“Strategic” is a much misused word – and in 2007 some genuine strategic trends played out in compliance markets:
1. The HR & payroll software developers finally cottoned on to the employee relations compliance sector - with Northgate leading the dance in buying HLR and First Business Support.
2. The mid-market HR & Payroll software market continued to consolidate – but rather than VCs building a strong federation, it was Sage who ploughed back in to build a strong defensive position - defending mid-market enterprise territory predominantly - and sticking to code not service as their driver.
3. The safety compliance market began its consolidation in earnest with National Britannia transforming from a £25m blue chip specialist to a £50m compliance generalist. Early days yet though - more to come.
4. The traditional leaders of the complaince markets - publishers, are being forced to consolidate, and Thomson’s exit in selling Gee confirms a market in relative decline. While Croner being the buyer was predictable, it does effectively nail them to the publishing mast whereas they should be leading the consulting dance – good news for the vibrant consultancy mid-market.
5. VC’s broke the stagnation of deals in the early noughties with a vengeance, and in many cases were able to outbid trade players. The credit squeeze has not shut off deal flows altogether – the compliance market is one of the few were deals will still be seen as attractive and recession resistant – but trade players increasingly lead the dance where they are cash rich and not dependent on debt funding.
At ARK we’ve never been a fan of “group think”. In economic terms it is usually a sign of a lack of differentiation in the market. We expect to see the following key trends play out in the compliance markets from now to 2010 (no doubt others will disagree):
Regulatory Consultancies:
Increasingly the payroll service companies will look for acquisitions and partners – deals are still held up by the old tendency for suppliers to play games with revenue recognition which are simply no longer justified or necessary. Those who can show a 1:1 profit to cash conversion ratio with the cash in the balance sheet will sell well ahead of larger more financially engineered players. Keep it simple.
Safety compliance:
The avalanche of occupational health niche suppliers will continue, but increasingly networks or partnerships of groups will emerge as national coverage is required by larger clients. Capita will find that their two operations deliver a defensive position only (all they need though) while the entrepreneurs move the market away from the insurance business model.
Legal Services:
Lawyers increasingly understand the nature of fixed fee compliance – even for SMEs and medium sized companies. They will muddy the waters with new promotional efforts for a year or two, but predominantly still fail to build long term discrete businesses which can extend their brands to the detriment of independent suppliers.
HR & Payroll suppliers:
They have to take one of two paths. If they see themselves as a technology competence primarily, they should aim to be swallowed up by Sage or even mid-market enterprise developers and be prepared for the traumas of quick integration and client migrations – cost reduction and client scale is the name of the game. If they see themselves as a client service provider – they will experiment with bridging the gap between administration solutions and compliance ones and punch through the £1 per employee per month barrier.
Publishers will still struggle to find significant growth (ie 5%+) as clients increasingly move towards outsourcing style solutions. It seems to be taking an inordinate amount of time for the penny to drop – clients do not want to build libraries – they want to make back office staff (and fewer of them) more efficient – publishers still struggle with moving from “describing it” to “doing it” – but getting business critical is ever more vital. The alternative of repositioning to meet the Web2 transition doesn’t bear thinking about – a Wiki future is a bigger challenge to the traditional publishing business model than the "free" web of the late 90s was – long term they will survive, but they look more like blacksmiths than car salesrooms every day.
Trainers who are not qualification programme specialists will find filling seats increasingly precarious and the claimed benefits of e-learning increasingly precarious. E-learning is a significant contributor to the delivery of training systems, but it will be dominated by other compliance solutions providers and only rarely by training specialists (and hardly ever by technology specialists). The training market will continue to decline in relative terms against consultancy practices only – compared to technology and publishing businesses they will show stronger growth and profitability increasingly.
Says who? Well this anniversary makes ARK 8 years old – and we now track over 800 firms in the UK in compliance services with data from 1995 to date and projected firm by firm to 2010.
The biggest threat?
A change in administration in 2010 is likely – always good news for compliance driven businesses. When the capacity of government to regulate hit over £1bn of regulatory impacts per year – this burden simply proved too much for publishing solutions and pushed businesses to build internal teams and use consultants a lot. A new administration is likely to exempt most smaller SMEs (ie regulations do not apply to those with less than 10/20/50 employees) so firms with a reliance on this sector need to diversify – and soon. Any reduction in the volume of regulation is, however, likely to be offset in an increase in the shock tactics of enforcers with the HSE style prevailing over that of certifiers and local authorities.
May you live in intereting times...
Monday, December 24, 2007
Friday, November 16, 2007
and the Real market leaders are...
Every firm claims to be “the leading this” or “the leading that” – and to be fair a few actually are. Most are trying hard to offer something a little bit different from the crowd. Egg heads call it “differentiation” – and if it works it means you really do have no direct competitors and in theory no one is able to copy what you do.
Market leadership when it is achieved delivers “sustained superior return on investment” or in lay terms – consistently more cash per week/month/year than anyone else. Differentiation is one way of achieving it – being a “cost leader” is the other. Do you see yourself as a Waitrose or a Tesco?
All sorts of nice things happen when you are a market leader. Good people want to work for you and apply speculatively (lower recruitment costs). Good staff stay switched on and don’t leave (lower HR and admin costs). Good staff lead and innovate pushing up operational efficiency ratios. Clients have you in mind as the best of breed and come to you (reduced marketing and sales costs). Suppliers want to be associated with you and negotiations are quicker and often cheaper. Clients are prepared to take your pitch on pricing and premiums (better profitability). Clients prefer to stay longer and don’t defect (lower renewal, maintenance costs and enhanced profitability).
The effect of any one of these can be worth as much as 10% on the bottom line and combinations of them can make achieving 50% profitability or better deceptively easy. It is a little tautologous – but one of the best indications of market leadership is the ability to repeat a 50% profit benchmark. This is where market norms of profit become a floor, not a ceiling.
The reality is, however, that processes, solutions, benefits, systems and prices do get copied – a lot. So you end up with, for example DAS claiming to be the UK market leader as well as Peninsula. In a sense both a right. For the record, the latest ARK Regulatory Consultancy Report 2007/8 shows that the following firms have genuinely achieved “leadership”:
Abbey Protection Group: leaders in the insurance led advice & assistance sector selling primarily through resellers;
RBS Mentor: leader in the micro company (less than 10 employees) sector selling primarily through the banks retail network.
Peninsula Business Services: leader in the SME sector (10-100 employees predominantly) through their national sales force;
Croner Consulting: leader in the SME/LME client sector (100-500 employees predominantly) through their sales force;
National Britannia are the market leader in specialist safety compliance services, through their sales presence but also a long focus on consultancy sales to property services clients;
Eversheds are still the leader in employee relations support for listed and larger clients, albeit primarily in bespoke dispute resolution services in predominantly employment law and only very rarely head to head with these compliance specialists.
No mention of DAS? Norwich Union? Capita? Northgate? Allianz? McAlpine? Reed Elsevier? Thomson Corporation/Reuters? Well no. All are or were present in some form, but – in all honesty – size isn’t everything.
But please – no more web pages claiming “market leader”, ”the leading...”, “biggest...”, “voted best...”, etc. Journalists (especially) typically can’t count, so the “XYZ top entrepreneur” listing also doesn’t fool anyone (and usually only clogs up your phone with a raft of naive VC sales pitches). It is worse still when its “the 2004 [regional] finalist...” – quite why you’d go through this pain to be the “first loser” is mystifying.
If you want to win in this market – the top six players above are the ones to beat. And if you are one of those you need to consider why your profitability is less than 35% currently. Even allowing for competitive intensity and the high growth investment, 25-35% should be the norm (50%+will come later - but that's another story).
Market leadership when it is achieved delivers “sustained superior return on investment” or in lay terms – consistently more cash per week/month/year than anyone else. Differentiation is one way of achieving it – being a “cost leader” is the other. Do you see yourself as a Waitrose or a Tesco?
All sorts of nice things happen when you are a market leader. Good people want to work for you and apply speculatively (lower recruitment costs). Good staff stay switched on and don’t leave (lower HR and admin costs). Good staff lead and innovate pushing up operational efficiency ratios. Clients have you in mind as the best of breed and come to you (reduced marketing and sales costs). Suppliers want to be associated with you and negotiations are quicker and often cheaper. Clients are prepared to take your pitch on pricing and premiums (better profitability). Clients prefer to stay longer and don’t defect (lower renewal, maintenance costs and enhanced profitability).
The effect of any one of these can be worth as much as 10% on the bottom line and combinations of them can make achieving 50% profitability or better deceptively easy. It is a little tautologous – but one of the best indications of market leadership is the ability to repeat a 50% profit benchmark. This is where market norms of profit become a floor, not a ceiling.
The reality is, however, that processes, solutions, benefits, systems and prices do get copied – a lot. So you end up with, for example DAS claiming to be the UK market leader as well as Peninsula. In a sense both a right. For the record, the latest ARK Regulatory Consultancy Report 2007/8 shows that the following firms have genuinely achieved “leadership”:
Abbey Protection Group: leaders in the insurance led advice & assistance sector selling primarily through resellers;
RBS Mentor: leader in the micro company (less than 10 employees) sector selling primarily through the banks retail network.
Peninsula Business Services: leader in the SME sector (10-100 employees predominantly) through their national sales force;
Croner Consulting: leader in the SME/LME client sector (100-500 employees predominantly) through their sales force;
National Britannia are the market leader in specialist safety compliance services, through their sales presence but also a long focus on consultancy sales to property services clients;
Eversheds are still the leader in employee relations support for listed and larger clients, albeit primarily in bespoke dispute resolution services in predominantly employment law and only very rarely head to head with these compliance specialists.
No mention of DAS? Norwich Union? Capita? Northgate? Allianz? McAlpine? Reed Elsevier? Thomson Corporation/Reuters? Well no. All are or were present in some form, but – in all honesty – size isn’t everything.
But please – no more web pages claiming “market leader”, ”the leading...”, “biggest...”, “voted best...”, etc. Journalists (especially) typically can’t count, so the “XYZ top entrepreneur” listing also doesn’t fool anyone (and usually only clogs up your phone with a raft of naive VC sales pitches). It is worse still when its “the 2004 [regional] finalist...” – quite why you’d go through this pain to be the “first loser” is mystifying.
If you want to win in this market – the top six players above are the ones to beat. And if you are one of those you need to consider why your profitability is less than 35% currently. Even allowing for competitive intensity and the high growth investment, 25-35% should be the norm (50%+will come later - but that's another story).
Wednesday, November 7, 2007
If I gave you £4.6m could you shoot yourself in the foot please?
Why is nobody asking the right questions? Does it really need to cost £4.6m to injure more employees in UK industry each year? And yes - that is £4.6m for each extra injury - each and every one!
According to health & safety executive statistics, the number of work related injuries, major injuries and deaths is down over the long term (ie since 1997). Hooray.
Fatal injuries in 1997 were 207 and last year they were 185 - down 11%. Great. Since 1997 we've saved 186 more lives than we would otherwise expect if things stayed at 1997 benchmarks. Fantastic.
Major injuries, however, actually increased their annual run rate by 303 to 28267. Since 1997 an additional 5717 people have been injured in a major way.
Injuries causing over 3 days absence fell by 14,203 in 2006/7 to 113083 - bringing the run rate down 11% again (hooray), but the improvement relates only to the last 2 years and since 1997 an additional 8532 people have actually been injured.
Over the same period the compliance burden placed on businesses to achieve this totalled over £11bn pa (some would say £55bn pa, but we have been prudent and isolated just the safety and employee related issues). £11bn is the current annual run rate, and in the period since 1997, the total cost of implementing and running the compliance measures now in place totals £66.6bn.
At its simplest therefore we have just spent:
(a) £358m per life saved since 1997 for the 186 people alive now that wouldn't be had we continued as we were in 1997; or
(b) We have invested £4.6m in injuring each and every one of 14249 more people than would otherwise have been injured in 1997.
This does not even include the £232m 2006/7 cost of the HSE itself or the related Local Authority costs which are likely to be of a similar order each year. These are the government's own numbers - their Regulatory Impact Assessments, their HSE/Riddor statistics.
I am delighted for the 186 individuals alive now. It is highly likely, however, that they would in all probability have survived any way as UK plc marches inexorably from its industrial past to its service based future.
So why is no-one asking the obvious question:
- Why have we spent over £4.6m per injury to injure more UK employees?
- Even if the reduction in deaths is almost 200 - why are we prepared to spend over £358m per life saved here while not making similar investments in transport, the MoD or the NHS?
A dispassionate look at the facts here at the very least proves that there is no compelling case for the regulation and enforcement regime in place currently. It could equally well be argued that it is counterproductive.
The "elf n safety" culture is subjected to a lot of criticism - but no-one seems to be asking why it simply isn't working, let alone cost effective.
According to health & safety executive statistics, the number of work related injuries, major injuries and deaths is down over the long term (ie since 1997). Hooray.
Fatal injuries in 1997 were 207 and last year they were 185 - down 11%. Great. Since 1997 we've saved 186 more lives than we would otherwise expect if things stayed at 1997 benchmarks. Fantastic.
Major injuries, however, actually increased their annual run rate by 303 to 28267. Since 1997 an additional 5717 people have been injured in a major way.
Injuries causing over 3 days absence fell by 14,203 in 2006/7 to 113083 - bringing the run rate down 11% again (hooray), but the improvement relates only to the last 2 years and since 1997 an additional 8532 people have actually been injured.
Over the same period the compliance burden placed on businesses to achieve this totalled over £11bn pa (some would say £55bn pa, but we have been prudent and isolated just the safety and employee related issues). £11bn is the current annual run rate, and in the period since 1997, the total cost of implementing and running the compliance measures now in place totals £66.6bn.
At its simplest therefore we have just spent:
(a) £358m per life saved since 1997 for the 186 people alive now that wouldn't be had we continued as we were in 1997; or
(b) We have invested £4.6m in injuring each and every one of 14249 more people than would otherwise have been injured in 1997.
This does not even include the £232m 2006/7 cost of the HSE itself or the related Local Authority costs which are likely to be of a similar order each year. These are the government's own numbers - their Regulatory Impact Assessments, their HSE/Riddor statistics.
I am delighted for the 186 individuals alive now. It is highly likely, however, that they would in all probability have survived any way as UK plc marches inexorably from its industrial past to its service based future.
So why is no-one asking the obvious question:
- Why have we spent over £4.6m per injury to injure more UK employees?
- Even if the reduction in deaths is almost 200 - why are we prepared to spend over £358m per life saved here while not making similar investments in transport, the MoD or the NHS?
A dispassionate look at the facts here at the very least proves that there is no compelling case for the regulation and enforcement regime in place currently. It could equally well be argued that it is counterproductive.
The "elf n safety" culture is subjected to a lot of criticism - but no-one seems to be asking why it simply isn't working, let alone cost effective.
Friday, October 26, 2007
The 5 Most Dangerous Words in M&A
Like it or not – M&A is both a spectator sport and a highly secretive one.
The whole dance is shrouded in mystery and non-disclosure or “confidentiality” agreements ranging from one page to volumes.
Very often as a buyer, the person you most want to talk to or sound out about an issue is the last person you can actually risk talking to. “Plausible deniability” is the only true secrecy in a market where silence speaks volumes and how a person dodges a question simply means the questions is rephrased and pitched more accurately again and again.
It’s frustrating as hell for line managers who think they know the background to Company X better than anyone (they’ve probably interviewed every pissed off manager from there for the past 5 years or even worked there in the past) to be excluded precisely because they know so much.
But the biggest asset in M&A negotiation is trust, and the biggest risk for a buyer is being perceived as a raider or poacher (of information, know-how or staff). It is immensely frustrating for the deal makers, as just when they need their best rifle – they have to go back to slings and arrows.
So when I say that the most dangerous words in M&A are not “confidentiality” or even “trust” – you may be amazed. But they are quite simply:
“How hard can it be...”
Every time I hear these gems, I know the game has gone south.
Line managers will say: “ I could have told them that this was a basket case before they started throwing millions around – what does it take for this firm to trust its own staff – S’truth - how hard can it be to send an email...”
Directors, and even quite experienced ones will say: “ ABC Ltd is a peach of a company – you just need to ring them up and get the offer process going. We need a stronger pipe line now for Goodness sake – pick up the bloody phone...how hard can it be...”
Chairmen will say: “It’s a simple “tuck in” for God’s sake – get it done within 3 months – how hard can it be?”
The simple truth is that “nothing is impossible to people who don’t have to do it”.
This applies as much to line directors as it does to spreadsheet jockeys and bankers.
M&A prospecting looks easy – but it isn’t. Integrating a business “foisted” on you is tough – but if this is the perception, the ball has already been dropped.
Acquisitions, even simple tuck ins, are aspirational. By definition they bring some market share, competence or capability that you don’t already have.
The art of the process is keeping all of the players on-side – and especially your own team.
The “not invented here” syndrome, and especially its flip side - the “who’s the daddy now” syndrome – are the evil spawn of “how hard can it be”.
The real managers are those who can bury their egos, shrug off perceived slights and make the aspirational deals a reality. In compliance markets the record here is not good, and integrations have typically been poor or even disastrous. With a new crop of deals being integrated as we speak - let's hope the 5 most dangerous words and especially their "evil spawn" are under control for once.
2 relevant anecdotes:
1. Chairman summons Director following £5m shortfall revealed post acquisition. Director expecting the sack is told "why the hell would I sack you when I've just spent £5m on your education?"
2. Chairwoman asks director excluded from the big deal to a meeting after the announcement and before the director can resign or offload his tirade, the chair intecedes. She asks whether she had guaged his assesment of the prospect as well she'd hoped he would have done. Her benchmark for pricing was the market's (her job), but she hoped he'd trained her ("now the student is the master") well enough in this sector to get it right.
The whole dance is shrouded in mystery and non-disclosure or “confidentiality” agreements ranging from one page to volumes.
Very often as a buyer, the person you most want to talk to or sound out about an issue is the last person you can actually risk talking to. “Plausible deniability” is the only true secrecy in a market where silence speaks volumes and how a person dodges a question simply means the questions is rephrased and pitched more accurately again and again.
It’s frustrating as hell for line managers who think they know the background to Company X better than anyone (they’ve probably interviewed every pissed off manager from there for the past 5 years or even worked there in the past) to be excluded precisely because they know so much.
But the biggest asset in M&A negotiation is trust, and the biggest risk for a buyer is being perceived as a raider or poacher (of information, know-how or staff). It is immensely frustrating for the deal makers, as just when they need their best rifle – they have to go back to slings and arrows.
So when I say that the most dangerous words in M&A are not “confidentiality” or even “trust” – you may be amazed. But they are quite simply:
“How hard can it be...”
Every time I hear these gems, I know the game has gone south.
Line managers will say: “ I could have told them that this was a basket case before they started throwing millions around – what does it take for this firm to trust its own staff – S’truth - how hard can it be to send an email...”
Directors, and even quite experienced ones will say: “ ABC Ltd is a peach of a company – you just need to ring them up and get the offer process going. We need a stronger pipe line now for Goodness sake – pick up the bloody phone...how hard can it be...”
Chairmen will say: “It’s a simple “tuck in” for God’s sake – get it done within 3 months – how hard can it be?”
The simple truth is that “nothing is impossible to people who don’t have to do it”.
This applies as much to line directors as it does to spreadsheet jockeys and bankers.
M&A prospecting looks easy – but it isn’t. Integrating a business “foisted” on you is tough – but if this is the perception, the ball has already been dropped.
Acquisitions, even simple tuck ins, are aspirational. By definition they bring some market share, competence or capability that you don’t already have.
The art of the process is keeping all of the players on-side – and especially your own team.
The “not invented here” syndrome, and especially its flip side - the “who’s the daddy now” syndrome – are the evil spawn of “how hard can it be”.
The real managers are those who can bury their egos, shrug off perceived slights and make the aspirational deals a reality. In compliance markets the record here is not good, and integrations have typically been poor or even disastrous. With a new crop of deals being integrated as we speak - let's hope the 5 most dangerous words and especially their "evil spawn" are under control for once.
2 relevant anecdotes:
1. Chairman summons Director following £5m shortfall revealed post acquisition. Director expecting the sack is told "why the hell would I sack you when I've just spent £5m on your education?"
2. Chairwoman asks director excluded from the big deal to a meeting after the announcement and before the director can resign or offload his tirade, the chair intecedes. She asks whether she had guaged his assesment of the prospect as well she'd hoped he would have done. Her benchmark for pricing was the market's (her job), but she hoped he'd trained her ("now the student is the master") well enough in this sector to get it right.
Wednesday, October 17, 2007
Compliance Deal Benchmarks
When England again beat the odds to rumble the French at home it was fun - but does it mean they can beat the Springboks? Leon Haslam did the double at Donnington and when push came to shove for title positions at Brands Hatch he struggled to make the podium? England keep doing 3-0 games, so does that mean they can put the same score up on Russia? My mate Rob had a great time out with a new "partner" last week-end - but does that mean if I ask her or her mate out it's game on?
Saying that So and So got 2 x sales or 20 x profits means nothing if it can't be translated into a real appreciation of whether that means your deal or the next deal is likely to follow suit in some way. The rash of deals in UK compliance companies recently needs explaining if you are to get any sort of lessons from them.
First - be sure about what you're quoting. You wouldn't take a punt on a horse based on a form sheet of the last 2 races only and not knowing the rider or trainer - but then again plenty do...Forget PE ratios, post tax, pre tax, etc - you need to know the current sales or turnover of the business, the likely operating profit at "ebitda" level (earnings before interest, tax, depreciation and amortisation). Then you need to take a view on what owner benefits or post deal adjustments will do to that profit figure. Much of this is guess work, as companies house data will be 12-18 months out of date, but if you know market benchmarks and take a 10 year + view, you can make the guesses educated and narrow the range for error significantly.
Secondly, time is important, so get as close to the real time deal benchmarks as you can. Wasps rugby can afford to stay cool about losing a few games early in the season, Spurs rush in to change management at the same point - why? Should other managers be especially worried - or maybe only rugby coaches are "safe". Deals take 4-6 months to do, so in a rising or falling market this is key. Is this likely to be the first of many or the last of several? Is this buyer doing a roll up, or dipping a toe in?
Thirdly - says who? Business is the only "game" where you find footballers, rugby players, hockey, golf and cricket players all on the same pitch - each diligently focused on thier ball and trying to cope with the "clutter" created by the other players. Understand the buyer motivation, as well as pricing. VCs, institutional and trade players operate on different benchmarks, and will pay different prices for small/large, high growth/low growth; tuck in/stretch prospects. In compliance markets in particular you now have builders, bookies, and bankers competing with software developers, publishers, trainers and consultancies. Each has their own perspective and hang ups.
So what about National Britania being sold on by their VC shareholders to Connaught? Was £90m too much or not enough? Does it mean anything for other compliance players? (http://www.natbrit.com/)
The last reported sales and profit figures for Nat Brit were £28.2m and £4.3m for the year ending October 2006, but what has happened since then? Is it really saying that x3.2 sales and x21.2 profits is a realistic assumption for other compliance players?
Well - no. Nat Brit put a bit of weight on throughout 2006/7, and their accounts refer to buying 4 companies, the largest of which, CHSS (http://www.chss.uk.com/), generates sales of over £9m pa. Nat Brit was itself on a strong growth path organically as well, and the group could realistically be expected to be on run rates of £48-52m sales and £6-7m profits at the time of the deal. Fine - that means real benchmarks on a current basis are x1.8 (sales) and x14 (profits). No surprises here - effectively a x14 multiple is normal for a business with between £5-10m in profits on a strong growth ramp and with a highly contracted renewal business (a range fo x12-15 is typical). Making less than £5m in profits will deflate the multiple, and Lyceum (the VCs here) have done well to play the multiple arbitrage game very effectively.
The buyers, Connaught (http://www.connaught.plc.uk/), are a listed PLC heavily involved in social housing services - a market which shares many of the characteristics of the construction one, notably an inability to sustain superior profits for too long, and one where 20% profits are rare. McAlpine bought a Nat Brit competitor some years ago, and there is a distinct trend among lower margin industrials (including Bodycote and others) to continue to diversify into compliance because of its high growth and profit potential currently. Share prices have been robust post deal. Two happy bunnies.
So will Rob's friend be chuffed if I ask her out? Maybe her mate will be up for it? Probably not - unless I transform into a real "oil painting" - much as Caerphilly's ugly duckling became this swan over time. This deal has only confirmed x14 multiples for market leaders generating significant profits and growth potential. The only thing it does suggest is that there are probably still plenty of fish in the sea - plenty more pebbles on the beach. Plenty of buyers still around for good players in a market with fundamentals as attractive as this one.
d
David R Johnston
CEO A.R.K. Business Analysis Ltd (http://www.arkbusiness.co.uk/)
For a fuller appreciation of the long term impacts and context for this and the other deals such as Northgate's purchase of First Business Support - see www.arkbusiness.co.uk for details of the Market Reports. The Red Tape Removal Specialists Market 1995-2010 is now available (01280 843900).
Saying that So and So got 2 x sales or 20 x profits means nothing if it can't be translated into a real appreciation of whether that means your deal or the next deal is likely to follow suit in some way. The rash of deals in UK compliance companies recently needs explaining if you are to get any sort of lessons from them.
First - be sure about what you're quoting. You wouldn't take a punt on a horse based on a form sheet of the last 2 races only and not knowing the rider or trainer - but then again plenty do...Forget PE ratios, post tax, pre tax, etc - you need to know the current sales or turnover of the business, the likely operating profit at "ebitda" level (earnings before interest, tax, depreciation and amortisation). Then you need to take a view on what owner benefits or post deal adjustments will do to that profit figure. Much of this is guess work, as companies house data will be 12-18 months out of date, but if you know market benchmarks and take a 10 year + view, you can make the guesses educated and narrow the range for error significantly.
Secondly, time is important, so get as close to the real time deal benchmarks as you can. Wasps rugby can afford to stay cool about losing a few games early in the season, Spurs rush in to change management at the same point - why? Should other managers be especially worried - or maybe only rugby coaches are "safe". Deals take 4-6 months to do, so in a rising or falling market this is key. Is this likely to be the first of many or the last of several? Is this buyer doing a roll up, or dipping a toe in?
Thirdly - says who? Business is the only "game" where you find footballers, rugby players, hockey, golf and cricket players all on the same pitch - each diligently focused on thier ball and trying to cope with the "clutter" created by the other players. Understand the buyer motivation, as well as pricing. VCs, institutional and trade players operate on different benchmarks, and will pay different prices for small/large, high growth/low growth; tuck in/stretch prospects. In compliance markets in particular you now have builders, bookies, and bankers competing with software developers, publishers, trainers and consultancies. Each has their own perspective and hang ups.
So what about National Britania being sold on by their VC shareholders to Connaught? Was £90m too much or not enough? Does it mean anything for other compliance players? (http://www.natbrit.com/)
The last reported sales and profit figures for Nat Brit were £28.2m and £4.3m for the year ending October 2006, but what has happened since then? Is it really saying that x3.2 sales and x21.2 profits is a realistic assumption for other compliance players?
Well - no. Nat Brit put a bit of weight on throughout 2006/7, and their accounts refer to buying 4 companies, the largest of which, CHSS (http://www.chss.uk.com/), generates sales of over £9m pa. Nat Brit was itself on a strong growth path organically as well, and the group could realistically be expected to be on run rates of £48-52m sales and £6-7m profits at the time of the deal. Fine - that means real benchmarks on a current basis are x1.8 (sales) and x14 (profits). No surprises here - effectively a x14 multiple is normal for a business with between £5-10m in profits on a strong growth ramp and with a highly contracted renewal business (a range fo x12-15 is typical). Making less than £5m in profits will deflate the multiple, and Lyceum (the VCs here) have done well to play the multiple arbitrage game very effectively.
The buyers, Connaught (http://www.connaught.plc.uk/), are a listed PLC heavily involved in social housing services - a market which shares many of the characteristics of the construction one, notably an inability to sustain superior profits for too long, and one where 20% profits are rare. McAlpine bought a Nat Brit competitor some years ago, and there is a distinct trend among lower margin industrials (including Bodycote and others) to continue to diversify into compliance because of its high growth and profit potential currently. Share prices have been robust post deal. Two happy bunnies.
So will Rob's friend be chuffed if I ask her out? Maybe her mate will be up for it? Probably not - unless I transform into a real "oil painting" - much as Caerphilly's ugly duckling became this swan over time. This deal has only confirmed x14 multiples for market leaders generating significant profits and growth potential. The only thing it does suggest is that there are probably still plenty of fish in the sea - plenty more pebbles on the beach. Plenty of buyers still around for good players in a market with fundamentals as attractive as this one.
d
David R Johnston
CEO A.R.K. Business Analysis Ltd (http://www.arkbusiness.co.uk/)
For a fuller appreciation of the long term impacts and context for this and the other deals such as Northgate's purchase of First Business Support - see www.arkbusiness.co.uk for details of the Market Reports. The Red Tape Removal Specialists Market 1995-2010 is now available (01280 843900).
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