February 2012

The good news that an acquisition can be good for a company’s health is also backed up by a survey of more than 3,200 deals involving a UK target between 1997 and 2010 by Cass Business School for the Department for Business, Innovation and Skills. According to the report, acquiring companies are generally found to have outgrown their peers in terms of both employment and revenue in the three years following acquisition.

While recent M&A activity suggests there’s some way to go before we return to the kind of buying frenzy seen prior to the credit crunch, Peter Terry, Corporate Finance Partner at Mazars, stresses that it is vital to remain well connected to make the most of current opportunities. “Companies on the lookout for an acquisition should also be watching the insolvency guys and the problem departments of the banks. When you’re looking to acquire opportunities at a keen price, these are the places to watch,” says Terry.

But timing can be crucial. Terry gives an example – typical in these difficult times – of a distressed business prompted by a bank to appoint administrators, leaving potential buyers no more than two weeks to complete a transaction. “Banks are now looking to protect their value, which may mean they have to act very quickly. So it’s vital to have your feelers out all over your chosen market and place yourself in a position to move quickly.”

It’s also important to consider the big picture. While much of the negotiation will hinge around profit generation, cash flow and other financial synergies, Terry doesn’t believe these are the key aspects that drive a deal. He calls these the “acquisition drivers”.

Acquisition drivers should always dovetail with a company’s own growth strategy and vision. Terry gives the example of a recent deal involving the sale of Document Express to an international managed print services provider wanting to grow its business within the UK. “The buyer wanted to expand its customer base into the North West where Document Express had a strong presence. In this instance, geography was the key driver for the buyer.” 

Geographical expansion is one factor underpinning a relatively healthy flow of deals in the pipeline, particularly in the oil and gas services sectors. Although securing finance for acquisition purposes remains tough. With many banks still reticent to lend, Terry says development capital and growth funds offer another option for businesses looking to finance expansion plans. “These types of funds are relatively new to the market and specifically aimed at companies looking to grow and develop.”

Unlike traditional venture capital funds, these new style funds often have UK government or European backing and can be regionally based. An example is the North West Fund, which provides finance from £100,000 to £2m to trading businesses seeking finance to support their expansion plans in the region. In return for an equity share in the business, the fund offers a range of financial structures including a mixture of equity and loan options. The Business Growth Fund (BGF) is pitched at a level above this – £2m to £10m of investment.

While this doesn’t mean that raising finance is going to get any easier instantly, Terry believes any increase in the number of options available can only help reduce the current financial barriers that are holding some companies back unnecessarily.