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.
Friday, October 26, 2007
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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