M&A: Knowing your worth
While large deals naturally make for bigger headlines, the smaller merger and acquisition (M&A) deals are often more successful. UK M&A deal figures have been skewed upwards by larger deals as a weaker pound makes UK firms more attractive targets for overseas rivals. When it comes to M&A, however, companies that execute small deals tend to do better than those that embark on infrequent, large deals.
Why the buzz around M&A?
The headlines around mergers and acquisitions (M&As) are not unwarranted, billions of pounds change hands every year as companies are bought and sold. Despite Brexit uncertainty, the industry has prospered in the last few years especially as the sterling has weakened, making UK targets more attractive.
Our research last year showed that in 2017 there were 247 disclosed transactions of US acquirers of UK businesses up to £1 billion, an 86% increase since 2009. The 2018 figures are not yet in but there is evidence to suggest that this upward trend of smaller transactions is likely to continue
Research from the Harvard Business Review has also found that smaller acquisitions boost shareholder value by between 8.2% and 9.3% versus just 4.4% for the big transactions. Entrepreneurial businesses often have faster growth rates than their larger counterparts, but there’s more to it than that.
Why are entrepreneurial businesses attractive?
It is often cheaper and quicker to acquire technologies or knowhow than it is to develop it in-house; these frequently lie within the start-ups and entrepreneurial businesses. The rapid pace of technological innovation over recent years has made technology and the associated in-house skills a popular driver of deals. For instance, enhanced digital capability in areas such as internet of things (IoT) and cybersecurity has been in high demand.
Technology giants like Cisco Systems have long used this acquisition strategy successfully. In 2018, it acquired cybersecurity firm Duo Security in a $2.35bn deal, enhancing its capabilities in cloud authentication.
The strategy has been mirrored lower down the market-cap spectrum too, and with great success. For example, the Buzzacott Corporate Finance team disposed of Vocality International to NYSE listed Cubic Corporation – Vocality specialises in low latency, lossless communications and had developed some fantastic intellectual property. Cubic understood the IP and were excellently positioned to exploit it globally.
Gain a competitive advantage
Start-ups and entrepreneurial businesses are able to give acquirers something truly unique; they can provide established players with major competitive advantages. For example, in 2013, Cambridge based Evi Technologies Limited was acquired by Amazon. It was from the AI technology of this small, British company that the Amazon Echo was built.
Market access and/or go international
Larger firms may have a strong distribution network and more established relationships with key buyers. But entrepreneurial businesses also have leverage when it comes to market access. Smaller firms tend to have unique and differentiated products and may also be placed in an attractive geographical market. For example, in 2018 Buzzacott disposed of Pex to Nasdaq listed RealPage, a SAAS business focusing on the real estate sector again with excellent IP, but also the perfect platform from which RealPage could launch into the UK and European markets.
Economies of scale
Smaller or mid-tier firms merging together are also more likely to reap the advantages that come with greater economies of scale. The simple reason is that larger companies are intrinsically more likely to already be operating at an optimum scale.
Such a strategy can potentially result in a significant reduction in unit costs, for instance where production platforms and distribution networks can be shared. The companies merging can still choose to retain their separate brands.
As an example, the proliferation of craft beer companies over recent years has made the sector ripe for M&A. Merging with other smaller producers stands to reduce unit costs, which is likely to be critical to long-term profitability in a crowded market.
Investment from bigger groups can also enable small producers to increase the scale of their production. In 2018, London-based craft brewer Beavertown sold a stake in its business to brewing giant Heineken in a £40m deal, with plans for a 10-fold increase in Beavertown’s brewing capacity.
Start-ups and entrepreneurial businesses are often most attractive to larger companies, however exits to closer peers should not be ignored as they are often the best at spotting the huge amount of potential that a business may have.
Overall, start-ups and entrepreneurial businesses have a lot to offer and when it comes to the prospect of being bought out or merging with another company. Buzzacott’s Corporate Finance team make sure that entrepreneurs understand and realise their true value.
If this is the way you want to go, the question you need to ask yourself is: what’s the best next move for my business?