major UK mergers and acquisitions during 2011 – and the one that got away • Hewlett-Packard acquired the UK software company Autonomy in October, in a deal worth £6.7 billion, making it the biggest deal of the year involving a UK business • The protracted merger of British Airways and Iberia, creating International Airlines Group (IAG), was finally completed in January this year, with an estimated valuation of £6.1 billion. IAG is currently in the process of taking over BMI from parent company Lufthansa in a move analysts estimate is worth around £300m • Virgin Money’s recent takeover of Northern Rock has been valued at £1.03 billion, some £747m of which will be paid in cash upfront

• Forth Ports, the largest port owner and operator in Scotland, agreed to a £760m takeover by its largest shareholder Arcus European Infrastructure Fund in March • EC Harris merged with Dutch professional services company ARCADIS in November, with a total valuation estimated to be in the region of £125m • And finally… G4S’s proposed £5.2 billion takeover of Danish firm ISS, which would have created the world’s second-largest private sector employer after Wal-Mart, was scrapped in November after shareholders failed to back the move.

Will the level of global M&A activity increase in 2012?

100 28% 40%

most cause for concern when it comes to mergers and acquisitions. “Markets got nervous about the promises that were being made about the ‘haircuts’ banks would have to take on Greek and Italian debt,” he says. “We moved from there being no concerns to having concerns around 2013, to 20 per cent and then to 50 per cent write-offs. That’s made everyone else, including corporates, uncertain.”

Other factors can also get in the way of mergers and acquisitions, again related to debt. Patrick Groarke, a partner at private equity firm Livingstone Partners, says defined benefit pension schemes can be “the death blow to transactions”, as liabilities can sometimes be larger than the value of the business itself.

The market, however, is far from dead. In fact, Donaldson says his firm has never advised on so many transactions at any one time. He puts this down to Baker Tilly’s mid-market specialism; the firm’s transactions tend to be in the low tens to a few hundred million.

Sometimes they are private businesses that need to

On the money?

get on with post-business lives, according to Donaldson.

“The reasons that bring people to sell are many and varied,” he says. “It can be divorce, retirement, boredom or a desire to do something else. There’s been a long period of uncertainty, but eventually life has to go on for these people, even if prices are not what they were.”

It’s unlikely, however, that mergers and acquisitions will increase dramatically until the current turmoil is resolved and it becomes clearer as to whether or not the world economy can escape a double-dip recession.

A solid but unspectacular 2012 is the most likely outcome, but given last year’s optimism, predictions of M&A activity is more guesswork than science.

Percentage of respondents

80

52%

52%

52%

48%

48%

48%

47% 60%

60

40

72% 60%

20

0

53% 40%

Germany

CEE Yes

France No

Russia

Switzerland

UK

Overall

Source: A Netjets Europe study of European M&A

Donaldson: not buying into retail or leisure sector

The financial services sector could be ripe for the picking

Regulatory pressure in the wake of the Vickers Report, which suggested that banks should be forced to ring-fence their highstreet businesses from their investment banking arms, as well as the government’s desire to reduce its debt by selling off the nationalised banks including Northern Rock, are two factors that suggest that the financial services sector is likely to see

increasing levels of activity over the next year or two.

“If the current trend for worrying financial news continues, pricing low will stay low, creating a good opportunity for cash-rich internationals to buy into new markets or market areas,” says Tom O’Kelly, managing consultant at mergers and acquisition integration firm PIPC.

On the retail side, the most likely candidates for takeovers in the UK in the sector will be smaller building societies with clean books and low levels of debt. “We’re going to see smaller firms struggle to accommodate all three core obligations required by the market: to lend more, stabilise by increasing cash reserves and keep prices low to stay competitive,” says O’Kelly.

“It’s looking very much like a perfect storm that will claim several smaller ships along the way.”

If and when the current uncertainty in the euro zone is resolved there are likely to be opportunities for investors to take control of major institutions which are currently trading way below book value, says Paul Crowe, director of LOC Consulting.

“I can see some heavy investment in this sector, not least because many of these institutions have spent the past three years repairing their balance sheets and reducing reliance on short-term wholesale funding,” he says. “If charging for standard bank accounts becomes a reality, the retail banks could return to dramatic profitability quickly.”

The Vickers Report, in

particular, will force banks to double up on infrastructure and make investment arms less attractive to existing owners, suggests David Field, executive director of Rule Financial.

“We expect to see an increase in mergers and acquisitions, with larger investment banks absorbing these smaller investment operations,” he says.

Business Reporter · December 2011

8

an independent report from lyonsdown, distributed with the daily telegraph

Industry view

Information is the key When you’re looking to acquire a business, it pays to get the right information from the right people.

Due diligence isn’t a luxury – it’s a real necessity The process of due diligence is a key part of mergers and acquisitions strategy, as it provides a bridge between the making of an offer to acquire a target and completing a deal.

In any acquisition, the scope of investigation for a due diligence report will vary. For instance, in a manufacturing business, the supply chain and facilities will be critical as well as the production “recipes” and processes, while in a service business, customer relationships tend to be key.

Hence, in setting a mergers and acquisitions strategy, a key issue to consider is what information the buyer needs to get comfortable with completing any acquisition he is willing to make an offer for. We have seen a trend towards an increasing requirement for commercial and management due diligence alongside financial, tax and legal enquiries.

Given that there are often multiple acquisition stakeholders – the acquirer itself, its bank and sometimes its equity providers – it is also vital

that there is an agreement in place of the scope and timing required by all parties at an early stage.

From an adviser’s perspective, the nature of the report required affects the timescale and cost of due diligence dramatically. At Price Bailey, we prefer to avoid long, written glossy reports repeating much detail already available, and instead concentrate on exception reporting and providing partner opinion on the issues the acquirer has specifically asked us to report on.

In today’s increasingly litigious world, this approach can be at conflict with the requirements of parties simply looking for someone to pass the buck to, if needed, but we firmly believe clients are looking for advice and guidance out of due diligence. This also means it is necessary to staff due diligence exercises with senior experienced advisers and not spend more time writing the glossy report up than on the investigation and enquiry stage itself.

The general scope of due diligence should therefore be considered at the start of a mergers and acquisitions strategy, to identify what the key issues are that the buyer needs to be satisfied on before he completes the takeover.

Simon Blake is corporate finance partner, Price Bailey LLP www.pricebailey.co.uk

Focus: there’s a need for more commercial and management due diligence

A matter of money Don’t pay the price of ignorance when discussing the acquisition of a business – finding out the true value of an SME is crucial to any deal Key to any mergers and acquisitions strategy is a clear understanding of value. All too often vendors have inflated views of the value of their business, which can be a great barrier to opening serious discussions over acquisitions, but recessionary times tend to encourage owners to be more realistic about the true value of their business.

In most cases, business valuations are a combination of earnings and a price/earnings multiple. In considering mergers and acquisitions strategy and the SME (small and medium-sized enterprise) environment, gaining an early understanding of the value of a business is much more tricky than in the public or corporate arena as far less public information is available on both true earnings and transaction multiples.

The SME can file very limited information on public record, which gives hardly any information about their financials. Not only that, but as most SMEs are owner managed, profits can be distributed in a far more flexible manner than in a listed company, meaning the information available is often not transparent. Hence a lot more confidential data is required to fully understand underlying earnings than in a typical large company.

This means that buyers and sellers are much more likely to be poles apart on valuation expectation. The UK200Group first recognised this in 2009 and, to assist advisers and business owners in the SME sector, produced the first-ever UK-focused index of valuation multiples for SMEs. The index is prepared from real data provided by UK200 Corporate Finance members, and is based on information from transactions they have advised on where data on underlying earnings are available to compare to the actual deal values and a true valuation multiple can be obtained.

Conserve, capture, create value

In 2009, the UK200 SME price/earnings multiple was 6.8 times and that has hardly changed, standing at 6.0 times earnings based on deals completed in the past two years. Those figures come as no surprise to those close to SME deals and fit with typical maximum funding structures available from banks both pre and post-recession.

Simon Blake is chairman of the UK200Group corporate finance panel www.uk200group.co.uk

Three C’s framework

Mergers and acquisitions do not have to destroy shareholder worth, despite evidence to the contrary Like a second marriage, mergers and acquisitions (M&A) is paradoxical – hope triumphs over experience. This is not surprising when multiple studies show that 50 to 75 per cent of M&A destroys value for the acquirer’s shareholders.

Marakon’s research both supports and refutes this received wisdom. While acquisitiveness does not necessarily lead to exemplary performance, exemplary shareholder return performers show a clear propensity to use M&A to execute their strategy.

It has been widely acknowledged by executives that it is easy to get carried away by the adrenaline rush of M&A. Caught up in the excitement of deal-making and urged on by advisors who say you must buy or be bought, acquirers often: select the wrong target, rely on market multiples to determine price and overpay, become distracted by post-deal integration and so neglect their pre-existing businesses.

Marakon’s experience suggests this does not have to be the case. M&A can actually create substantial value for an acquirer’s shareholders.

We f ind f ive com mon c ha rac ter ist ics distinguishing the most successful acquirers.

• Exemplars use M&A as a means to accelerate a strategy versus a strategy in its own right.

• The strategy itself provides the criteria through which to evaluate targets (or divestments).

• Exemplars use a series of transactions (or pathways) versus one “bold move”.

• Exemplars focus on the source of premium recapture versus market multiples when screening targets, and setting the “walk away price”.

• Exemplars have exceptional M&A discipline (value capture planning, negotiation, integration).

Marakon’s clients often use our three-prong framework – conserve, capture, create – to ensure the value delivery plan is clear and properly

© Marakon

grounded before entering into any transaction.

Acquirers must be able to conserve the value of the business being acquired, capture the value of synergies, and create new value from a new business model going forward. Exemplars focus on delivering all three elements of the framework in a way that doesn’t favour one over another.

Economics and organisational discipline can

triumph over ego and emotion to ensure that M&A can be a value-creating device to accelerate strategy execution.

Neal H. Kissel is a director and managing director UKE at Marakon: A Charles River Associates Company.

Email NKissel@Marakon.com or visit www.Marakon.com

Business Reporter · December 2011

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions

9

Ready, aim, acquire The route to a great relationship starts with finding a partner who fits.

We look at how firms can hit the target and get the gold

By Trevor Merriden

Livingston: strategy as important as finance

The first principle of identifying a takeover target is understanding what you want to achieve, insists Charles Skinner. He knows what he is talking about. When he took over as chief executive of office services group Restore the business was an amalgam of two separate firms. Since then, under Skinner’s direction, it has acquired six more.

Skinner did something similar in his previous role.

As chief executive of Brandon Tool Hire he grew the business by acquisition from a modest eight branches in the West Country through to 170 branches nationwide.

Skinner had an advantage. Having spent his earlier career identifying targets at 3i, he knows his way around buying and building businesses. You need to be very clear what you are trying to do, he says. “At Brandon Tool Hire we wanted to expand our geographic coverage and we knew why from day one. It’s all about customer loyalty in the business services sector. Customers go to the same tool hire shop they’ve been going to for years. If you set up a new shop from scratch, nobody will come but if you bought an existing shop customers would still turn up.”

Whether targets are big corporates or one-man bands, Brian Livingston, head of mergers and acquisitions in the corporate finance team at Smith & Williamson agrees about a generic need for complete understanding on the “whys” in identifying takeover targets as much as the price paid. “Whatever the size of the deal, the best acquisitions are those made for strategic as well as financial reasons – to extend the geography of the business, introduce a new range of products and so on – and in the best deals there has to be something for everyone involved,” Livingston says.

“Identifying a good target means spotting where the buyer adds something to a seller and a seller adds something to a buyer.” For example, if as a result of an acquisition, the number of people selling a product jumps from 30 to 300, then the buyer is adding volume and the seller is adding a new product to the range.

There are many reasons why a target business may be a good buy, but the key lies in unearthing the

trigger reason – and that’s all about good preparation. You need to gather and review as much relevant information as possible, Skinner says. “Once you’re clear what you want, you have to be equally clear about what that looks like in more detail. Fortunately, finding out information about the business market is far more straightforward than it was 20 years ago.”

Once you start digging, some companies will immediately become more attractive than others for various reasons. These include low debt levels – companies with higher levels of debt are harder to take over – and strong cash flow businesses. The latter are popular as they can carry higher debt loads than the more cyclical businesses and investors are more willing to finance them.

As well as numerical data, you must ask around, albeit with discretion. Encourage your team to use their networks as well as yours to gather information about likely prospects in your sector. You should ask customers of the target company about its products or services, how they compare it with competitors; who their main contacts are; and how much their relationship with the business is based on one person – usually the business owner.

This latter point is a crucial one for at least one merger and acquisition adviser. “The most important thing on my list is second-tier management which you may not have if you’re running your own show but is essential if you are looking to buy the business.” As well as looking at the entire market, don’t overlook anything obvious a little closer to home. Many acquisitions and mergers take place between companies that have an existing relationship so you may want to consider firms you already sell to or buy from.

The best opportunities for growth through merger or acquisition come where the target business is sound but not making the most of itself. It could be undervalued or unfashionable in the market (or both). It might not exploit its assets fully, would benefit from a change of location or geographical expansion, has poor management or even good management that simply wants to leave or retire.

The attitude of the seller is crucial. If a business doesn’t want to sell, you can save yourself a lot of trouble identifying and researching a target by finding that out

early on. Skinner says: “You can tell within five minutes of meeting or phoning a seller whether there is a transaction to be done or not”. And even if a transaction is on the table, then you need to be aware of the great sensitivity that sellers large or small feel when parting with their business: in the case of individual entrepreneurs this is something they may only do once in their life.

Toby Baxendale can testify to this. He sold his business Seafood Holdings at the end of 2010. He says: “It can be traumatic. You’ve put a lot of effort into developing your business and then someone comes along and looks at it to the nth degree. It’s a bit like someone running their hand up your leg and inspecting your private parts – it can feel very uncomfortable and invasive.”

Five golden rules Making the right decisions about whether to even start a mergers and acquisition process is crucial. Bruce Nolop, former chief financial officer with serial buyer Pitney Bowes offers his five rules of acquisition Go for logical business extensions They let you leverage your firm’s tacit strengths and management know-how.

Make multiple small buys Each one should be a manageable size and enough to make sure that if one goes awry it doesn’t ruin the whole parent business.

Use business line sponsors Trust your business unit managers to know a potential strategic target’s strengths and weakness – they are closer to the market than you are.

Clarify how acquisitions will be judged For bolt-ons – those fitting neatly into your existing market – expect short-term results; for platforms, those moving you into adjacent spaces, be more patient.

Don’t shop when you’re hungry Build from your strengths, not your weaknesses; don’t try and patch up existing poor performance by buying something better.

Business Reporter · December 2011

10

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions

The ball’s in your court You’ve found the perfect partner and they are ready to love you too, but only if the offer is good enough. It’s time to finance the deal

By Trevor Merriden

The death of mergers and acquisitions financing has been greatly exaggerated. Media stories of the near impossibility of attracting large-scale sources of funding are wide of the mark, but the many sanguine noises made by those whose job is to help them find it must be treated with equal caution.

Some optimism is certainly justified. Howard Leigh, senior partner for Cavendish the independent sell-side M&A advisers points out: “UK plc is quite liquid. While some potential purchasers can’t get anything like the terms they used to, there are many who are certainly not having difficulties getting funding.”

Leigh points to the example of Hawk-eye (main image). In March Sony announced the purchase of the UK-based company that famously provides tracking technology for sports events, such as appeals a g a i n s t de c i sion s m ade by umpires in tennis and cricket.

Leigh’s business, which advised for the deal, notes that: “Sony didn’t exactly struggle to raise the money”.

O’Reilly: business plans must be realistic

Neither do the many other, cash-rich overseas buyers who are currently eyeing UK assets, he adds.

Damian Guly, UK financial services deal leader at PwC, points out that there are more than enough UK buyers sitting on big piles of cash waiting for the right moment to acquire and that “plenty of money already raised has yet to be spent”. But while many are ready to spend their war chests, there is still no sign of any great rush to the tills. Current economic uncertainty is such that investors believe the price of a target merger or acquisition can only drop in the months ahead if they simply sit and wait.

There are of course ways to raise money for a merger or an acquisition – even in troubled times. There is payment by cash, by acquiring a company’s stock – issued to the shareholders of the acquired company as a proportion of the value of the acquired company – and, of course, through the issuance of debt. Cash is the route preferred by most with banks unwilling to issue debt on any scale while economic conditions are so challenging.

Leigh believes that the days of the short-term,

Raising the readies With gloom comes caution, and with caution comes cash

By Stephen Overell The currently subdued market in mergers and acquisitions is accompanied by a clear preference for financing deals in cash rather than equity or debt. According to the Office of National Statistics, some 91 per cent of UK merger

and acquisition expenditure was conducted in cash in the three months to September 2011, compared with 85 per cent a year earlier.

Excessive leverage lay behind the financial crisis of 2008, so it comes as no surprise that dealmakers are seeking the safety of money.

Richard Lloyd Owen, head of M&A at Deloitte, argues that a mixture of cost control and debt reduction means more companies have acquired cash surpluses.

“Where they see there is an opportunity they are prepared to spend that cash,” he says.

The UK accounts for a large slice of the European merger and

acquisition market – more than a fifth of all deals occur here.

And figures from the data provider Mergermarket show a clear flight from equity as sovereign debt fears have worsened. In the first three months of the year, 17 per cent of European deals were equity only.

By October, the figure had shrunk to 6 per cent.

debt-laden investment and quick sell-on are over. “The people who have gone are fast-growing AIM companies and private equity houses who were dependent on debt.”

In terms of volume, he sees the mid-market (£10m to £200m-turnover businesses) accounting for much of the activity. However, he admits that many retailing deals in the pipeline have been postponed until after the all-important Christmas period.

Meanwhile, Guly pinpoints what we all know – that banks are de-leveraging.

“Banks used to be falling over themselves to loan money to private equity houses, but not now. This creates big problems – private equity houses are reluctant to sell because of a lack of buyers for what they have and are reluctant to buy because they can’t raise funds to do so.”

He concludes that we are seeing deals closing with more cash and more caution, and taking longer to complete.

Peadar O’Reilly, regional director of structured finance at Venture Finance points to signs of better times to come: “There is an increased level of activity a mong t ho s e s e e k i ng

Business Reporter · December 2011

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions finance, and debt is more available than some would have you believe. But the quality of the proposition has to be right”.

A high-quality proposition for funding means something quite different to what it used to even a few years ago. O’Reilly notes a clear flaw in most proposals seeking finance – large and potentially fatal doses of optimism. He says: “Many seeking to buy or merge with other businesses really want to believe that two plus two is going to equal five. Their business plans are unrealistic.”

O’Reilly points to one funding request from a leisure business that had put a major portion of its projected increase in profitability down to economic improvement. “When I asked them what they based this on, they simply asserted that the economy had to improve because it simply couldn’t get any worse,” he says. No finance was forthcoming.

11

A word in your shell-like Sound advice is crucial when it comes to financing a merger deal. But what do you need to ask your adviser?

Why should I trust you to advise me?

The old-fashioned qualities of discretion, trust and personal connection matter more than anything else in the world of mergers and acquisitions. Clients need counsel that understands their business and can give wise advice on whatever problem the client confronts.

What presence do you have around the world?

UK mergers are increasingly looking overseas for funding. The ability to finance deals via different markets and cultures matters more. This is especially true when advising global firms, but an international or at least multinational perspective is vital for advisers generally. Exposure to currency differentials can also significantly affect the cost and value of a deal.

Can you talk to me about geo-politics?

Financial acumen tends to be taken for granted – wisely or not. However, a broader array of

expertise is the critical quality. Issues here include how to raise capital and additional equity or conduct a rights issue, but political and technological insights matter too.

How well do you know my shareholders?

Some big recent deals (G4S and ISS, for example) have foundered due to lack of shareholder support. Adviser’s ability to judge the shareholder mood matters: is the deal viewed as do-able beyond a firm’s board of directors?

What makes you a heavyweight adviser?

This is a key issue on the beauty parades.

In-depth sectoral knowledge remains vital among advisers. They need to understand your industry’s history, its present configuration and its future strategic dilemmas, master both the detail and the bigger picture.

Stephen Overell

Winter warmers: many retail deals are on hold until after Christmas

Passport to potential Businesses are downsizing their deals and flying to get buying. In these times of change, should we ditch generalist for specialist advice?

The mergers and acquisition (M&A) specialist has arrived. Businesses looking for M&A deals are spurning generalists in favour of advisors with in-depth sectoral or geographical knowledge.

The move is driven by changes in the international markets. Three quarters of the businesses looking to acquire others in the UK and Europe come from other geographical regions, often the USA. Richard Northrop, managing partner at merchant bank Portico Capital Securities, a leading M&A adviser to the US information services industry, notes that large banks are reducing headcount. “As a result,” he says, “by necessity these large banks have fewer resources to specialise in industry sectors and must focus almost exclusively on very large deals.”

Among the cross-border deals on which Portico has advised this year was the sale of Accuity Holdings to Reed Elsevier for $530m and the sale of Datanomic to Oracle. “For both of these deals,” explains Northrop, “knowledge of and a regular dialogue with the relevant buyer universe was critical, even for Accuity which

was of sufficient size to warrant the interest of the large banks.”

In London, Jeremy Furniss of Livingstone, which specialises in €15m-€150m cross-border deals, says: “These days, sellers know their possible buyers but they demand intimate knowledge of companies and directors, which is where specialist on-the-ground advisors have an advantage.”

Livingstone foresaw this, and added US, Spanish and German offices in 2006.

Bigger players are also turning specialist. Ernst & Young, which handles all but the smallest deals, is restructuring its M&A practice by industry.

Jon Hughes, partner and head of Ernst & Young’s UK and Ireland Transaction Advisory Services business, says: “Genuine industry specialists know which companies are for sale, who the buyers are, and the word on the street.” Prospective clients are now taking up industry references to check advisors’ depth of sectoral knowledge, he says.

“Generalist advisors still have a role, but once clients get used to advice from deep industry specialists they won’t want to go back,” says Hughes.

Cross-border deals: specialist on-the-ground advisers are an advantage

industry view

Unprecedented opportunities Turning meagre economic activity into a “Once-In-a-Lifetime” opportunity The challenges facing SME’s are all too familiar: anaemic consumer and investment growth prospects across Western economies, coupled with political uncertainty generated by the Euro zone debt crisis. Given this backdrop, most commentators would be forgiven for advocating a cash preservation and survival focus as opposed to a strategy designed to seize the rare opportunities now on offer to grow businesses.

Despite the current scenario, many SME’s are able to find attractive growth opportunities within their sectors, at a time when competitors are not in a financial position to respond. The current market has in fact thrown up unprecedented M&A opportunities and investor appetite for the right opportunities remains undimmed.

Many industries are being transformed through consolidation and a shakeout of weaker players. This means there are unparalleled opportunities today to proactively look at M&A as a path to growth.

Companies can’t stand still if they want to remain competitive and profitable. Growth brings the obvious advantage of higher profitability, but perhaps most importantly in today’s market, growth builds confidence in customers, employees, suppliers and lenders.

So how do you take advantage of current opportunities ?

If you are a company owner – take

an active role in the change process. By formulating a plan outlining a strategy for how to take advantage of a changing market and industry environment, businesses can position themselves to attract investor capital to drive growth, investment and acquisitions.

If you are an employee – explore options to buy a business you are involved with.

You may be a director in a business that you would like to buy or, as an industry specialist, you may know a company that you would like to lead and own. An MBO may be the most significant opportunity of your career and thus worth exploring. Even in today’s recessionary world, we are finding that a compelling MBO proposal with the right business plan, a capable team together with an attractive company target has every chance of success.

Morten Bligaard, Director, Green Park Partners Ltd. Green Park Partners is a merchant bank in London that advices on M&A and MBO opportunities. 020 7118 1200 mbligaard@greenparkpartners.com

Bligaard: Investor appetite for the right opportunities remains strong

Business Reporter · December 2011

12

an independent report from lyonsdown, distributed with the daily telegraph

Industry view commercial feature

Technology M&A: shaping the future

As global financial markets and developed economies are finding it hard to cope with volatility and lack of visibility, global technology mergers and acquisitions (M&A) show no signs of fatigue. Against the backdrop of a difficult M&A environment across most other industries, the technology M&A market continued to grow steadily this year: according to 451 Group, more than 3,300 technology transactions were completed since the beginning of the year, for a total value of $237 billion. This is more than for the whole of 2010, both by volume and value.

An unabated need to innovate Consumers continue to flock to mobile internet, into the cloud, into online shopping, and are allocating ever more time and money for their digital lifestyle. Enterprises are in constant need for improved efficiency. The borders between hardware, software and services are being continuously redefined to drive consumer appeal and enterprise performance. Despite a somewhat reduced availability of capital, technology start-up activity remains very high across the world, and notably in Europe, with places such as London, Berlin, and Stockholm

Company Country

at the forefront. The speed of innovation and harsh competitive environment continues to drive investment and therefore significant M&A activity in the technology industry at large.

The “buy versus make” decision continues to be predominantly a “buy” decision for many technology companies.

The means to spend The technology industry as a whole is cash flow positive and has been accumulating cash for years. A look at the balance sheets of 14 of the largest global technology companies reveals a cumulated cash balance of almost $300 billion and low levels of debt. And while some companies use their cash surpluses for share buy-backs or dividends to their shareholders, these war chests are largely available for strategic acquisitions. Valuations of technology companies have also held up well through this turbulent year with the FTSE TechMARK 100 index gaining 4.6% over last twelve months compared to the FTSE 100 benchmark index, which is down by 3.9% (as of 30/11/2011).

Both cash and stock are available in quantities for the right deal.

Market cap (in $bn)

Total cash (in $bn)

Apple

USA

349.6

26.0

IBM

USA

214.8

11.7

Microsoft

USA

209.2

51.4

Google

USA

190.5

35.0

Oracle

USA

150.7

28.8

Intel

USA

119.5

21.9

Samsung

South Korea

114.7

20.1

Cisco

USA

96.8

44.6

Qualcomm

USA

90.7

11.7

HP

USA

52.7

8.0

Ericsson

Sweden

31.8

13.0

Dell

USA

26.9

1.4

Nokia

Finland

20.7

17.0

Motorola

USA

14.7

8.9

Source: Capital IQ as of 29 November 2011

A global game Technology M&A is a global phenomenon. The search for the “next big thing” crosses borders.

US technology companies continue to be the most active acquirers of start-ups and mature businesses across the globe. Since 2000, over 75% of global technology M&A was executed

by North American acquirers who have been buying predominantly US-based companies but still remain the largest buyers of European companies. There is little sign of this changing any time soon.

Overall however, the number of cross-border transactions is steadily on the increase, as the mining for great talent, intellectual property and growth is now elevated to an international level. UK and European companies clearly benefit from this trend: over the last 10 years, over a third of European technology businesses have been sold to non-European buyers, including Asian companies which are increasingly looking to Europe for reach and intellectual property.

Valuing the future, not the present Valuations of technology M&A transactions continue to defy established measures of value based on historic or current profitability. There are often no profits to be valued. Technology companies are acquired to deliver future growth, either directly or indirectly. And while there is indeed a large proportion of M&A transactions in response to more traditional market consolidation objectives, “gap-filling” technology acquisitions that deliver technology components into a wider solution or product are those that command premium valuations.

Scarcity remains the most important factor driving value: a unique technology solution that solves a problem shared by several potential acquirors is a key ingredient of the recipe for a successful sale. Timing is therefore also essential as scarcity is not a constant.

Selling early means that scarcity is not yet understood by the buyer, selling late means it was replaced by commodity. Finally, relative size comes into play as well: a small start-up acquisition by a large corporation goes unnoticed at the buyer level but can command very high valuations.

Peter Globokar

Small is beautiful Nowadays, only multi-billion dollar technology transactions are making the headlines of the financial media. Yet, most companies targeted in technology M&A are small to mid-sized.

Google, one of the world’s most active acquirers of technology companies, has acquired more than 20 companies over the last 12 months, of which it is estimated that only three companies had price tags in excess of $150 million. Large corporations are keen to acquire smaller teams driven by entrepreneurial spirit that can bring new perspectives, are easy to integrate and can rapidly adapt to change.

Getting bought, not sold The volume of technology companies of all sizes seeking to be bought is staggering.

Virtually every start-up is notionally for sale from the day it is formed.

After all, this is the model followed by the venture capital industry that plays a dominant role in the financing of innovation: investing early and taking risks for a significant return on capital on a three to five-year time horizon.

Yet, not all technology companies get bought, even fewer for a good price. There are the start-ups that do not survive to see this happen, those businesses that survive but that are strategically irrelevant.

But being strategically relevant is not all.

To be bought, a company must be able to cut through the noise of the competitive landscape and be visible to its potential suitors. Easier said than done: A blue chip technology company is typically approached with a new M&A opportunity on average once a day, sometimes several times a day.

So getting a technology company to be bought takes a lot of preparation and planning.

Long gone are the days of the internet boom, where companies were acquired for a yes or a no.

As far as the future is concerned, and 2012 in particular, the strong drivers for M&A in the technology industry will clearly remain.

Technology businesses with proven models and clearly identified scarcity value will continue to be attractive acquisition targets.

Peter Globokar is managing director in the London office of Mooreland Partners, an independent, global technology M&A advisory firm. www.moorelandpartners.com

Business Reporter · December 2011

an independent report from lyonsdown, distributed with the daily telegraph

Mergers and acquisitions

13

Buckle up for a bumpy ride Negotiating a merger or acquisition is one thing– making a success of it is another. Will it take-off, or is it on course for a crash landing?

By Marc Beishon

The value of mergers and acquisitions has come under much scrutiny for many years.

The most commonly quoted statistic on the subject is the landmark Bain & Co study from 2004 which reported that some 70 per cent failed to create shareholder value.

In fact, Bain has reported that not only have companies since got better at merger and acquisition, but also that downturns are good times to generate value thanks to the lower price of some businesses.

Even so, most studies still estimate that about half of transactions fail – or at least are very slow burners. “British Airways only really shook off the divide from the BEA and BOAC merger in the 1970s when it moved to Heathrow’s Terminal 5 in 2007,” according to Stephen Archer of business consultancy, Spring Partnerships.

More successful in the short term and an example of where a new vision has been well-handled comes from Astellas Pharma, a global pharmaceutical company. CEO Ken Jones, head of the firm’s European arm, explains that, untypically, Astellas is a merger of two Japanese firms (Fujisawa and Yamanouchi) which created a new entity – and a name with Greek, Latin and Japanese roots.

It was launched in 2005 with a ten-year Vision 2015 strategy. “We created a new employee value system around concepts such as respect for people, adaptability

Most challenging, Jones adds, can be getting back-office staff to understand the contribution they can make towards strategic objectives. “We ensure they are motivated by the end point – our focus on providing treatments for unmet medical needs.”

More painful mergers and acquisitions are often rooted in poor integration, particularly around culture, says Spring Partnerships’ Stephen Archer. “Business leaders think change and synergies can be forced through without creating a framework that people can work in. By saying ‘We’ll push this through’, there is an admission there is a barrier.”

Michel Driessen, lead partner for operational transaction services at Ernst & Young, agrees that the softer people factors are critical and often overlooked in mergers and acquisitions.

He says: “Inadequate planning and communications can cause a lot of problems. We often see a failure to plan ahead and lack of clarity on what will and will not be integrated, and by when.

“You have to be clear and decisive in the first 100 days after completion and communicate the key plans for the organisation when people are typically expecting things to change. After that, the status quo returns and it becomes much more difficult to deliver change effectively.”

Driessen suggests two key principles to bear in mind for mergers and acquisitions. One sounds obvious – being clear whether it is an acquisition or indeed a true merger.

In many cases, transactions are described as a bringing together of equals with resultant expectations of a fair say – when in fact one party is dominant.

Slow burner: it took more than 30 years for British Airways to stabilise after its merger

and agility, and we have been very consistent about communications to enable each region to integrate the strategy, empowering them to make decisions on allocating resources,” Jones says.

A key aim has been to evaluate people’s roles so they add value to a defined and focused product portfolio. “At senior managers meetings, for example, workshops are run to ensure employees are working towards the same vision, and a video animation – ‘Changing tomorrow’ – sets out the core values for staff and stakeholders.” Story telling is a good engagement approach, Jones says.

“Business development activities have to fit the strategy – otherwise, you don’t do them,” he adds. Getting a global sales force on message can be a tough call, but Astellas looks to have cracked it: “We grew 12 per cent last year and even survived two patent expiries, and with a new best in class molecule in oncology we are aiming to reach €2 billion by 2015.”

Intensive care:

“You also need to design the business operating model for the new organisation up front and align the values you will be communicating with the priorities in the model,” he says.

“If you acquire a firm for its customer base, values should focus on customer relationships. Or it could be talent management and retaining the right people, which we see often in media and IT mergers. If it’s a consolidation play, the focus is usually on cost reduction. Above all you need clear signals on what will be different or people will tend to stick to their old ways of working.”

And Astellas Pharma’s CEO Ken Jones has a final word about consultants. “Yes, we use them to support aspects of our business, but you can’t abdicate responsibility to advisers. You need to ensure knowledge is being retained with your core people, otherwise consultants take it with them when they pack up and leave. That’s why it works.”

The good, the bad, the ugly Pip Peel of consultancy PIPC selects his best and worst mergers BEST: RBS/NatWest “The deal created superb shareholder value.

The integration was textbook – it was completed in 18 months and realised benefits of £1.5 billion a year.” It’s generally agreed that the audacious hostile takeover of NatWest created economies of scale that quickly paid dividends and propelled RBS into the global banking league. Great project management – then an RBS forte – of merging resources such as IT no doubt neutralised some resentment.

But, of course, the magic touch deserted Fred Goodwin and RBS with the disastrous takeover of ABN AMRO (itself a poorly performing merger).

Goodwin: rise and fall of RBS WORST: AOL/Time Warner “Widely regarded as one of the worst mergers in history, it was an extraordinarily exciting idea but poorly executed as they failed to merge the businesses in a way that would maximise the benefits that each was bringing to the combined entity. The decade-long union at one point saw a $200 billion loss in stockmarket value and a $54 billion write-down in the worth of the combined company’s assets.”

Indeed, this deal would be top of many people’s worst of all time (but is possibly matched by Daimler-Chrysler), and of course Time Warner and AOL parted company in 2009. Culturally, it was a mismatch between old school content and opportunist digital, and they failed to see that new web platforms such as Google were the key. As one executive said of the culture: “They were like different species ... that were inherently at war.”

AOL and Time Warner in happier times

the first 100 days post-deal are critical, a strong dose of leadership and vision could see you through

It’s possible to be too prescriptive about what integration needs to be done after a contract has been signed, but all consultants talk about the critical first 100 days as make or break for maximising value from the transaction.

Certain criteria crop up in the early days – especially that true leadership and not just management demonstrates the

values of the new organisation to people and engages them in making it a success by promoting the right behaviour. Fluffy vision statements simply won’t do. And if new executives are taking over, there should be a good hand-over from the pre-deal team.

There’s usually no value in delaying announcements of major changes and the start of

new projects – clear and honest communication is vital.

Plus, ensure a dedicated integration team is in place to drive the detail. Consider also a “clean team” of independent people – such as retired directors, or interim managers – in the project office to help resolve the inevitable cultural differences that arise. They can also keep the

peace in the due diligence and planning stages.

Set a goal for a big win from a sales team comprising members from both parties – that will energise the new organisation around success.

Drive integration in systems where possible as it will engage the backroom staff, give employees the right tools to work

with and they will start to deliver value, as back-office savings are often the most reliable source of financial progress in a merger and acquisition.

Pay close attention to everyday details that employees value, for example, whether perks such as a gym membership, staff canteens and so on will still be in place.

These matter a lot more than executives realise.

Be flexible if the merger plan runs into problems – blind adherence to a faulty strategy could jeopardise the deal – and amid all this, don’t lose sight of customers and partners. Service continuity is important during a time that may seem uncertain to the outside world.

Business Reporter · December 2011

14

an independent report from lyonsdown, distributed with the daily telegraph

Industry view

A cannier way to trade Don’t sell yourself short Fail to prepare, prepare to fail. That’s the advice of one company, who works to help businesses maximise returns when looking to sell You spend years growing and nurturing a business and then when you come to sell it, there’s a global meltdown, with trading under pressure and no buyers in sight. Or is that really the case? At Spectrum, we’re working with a number of privately owned businesses and have some good news for those looking to exit. There is life in mergers and acquisitions; you just need to be cannier about how you do it.

It’s not bad trading for everyone out there.

The thing about niche businesses is that they are differentiated and their market position ensures they continue to perform well even in difficult times. We are seeing strongly performing businesses with excellent growth in the past three years, despite market conditions, and these businesses provide attractive acquisition targets.

Are there buyers for these businesses? There are, just fewer of them. Trade buyers have been paying down debt over the past few years so that they are now in a good position to mount bids for strategic acquisition targets. However, the trouble is what they now consider as strategic is a much narrower field. They are more focused on core operations, but this just means that preparation

and research is key before you ‘go to market’.

On the plus side, it also means that when they find such a business, they are prepared to pay a higher relative valuation for it.

Overseas buyers are also active and they see rich pickings in the UK market. We are seeing buyers from the US and across Europe looking for bolt-on opportunities through our involvement with AICA, an international network of corporate finance advisers. Researching overseas buyers will expand your horizons in more ways than one, and will hopefully provide the strategic purchaser that will pay a significant premium for your business.

More than ever, if you want to sell your business you must take advice. Businesses must be properly prepared, the market carefully researched, and competitive tension is fundamental. You have one chance to sell your business. Don’t restrict what you can get for it by not taking the right steps to maximise your return.

Simon Davies is a partner of Spectrum Corporate Finance LLP www.spectrumcf.co.uk

The entrepreneurial partner team at Spectrum Corporate Finance

There are many questions owners face when selling their business. But taking time to react to an initial approach can make the difference between success and failure

Imagine you are at a trade show and a competitor sidles up to you and says: “Hi John, what are your plans for your business? Have you thought about selling? If so, we would be really keen to talk. Can we have a meeting?”

Your mind rushes full of questions. Is he serious? How much? Is he on a fishing expedition?

How should you respond?

You may feel that, after four years of recession, a decent price for your business could be an attractive option, but how can you make sure you get the best price? And that even with 30 years experience you somehow feel it is different when it comes to selling your own business.

These thoughts and concerns are what most owners feel when they get approached. The key to success here is controlling the situation. Say yes to the meeting, but put it far enough ahead that you can prepare and do some research. This will enable you to understand from your advisors what prices

are currently being paid in the market, what are your options and alternatives, and who might the other buyers be?

Before the meeting, ensure that a nondisclosure agreement is signed. It is likely that the potential buyer will ask for some financial information, but what information should you give them?

You can control the information flow. In the same way that you would not sell your house just by sending the buyers a list of rooms and sizes, you should consider preparing an information memorandum to show the accounts in the best possible light to optimise the price. You should also outline issues the business may face, so that when it comes to the negotiations there are no excuses for price chipping. As such, we advise against providing any accounts or other sensitive information until the bidder’s real credentials can be established.

How you react to that initial approach can result in a wide range of outcomes, our advice is take your time, do your research and keep control of the negotiation.

HWCF partner Charles Whelan

www.hwcf.co.uk

Business Reporter · December 2011

an independent report from lyonsdown, distributed with the daily telegraph

Industry view

Intelligent moves Finding the best mergers and acquisitions target isn’t easy, but with the right help there’s a world of opportunity out there Finding the right mergers and acquisitions targets is key to making successful deals. But in a world of potential targets, how can businesses identify the best deals?

“The answer lies in market intelligence,” says Lisa Wright of Bureau van Dijk (BvD). “Our mergers and acquisitions (M&A) database Zephyr, backed by our company database Orbis, allows users to research and identify target companies – and locate potential targets that others can’t find.”

It sounds a tall order, but as Wright explains: “We can offer more deal and company details than other sources, because we gather more information.”

Zephyr covers almost a million deals worldwide going back to 2000, including M&A, IPO, private equity, venture capital deals, and even rumours.

More data are added continuously by BvD’s international researchers.

BvD’s researchers speak over 40 languages, so they can collect details of deals reported only in foreign languages, that English-only databases miss. “In Japan, for example, you miss 60-70 per cent of deal and company data if you fail to collect it in Japanese,” says Wright. The information on Zephyr and Orbis is translated into English.

The Orbis database, accessible directly from

Zephyr, contains around 100m sets of company data.

These are gathered from more than 100 high-quality sources, such as Companies House and its overseas equivalents, credit ratings agencies and national regulators. Reciprocal links between company reports and deal data are built into the system.

“We gather information about deals with a lower value threshold than our competitors, so we offer users more information,” says Wright.

User feedback has prompted BvD to address the issue of enterprise value – information that is very rarely disclosed, but always sought. BvD has created a software model that utilises the private company financials in Orbis, to provide a modelled enterprise value for applicable deals to help users with their research.

But why use Zephyr or Orbis when you could do the research yourself? “Investment banks and M&A advisers, for whom M&A transactions are a way of life, still use our services so as to understand in greater depth the sector or country a client is targeting,” says Wright. “Our data is also global and impartial.”

BvD’s services start at about £5,000 annually, with some unlimited use packages for £20,000. www.bvdinfo.com

Online database: research and identify potential targets

15

What to look for when selecting an adviser Having an independent mergers and acquisitions adviser who combines a hands-on approach with global reach could go a long way “Mergers and acquisitions is a people’s business, which is why companies seeking advice should look for a personal touch.”

So says Ronny Grosman, managing director of Blackwood Capital Group, the mergers and acquisitions (M&A) boutique that specialises in cross-border M&A and corporate finance advisory.

“Many boutiques offer international market access through membership networks which include advisors abroad – but it does not always mean that the person you are speaking to in the UK has on-the-ground experience in your target country,” says Grosman. “This sets us apart from other M&A advisory firms.”

While Blackwood has grown since opening its London office in 2002, the partners deliberately choose to stay involved in all transactions, from beginning to end.

“The partner that the client speaks to initially stays with the deal throughout – not something usually seen from bigger M&A firms and banks, where you may find your deal is farmed out to more junior staff,” says Thomas Kardos, co-head of Blackwood.

The firm’s stated aim is to deliver highquality, independent advice unencumbered by external influences. “Our objective is to create lasting client relationships that generate repeat business,” says Kardos.

Both operating partners have worked for bulge bracket investment banks (Credit Suisse First Boston and Salomon Brothers) and have wide experience in a variety of industries globally.

They have worked in offices in London, Frankfurt, New York and San Francisco which, combined with the fact that they speak six languages between them, helps them to

understand the nuances of local cultures.

Blac k wood ha s worked w it h la rge multinational corporations, such as Adecco, for which it completed transactions in four continents, while in the mid-market it has recently advised family-controlled Groupe CRIT on the acquisition of PeopleLink in the US. It has also worked on transactions including the acquisition of former Rexam subsidiary Petainer by two UK private equity funds (for which it also arranged debt financing) and provided advisory services for Coffeeheaven relating to its acquisition by Whitbread, which owns Costa Coffee.

Blackwood operates out of its offices in London, New York, Frankfurt and Zurich. www.blackwoodcapital.com

Ronny Grosman and Thomas Kardos

The value of competition If you’re looking to sell, maximise your potential with a vendor due diligence report that puts your company on the map Healthy competition is the basis of good business – whether you’re selling a loaf of bread or the whole bakery.

“Nothing raises the sale price of a company more than competition to buy it,” says Mark Jeynes, partner at OC&C Strategy Consultants, specialists in corporate strategy and merger and acquisition due diligence. “And the best way to encourage competition is to help potential buyers understand the company’s true value.”

When the value of the business is less obvious, buyers need more help and information to understand it, he says. An ideal solution is vendor due diligence – conducted independently on behalf of the vendor and made available to serious potential buyers.

“The more context you can put in the information memorandum, the more value buyers will attach to it,” says Jeynes. “When we perform vendor due diligence, we produce

detailed and objective information about the company. We clearly define the business and its model, and understand the trends and prospects of the markets in which it operates.”

This could include the company’s size, the rate, drivers and prospects for growth, market dynamics, competitive landscape, adjacent markets and government policy.

“We thoroughly validate the business plan and identify opportunities that could be exploited after the acquisition, such as extending product lines, diversifying into services or potential export markets,” says Jeynes.

The process can involve several weeks’ work for a specialised OC&C team. “We often go into more detail than the client did when it formulated its original business plan,” says Jeynes.

Nor does OC&C pull any punches. “We warrant our findings, and if there’s any suggestion that we’re not impartial we lose our credibility,” says Jeynes. “Occasionally we have to say, ‘This business plan is overcooked’ or ‘These opportunities aren’t realistic’.”

Sellers requiring vendor due diligence should begin as early as possible, says Jeynes, so that it can form part of their strategic plan for selling the business. It is usual to make the report available to all serious buyers, but not necessarily to everybody in the first round, since the findings could prove very valuable to competitors.

Two years ago, OC&C performed vendor due diligence for pet food and accessories retailer Pets at Home. “We identified some major growth potential, which resulted in the business selling at a very attractive price,” says Jeynes.

Competition: can increase interest in your sale

www.occstrategy.com