Getting the best deal: make or break

corporate finance

According to figures compiled by National Statistics, the amount of cash
splashed on deals involving UK companies in 2006 climbed to a staggering
£140.9bn from £108.1bn in 2005, and industry experts believe the boom will surge
forwards into 2007.

A survey by Morgan Stanley found that European finance directors now rank
mergers and acquisitions as their number one priority, while Standard &
Poor’s has forecast higher premiums for deals through the course of the year.
What this all means for sellers is that there is a big war chest of money out
there looking for businesses to snap up.

For buyers, interest rates are low, debt is cheap and corporate balance
sheets are robust. Yet in these heady times, businessmen, particularly finance
directors, should not lose focus.

FDs in the buyers camp should not use the abundance of surplus funds as an
excuse to overpay for a target, while those working for the sellers should
continue to push for the maximum price, no matter how tempting a first offer may

Buy low

The good news for acquirers of businesses is that capital is freely available
and that war chests have become so large that businesses, which were completely
off the radar a few years ago have now become realistic targets.

Yet the competition for target companies is more fierce than ever, the
turnaround time for rounding up a deal has shortened dramatically, and the
margin for error in paying the right price is a fine one.

A poll of 101 corporate executives conducted for KPMG by MORI found that 43%
of those surveyed believed that the cost of acquisitions had increased because
buyers had to build in the financial benefits of half the perceived synergies of
a deal.

John Kelly, head of integration advisory at KPMG, says this shows that the
FDs of acquisitive companies need to be sharper than ever when plunging into the
M&A market.

‘The sell-side now runs tight auctions with tight deadlines,’ Kelly says.
‘Any purchaser seeking to transact deals in this environment is likely to have
to make decisions with limited time and access. Winning the deal is only half
the job. The chief executive is going to be worried about how to make the deal
value stick and finance directors will want early assurance on exactly what they
have bought.’

For Steve Lucas, FD of acquisitive FTSE 100 energy giant National Grid,
precision can only be achieved through discipline and rigorous attention to
detail. ‘You don’t make money by just buying businesses, you make money by
buying businesses and then managing them better than they were managed before,’
Lucas says. ‘Discipline and patience is crucial. You have to be absolutely
rigorous about going through your numbers. You have to be absolutely rigorous in
your follow-through.’

Ian Leaman, director at Buckingham Corporate Finance, says that thorough and
intensive scouting Ð not only of the target company but also the market it
operates in and the competitors which may come up with rival bids Ð is the only
way to ensure that every detail is covered.

‘If your adviser is plugged into the right databases, there is a wealth of
information available on a company, its market and rival bidders. At a very
early stage, a buyer needs to collect this intelligence,’ Leaman says.

Accessing this data provides the foundation of any bid, Leaman adds. A
company’s details will reveal the strength of its underlying cashflow and future
prospects. An analysis of its price/earnings ratio compared with the multiples
of listed companies in the same sector will provide an idea of what to pay.

Market information offers details of other transactions in the space and what
sort of prices and multiples are involved.

Finally, the details of rival bidders provide a picture of what sorts of
rival bids can be anticipated. If a trade buyer is in the picture, the price
could go higher because of the perceived synergies. Financial buyers will need a
standalone business, and so might not be able to bid as high.

Leaman says buyers should constantly be weighing up this information against
the post-acquisition risks. ‘Acquiring a business involves such a wide range of
variables that it is impossible to go into a bid with a maximum price in mind.
All plans have to be kept under review, but if the risk of the deal becomes too
great, then you have to cut your losses and walk away,’ Leaman says.

Sell high

Selling a business involves much more than simply waiting for buyers to queue
up before handing over the business to the one with the deepest pockets.

David Brooks, head of mergers and acquisitions at Grant Thornton, says that a
business needs to be groomed ahead of sale.

The most important factor to consider is how a business will shape up once
the owner has sold out and taken their leave.

‘Before you put a business in the shop window you have to install a second
tier of management to run the business once the owner has moved on. It is no
good if the owner leaves with all the key contacts and knowledge. There needs to
be a sustainable management team in place to continue running the business,’
Brooks says.

Chris Grove, corporate finance partner at BDO Stoy Hayward, says proper due
diligence, conducted by the vendor, is another essential component to have in
place in preparation for a sale.

Such preparation provides bidders with reliable information they can use to
put forward the very best bid they can muster. It also provides the seller with
control over the process, as they know what information bidders are basing their
decisions on.

‘Due diligence is an inevitable part of any sales process. Sooner or later
potential vendors will be using vendor due diligence as a matter of course to
remain in control of the sales process,’ Grove says.

Then there is the issue of timing. No matter how good a business is, there
are market cycles that have to be taken into account in order to leverage the
best price.

‘If you sold a care home business four years ago, you would have taken a
multiple of eight or nine times earnings. If you sold that business today, you
would take a multiple of 13 or 14 times earnings. That shows how important
market timing is. Business moves in cycles and those cycles need to be
recognised,’ Brooks says.

Sometimes, non-financial factors also have to be taken into account when
making a sale. Owners may want to protect employees, customers or suppliers
after they have moved on, and this should have influence on the sale process.

Brooks says careful consideration needs to be paid to how key staff and
customers will react to news of a sale.

‘Discussion and communication is a necessity when about to embark on a sale.
An owner needs to decide when the best time is to let staff and customers know
about an upcoming deal. It can be a delicate topic and requires sensitivity and
experience,’ Brooks says.

Then there is the issue of taxation, particularly for the seller.

‘Tax planning is a must. Taper relief is not always as simple as people
assume and there is also inheritance tax to be considered. Tax is complicated
and requires expertise,’ Brooks adds.

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