Should I stay or should I grow now? For businesses looking to expand, mergers and acquisitions can be an efficient way to do everything from enter new markets to acquire new technology. It’s faster than organic growth and can bring the advantage of key skills too. But only if you choose wisely.
For example, consolidation can be appropriate where there is a very fragmented sector, with lots of smaller businesses which, combined, can create cost or revenue synergies.
“We’ve seen it lots of times in areas such as pharmacy, vets and insurance broking, where a number of companies went on an acquisition spree in order to grow revenue, create synergies, win new customers or create cost savings, often back-office or administrative type savings, but also to create greater buying power with suppliers,” says Jan Fitzell, partner in M&A advisory at Deloitte Ireland.
It can also work where a company has a strong balance sheet, or significant financial backing, such as from a private-equity (PE) backer.
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“A PE owner is normally very happy to deploy additional capital into a business that it knows and a management team that it trusts, to enable the company make acquisitions. This is often easier and less risky that deploying into a new platform,” he says.
Sometimes an industry experiences low growth or a business finds it hard to continue to grow at the same rate as previously, in which case it can be easier to buy growth and add revenue through acquisition.
“Often a company can have difficulties in breaking into a new market or geographic area for cultural, language or geographic reasons, or it may take too long to develop a market-leading position. Here it can make sense to acquire a company in that new market and take over a ready-made market position,” he adds.
In all such cases, there is much to consider, including ‘strategic fit’. “It’s about understanding why you are making the acquisition, what it is going to do for you and how it fits in with your strategy,” says Fitzell.
An organisation’s ability to embrace new, transformative technologies quickly and having strategies to bolster capabilities is now seen as critical
— Gerard Ryan, partner and head of corporate at law firm Eversheds Sutherland
Once you’re comfortable that it’s the right thing to do, there are a number of issues to consider.
“It’s possible to turn a good acquisition into a bad one through a lack of planning,” adds Fitzell. “One of the things towards the top of the list is how much you are going to pay and what is it worth to your organisation – these can be different amounts, the idea being that it will hopefully be worth more to you than you have to pay.”
After figuring out how to finance it, next comes the integration planning, including any operational changes required, knowing who will run the business and who will manage its integration.
Figure out which key employees you need to hang on to and the impact of failure to tie in key employees or key customers.
Be careful but don’t be too slow, Fitzell cautions: “No seller wants a buyer who takes forever to make decisions or complete due diligence. The risk for the buyer is that the seller decides to run a wider process and talk to other buyers, so if you have an opportunity and have done your background work, be prepared to pull the trigger.”
The past 12 months have been busy ones for M&A, according to Eoin O’Keeffe of Focus Capital Partners, which has offices in Dublin and Limerick and is a partner of leading advisers M&A Worldwide.
Private-equity firms have been particularly active, he says, pointing to Irish firms such as Melior Equity Partners, BFG, MML, Cardinal Capital and Foresight Group, as well as the portfolio companies of UK and US private equity coming to Ireland to seek assets.
“They have had a good experience and view Ireland as a positive place to invest. The outlook is positive and they have money to deploy. At the same time, for Irish companies it’s important that they get off the island and try and build their businesses in a way that makes them more resilient,” says O’Keeffe.
In terms of how a company knows when it is time to start out on the acquisition trail, there are a number of factors: “In some cases they will have reached a position where they are stable in Ireland and their growth might have slowed a little,” he explains.
“At the same time, to be attractive for an eventual exit, having a position in other markets is important too. Depending on the ambition of the company, it can also make them more attractive for future investment.”
Right now a key driver of M&A is digital transformation.
“An organisation’s ability to embrace new, transformative technologies quickly and having strategies to bolster capabilities is now seen as critical,” says Gerard Ryan, partner and head of corporate at law firm Eversheds Sutherland.
To mitigate risk as much as possible, he identifies culture, communication and collaboration as three elements that need to be managed properly to ensure the success of any acquisition.
“Information and data need to support any decision to acquire a target and then it is vital that there is communication within an organisation to identify synergies, opportunities, efficiencies and cost savings,” says Ryan, adding that it’s the integration phase that will ultimately determine how successful the acquisition will be.
In the meantime, the right structure can do a lot of heavy lifting. “In terms of the mechanics of deals, dealmakers have looked to stricter financial terms to mitigate risk, such as earn-outs and alternative means of deferring related payments,” says Ryan.
The right advisers help too. “Legal advice is crucial in setting a transaction up for success and achieving closing within agreed time frames,” he adds.
