Probe the vendor as well as the business
First published in the Financial Times on 17th July 2012.
There is no golden rule as to whom one should do deals with
Among those who make acquisitions for a living, there are contrasting views about different types of seller. Some buyers will only purchase from founders; others will never touch companies being sold by venture capitalists. Yet others only target distressed situations. Over the years I have bought from almost all sorts of vendors, and my experience has been that there is no golden rule as to who one should do deals with – it all depends on the specific circumstances.
Bidding for companies on the stock market is fee laden and highly regulated. The buyer receives no warranties and is generally obliged to pay in cash, with no deferred element to the consideration. Exclusivity is hard to obtain, and completion can take months. But publicly traded companies are frequently mispriced, and all the legal rigmarole can put rival buyers off. I have done a few public-to-private deals: they involve a huge amount of work, but can certainly pay off, because quoted investors are often very short term in their outlook.
Private equity owners are straight forward sellers. They usually offer minimal warranties and behave entirely unemotionally: they seek the highest price and a clean exit. They are professionals in trading companies and dress them for sale, so typically secure a full price for their assets. Perhaps the best thing about such owners is that you know they will transact – unlike families, say, who frequently want to hold onto things for ever – even when it might make more financial sense to exit.
Corporate disposals are a fertile hunting ground. Major companies usually take strategic decisions to dispose of non-core subsidiaries, and often price is not the priority – tidying up the portfolio is more important to the board. Confidentiality is usually critical, so wide auctions are rare. Some major firms don’t even bother with advisors, but handle sell-offs in house. Given these conditions it can pay to make unsolicited approaches to buy such assets.
Many believe government is the softest seller of all, and it is certainly true that privatisations have often been virtual give-aways. For example, the disposal of most of Russia’s industry by Yeltsin in the 1990s was one of the bargains of the century for the wily oligarchs, who ruthlessly stripped the country of much of its national wealth. The process was so corrupt that is has come to be known as ‘Catastrokia’. But in many nations the process is highly bureaucratic and cumbersome – so purchasers need to be patient.
Buying companies out of bankruptcy is a tricky business. It takes ready cash, an appetite for risk, and plenty of knowledge beforehand. It is almost impossible to arrange bank debt for such deals given time constraints and lack of information, so they must be funded with 100% equity. Deadlines are very short and so due diligence usually has to be very limited.
Working with family owners of companies is a complicated matter, but can be worthwhile if you get it right. It is important to understand the motivation of the seller: why are they doing it now? Divorce, death, illness, retirement and partnership bust-ups are the most common reasons. But on numerous occasions founders sell because they know their market very well, and sense they can maximise proceeds. Some individuals are highly motivated to achieve the very highest price, but from time to time other factors come into play, such as ensuring the business is passed into the right sort of hands. Several of the best investments I’ve ever made have been into firms owned by founders – helping them to take their creation to the next stage.
Whichever type of seller is involved, buying companies tends to pay off when you can add value to the business. That means delivering extra revenue, saving costs or introducing new technology or people. This is much easier to do if you are a trade buyer rather than a financial acquirer. However, financial buyers are experts at doing deals, so carry out the process of buying and selling well – and are less at the mercy of stock market fluctuations when it comes to timing. And right now is the toughest time I can ever remember to carry out solid acquisitions at a fair price.