lessons from the coal face the m&a process: a practitioners perspective justin ray director and...
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Lessons from the Coal FaceThe M&A Process:
A Practitioners Perspective
Justin RayDirector and Head of Corporate
Finance
Critchleys LLP• Critchleys is one of the largest firms of independent chartered
accountants and business advisers in the Thames Valley. We rank among the Top 80 accountancy firms in the UK. With 12 partners and over 100 staff, we have the depth of resource to service all our clients’ needs, while remaining an approachable and friendly firm.
• Critchleys’ corporate finance team can draw on specialist expertise to provide a comprehensive financial advice. Our experts in corporate tax, VAT, accounting, audit and financial planning are on hand to advise on broader issues affecting the success of a transaction. This multi-disciplinary approach provides a level of service which stand-alone corporate finance boutiques find hard to match.
• we offer a full range of services to help you achieve your business ambitions and measure our success by your success. Critchleys’ experienced corporate finance professionals have the expertise, contacts and commercial acumen to effectively negotiate and conclude deals - and an impressive track record to prove it.
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Justin Ray• Director and Head of Corporate Finance
• Fellow of the ICAEW and holds the Corporate Finance qualification.
• over 19 years’ experience (with Deloittes, Grant Thornton and Critchleys) of advising on corporate finance transactions including business disposals, acquisitions, MBOs, MBIs and raising debt and equity finance.
• Court expert for valuation disputes
• Associate Fellow of Warwick Business School
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Our Credentials• We act internationally – we have bought and sold businesses in
USA, Germany, France, and Asia amongst others
• We are committed to providing sound commercial advice to the mid-market, and have particular expertise in owner-managed businesses and SMEs
• What does this all mean:
• We operate predominately in the transaction size of £1m to £20m, but have been involved in transactions up to £200m
• We are not experts in acting for Public Quoted companies or significant mergers
• That said we do sell a lot of businesses to Public Quoted companies (both here and internationally)
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‘Normal’ M&A Process
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Stage 1
•Identify key value drivers
•Research: Identify buyers/targets
Stage 2
•Approach agreed buyer/target list
•Exchange confidentiality letters
•Exchange information
•Indicative offers
Stage 3
•Management meetings
•Final offers
Stage 4
•Heads of Terms
•Exclusivity granted
•Due Diligence
•Legal documentation
•Completion
1) Strategy
2) Research /
Data
5) Funding
6) Structure
4) Valuation 8) Integration
3) Use of Advisors
7) Due Diligence
1) Strategy• Clarity on shareholder / business objectives is
crucial
• How can the target help meet those objectives ?
• What are the alternatives ?
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Which?
Where? What?
Why?
• Majority of SME’s are re-active rather than pro-active.
Key Building Blocks
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Clear strategy A solid base
Understanding of value drivers/risks
Pricing & Structure Financing
Integration Plan
Why Acquire• Bring in new talent and/or technology
• Shareholders require growth
• Enhance the matrix to better serve clients
• Geographic acquisitions
• Broaden capabilities
• Solve management problem
• Not because it's for sale!
• Effectively boils down to 4 different M&A types:
• Growth
• Synergy
• Diversification
• Horizontal or vertical integration© Critchleys 2014
2) Research / Data
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• Desktop research• Research databases• Comparative transactions• Trade journals, directories, market reports• Associations• Management’s ideas• Venture Capital portfolios
• UK and International professional contacts• International networks (JHI, Kreston, IAPA etc)• UK Networks (UK200 Group, Kreston etc)• LinkedIn
• Specific Sub-groups• Own UK network of advisors
Research Issues• Global market place:
• Getting access to international data difficult
• Red Tape:
• Jurisdictional law
• Companies House data:
• Filing requirements
• International data even worse
• Historic information out of date
• Historic information un-adjusted
• No detailed P&L
• SIC codes often misleading © Critchleys 2014
Filing exemptions
Small Company
Medium Company
Turnover £6.5m £25.9mBalance Sheet £3.26m £12.9mAverage no. of employees
50 250
3) Use of Advisors
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• Better dealing with experienced advisors.
• Dealing with unrealistic expectations
• Need for clarity
• Beware of ‘Spin’
• Advisors get rid of emotion.
4) Valuation
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• Don’t propose to debate about the merits of each valuation technique.
• Some specific issues with using Multiples of Profit:
• Using Quoted multiples
• What discount rate to apply to quoted multiples
• Using reported transactional data
• Client expectations
• What is maintainable profit
• Minority discounts
Issues with Quoted multiples
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• Are quoted companies directly comparable?
• Fudging outliers
• P/E ratios readily available……
• but EBITDA multiples are not
What discount rate to apply to quoted multiples
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• Very subjective!
• “can typically range from 30% to 80%”.
• Tools?
• BDO PCPI plots reported transaction against public data. (See earlier slide on issues with comparable transactions)
• “In our professional opinion”
Issues with Comparable transactions
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• Information is collated by a number of organisations that reports on completed and rumoured transactions.
• But.....
• Very few will actually disclose the value paid or deal structure.
• Where a value is disclosed it is often ‘inflated’ as it would included the full earn out amount, excess cash and freehold properties.
• The databases would use unadjusted historical reported profit (where available). (See earlier slide on issues with Research)
• Therefore (high number) divided by (low number) = very high multiple.
Transaction Multiples
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P/E multiple
Occ
urre
nce
•USPs•competitive tension
/ auction process•positioning
• The graph illustrates the typical range of P/E ratios achieved for corporate transactions. The graph is not specific to any sector but simply illustrates the range of P/E’s that can be achieved by advisors.
Transaction Multiples
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• On an anonymised basis we submit transactional data to the UK200 Group this data is then processed to show the ‘true’ transaction multiples achieved on a wide variety of deals. The last report resulted in an average P/E ratio of 6.4 (this is equivalent to broadly in the 4 to 5 EBITDA range).
Client expectations
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• What is my business worth…..
• Eye of the beholder
• Dealing with unrealistic expectations
• Option 1) tell truth and deal with it now and ….may lose work as a result.
• Option 2) flatter their expectations and ……pick up pieces later
• Reliance on exiting shareholder
Examples of Drivers of value
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Business related Market related
Scale and market position Market size
Barriers to entry Growth prospects
Quality of management Volatility / cyclicality
Financial performance and prospects
Availability of buyers
Scale and Scarcity Market consolidation
Contracted income
Technology
Geography
Customer base= Eye of the beholder
Minority Discounts
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Minority Discount
Majority holdings in excess of 50%
5% to 10%
50% interests 15% to 25%Interests of 26% to 49% 30% to 40%Interests of 10% to 25% 45% to 55%Interests of less than 10% 60% to 75%
• Very subjective!
• “In our professional opinion”
• The ACCA Technical Factsheet 167 does provide some guidance on the matter (detailed in the table below) but concludes that a discount needs to be considered on a case by case basis.
5) Funding
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• Banks:
• Restricted funding
• Promising but not delivering
• Venture Capital:
• Equity gap
• Not really risk takers any more
• Angels:
• Excellent tax incentives for EIS qualifying businesses (size and sector restrictions)
• Angels are like cats!
• Crowd funding
• Vendor
• Make the business pay for itself
6) Structure
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• Cash at completion.
• Deferred consideration:
• Buyers have and are still using the recent recession as an excuse to defer consideration
• Sometimes this is as much as 50%.
• Earn Out:
• Used to bridge valuation gap where high growth is forecast (particularly technology based companies).
• Quite often Earn-Outs are bought out post acquisition
• Shares in Buyer:
• Only really valuable is a quoted buyer.
• Risk
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• Timing
• Difficult to get all offers in at same time
• Managing expectations
• Comparing offers
• Headline price vs structure
• Comparing apples and pears
Structure
7) Due Diligence
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• On the back of a clearly defined strategy identify the key value drivers
• Financial and legal due diligence is only a part of this…
• As important are
• Cultural fit
• HR/ people
• Market dynamics/competitor actions
• The value of the vendor!
• Don't over-estimate synergies…
• Manage lawyers: avoid point scoring
• Manage timetable
8) Integration
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• More than 70% of M&A fail to produce any benefit to Shareholders and over half actually destroy value (McKinsey & C0 2010).• Main reasons for failure include:
• Paid too much• Lack of shared vision• Leadership clash• Cultural mismatch• Loss of key talent• Misaligned structures• Lack of management commitment• Lack of employee motivation• Poor communication• Poor change management• Management distraction
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