During a year of tremendous political and economic uncertainty, the mergers and acquisitions market continued to thrive. While many people across the US and Europe sat glued to their phones and TVs, with their lives on hold as they waited for the next unpredictable Trump move, or step towards Brexit, multinational corporations were exchanging billions of dollars in some of the largest deals ever seen.
Analysts agree that one of the main drivers for these deals was scale. This is where the buyer seeks an enlarged presence in a particular market or sector and hopes to achieve greater overall economies of scale. Here, we look into why scale through acquisition has become such a popular strategy and why M&A analysts now believe small and mid-sized business are to follow suit in the year to come.
2018 was the year of the megadeal
Around the world, some 79 deals worth more than US$5bn took place last year, which breaks the previous record set in 2007. At the beginning of 2018, deals involving British companies increased to a value of US$275bn, which is the highest value so far this century. And this is despite an uncertain Brexit on the horizon.
However, many onlookers believe that it is Brexit itself that could be driving the influx of deals, especially as US buyers have been particularly keen to acquire UK firms - and especially UK tech firms. The falling value of sterling is one obvious reason for this. Foreign businesses that invest in UK firms now are often getting a good deal, in terms of the value of the pound. If they can weather the storm of Brexit and come out fighting on the other side, they may have got themselves a bargain. PWC’s ‘Year End Review and 2019 Outlook’ report stated: “corporates and PE investors are looking beyond the short-term uncertainties of Brexit Day and instead taking a medium to long-term view.”
Could scale become a major driver of SME deals?
PWC’s 2019 outlook report also suggests that the appetite for scaling up through acquisition, that has been so popular among large corporations over the past 12 months or so, could drive deals among SMEs. It states: “Scale drove mega deals in 2018. This trend will likely continue, and it will extend to smaller and mid-sized firms looking to expand their businesses.”
In fact, it seems that scaling up is already a major driver of dealmaking in the UK SME space. You just have to look at the deals being done around the country at the moment and there is no shortage of examples.
Wealth management firm Tilney announced in December 2018 that it was acquiring Midlands-based Index Wealth Management to help it scale up. The target business has some £243m in assets under management and will help Tilney increase its presence and market share in the Midlands region. The firm’s CEO Chris Woodhouse, explained: “ We have been expanding our presence in the Midlands in recent years and this acquisition will further cement Tilney's position as the leading wealth management firm in the region.”Meanwhile, healthcare and industrial fabric supplier, Techtex, has announced a double acquisition of rivals Klenzeen and Whitminster International. Techtex is now one of the largest businesses of its kind in the UK. David Beardsworth, the company’s financial director, stated: “These acquisitions will further strengthen our offer to customers in healthcare and industry, and will enhance our offer to new markets, including significant overseas opportunities.”
High performance vehicle exhaust manufacturer, Cobra Sports, has embarked on a similar growth exercise by acquiring Macclesfield-based JP Exhausts, helping it to increase its market share in the Pennines region. The firm said that the deal will help it to “scale up its operation and address the attractive US market.”
Why is scaling attractive right now?
There are many reasons why businesses decide to scale up. Some do it simply because it is the right time for their business. They may be turning contracts away due to lack of capacity, or they may have a very strong cash flow, a proven concept and repeatable sales. However, political and economic reasons can play a part, and this may be the case right now.
Stephen Arcano, global co-head of the transactions practices at law firm Skadden, notes: “Most companies are primarily focused on how to increase earnings in an economic environment where organic growth may be improving, but not fast enough. Deals are often still the best solution to that problem.” Indeed, scaling up through acquisition allows businesses to increase market share which can, in turn, make them more robust in uncertain times.
When it comes to technology, economists claim that scaling up by acquiring rival businesses is one of the only ways companies can compete.
Scale also translates into higher valuations, which can allow business owners to ride out economic storms more comfortably - with the knowledge that with a larger size, the EBIT multiple also grows.
Keys to successfully building scale through acquisition
Whatever your reasons for scaling through acquisition, there are right and wrong ways to go about it.
Do you have a requirement that can be fulfilled through acquisition?
To successfully scale your business through acquisition, you will usually be able to identify a clear requirement that can be met through that acquisition. Do you need more space or capacity? Will an acquisition give your products/services access to a larger market? Do you need skills or technologies fast? Maybe you are lacking the resources you need to take your business to the next level and an acquisition might hold the key to gaining that resource. Identifying the requirement is the first stage.
Have you found the perfect business target?
For an acquisition to work as a tool for growth, you must be sure the target is the right fit. It should tick all the boxes, so to speak, and must have a compatible culture. Are you sure that your business and/or the target are not already operating at scale? Is your target early in its lifecycle, or in an infant or growing industry? Acquiring a business that is only partially what you are looking for could be a disastrous move, so hold out for the right opportunity.
Do you have an ongoing strategy for merging the two businesses after the deal is complete?
The work you put in following the acquisition is extremely important. Use the results of your due diligence process to guide your strategy for growth following the deal and keep your own values and customers at the forefront of your mind. Pay particular attention to the key staff of the respective businesses, before, during and after the merger or acquisition - there will be people that you really will not want to lose. This can be even more important when these key people comprise a significant part of the firm’s value.
In conclusion, the year to come holds many unknowns but smaller businesses can take a leaf out of their multinational counterparts’ book and bolster themselves through acquisition. If the right opportunity presents itself, the argument for taking a ‘wait and see’ approach to your business can make little sense.
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