EXCL – Why Private Equity’s appetite for aggressive takeovers will only increase in 2023
It’s no surprise that economic turmoil often drives consolidation. Companies may be struggling to survive and looking to M&A as a way to drive value.
Not to mention the current weak pound that makes UK-based businesses, especially those with a global footprint, more attractive to overseas buyers.
City experts don’t expect that to change in 2023.
According to recent ONS data, Q2 this year saw the total value of inward M&A of UK companies made by foreign companies increase to £16.1bn, up £500m on the previous quarter.
A good time for Morning Wire to catch up with Jim Houghton, partner at M&A consultancy Waypoint Partners, to discuss what makes a good buyer.
Houghton stressed that, perhaps counter-intuitively, it’s not all about the financials.
“You’d be surprised by how few buyers have a firm strategic plan for M&A. Instead they have a 12-month budget for acquisitions and that’s it.”
“But although the bean-counters might get excited by great returns and a high margin – in fact, it can be irresistible – the numbers aren’t as important as the right strategic fit,” he added.
“Buyers need a menu of priorities so they know that the target is the right quality and the right culture as well as the right price.”
Jim Houghton, partner at M&A consultancy Waypoint Partners
In fact, Houghton noted that good M&A is never led by a corporate development team but merely facilitated by it.
“Accountants and lawyers shouldn’t dictate what companies a business acquires. People and chemistry matter enormously,” he argued.
“Financials are a reason not to do a deal. Not a reason to do one.”
Houghton also identified a number of other areas where buyers can strive to get it right.
Having identified a good strategic fit and ensured stakeholders are on board, the key is to be disciplined. Contrary to what some may believe, Houghton argued, good M&A is mostly common sense.
“Normally the focus is on the target company delivering, but the buyer is also ‘selling’ right up until the deal is done,” he added.
“M&A is all about confidence and momentum and it cuts both ways.”
Jim Houghton
“It also makes sense for buyers, especially those who acquire regularly, to codify their approach so they don’t get bogged down in the details and end up re-educating their stakeholders with every deal.
“They need key terms and red lines they won’t cross. Make the rules and stick to them.”
“And yes, there are also red flags to watch out for at the eleventh hour. Keep an eye out for things like principals dropping out of calls with a week to go and leaving it all to their lawyers, or the seller whose aftershave or perfume you can smell more strongly because their body temperature has risen due to stress.”
Cross-border deals
Although numbers and financials may not be the lynchpin of good M&A, Houghton noted that it’s still vital to keep them consistent, especially in cross-border deals.
“I’ve seen deals stall because of different terminology used by companies in the UK and China, or even involving UK sellers and buyers from the US. Two nations ‘divided by a common language’ indeed,” he said.
“It’s critical for buyers to capture what’s been agreed in a spreadsheet so everyone is working from the same set of numbers – particularly when your audit trail of what’s been agreed may be a blizzard of disparate emails and texts in chat windows from your devolved team.”
Confusion
Houghton also identified that miscommunication and confusion over terms isn’t just a cross-border issue.
“You often see deal norms that talk about ‘normal market’ non-compete clauses, restrictive covenants and other deal protections, but buyers and sellers often have vastly differing ideas of what this so-called ‘normal market’ looks like,” he added.
“This can then lead to friction and difficult conversations as both parties realise their interpretations are so different.”
Curiously, he found, the oft-derided private equity buyers are often the best at getting this right.
“You might not like what they say, but they’ll cover all those tricky conversations upfront.”
“Private equity are the best at keeping everything simple.”
Jim Houghton
Finally, buyers should have a plan for the first three months and six months post-deal.
For many acquirers, he stated, the deal stops at the point the contracts are signed and “everyone just goes back to doing what they were doing before”.
This is actually one of the biggest contributory factors to deal “underperformance and post-deal churn,” Houghton concluded.