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Mergers & Acquisitions - DEAD OR ALIVE?
By Malcolm Coomber and John McCartney

The credit crunch is now in its second year and the press is full of gloom about the availability of funding, collapsing share prices, the woes of AIM (the market value of AIM listed companies collapsed by 33% in only three months) and a myriad of other depressing stories . In the world of high finance, multi-billion pound transactions are being pulled or forced through at crazy prices upon reluctant parties. So is there any light at the end of the tunnel?

Whilst the world of billion dollar businesses may currently be a nightmare environment and with it looking as though the recession could last through to 2010, we at Hyde believe that there is plenty to be cheerful about. Our niche in the marketplace has always been clearly defined with most of our clients having turnover between £1m and £100m and capital values of up to £50m. It is in this sector that there is still plenty of interest. We have never been more active in helping companies to acquire, owners to sell or suitable parties to merge and we hope that you will find our thoughts a little more positive than most other recent comment.

Company Acquisitions

For those running sound companies the credit crunch has created fantastic opportunities. Across a wide range of sectors price earnings ratios are much lower than they have been for many years and the shaky economic climate means that sellers are unable to demand premium prices for their businesses. Additionally, some owners are finding themselves in the position of having to sell their businesses at a discount because of funding difficulties.

We are retained by an increasing number of companies seeking to expand by acquisition and the current climate means that the potential upside can be significantly increased above previous expectations.

Whilst we believe that there will be many outstanding acquisition opportunities over the next year or two we would also strike a cautionary note. Nearly three quarters of acquisitions fail to deliver the strategic or financial benefits expected of them for a number of reasons. The main causes are paying too high a price, not protecting the purchaser's interests adequately in the Sale & Purchase Agreement, strategic errors and/or integration difficulties.

The lesson is clear, don't be tempted into taking advantage of low asking prices without making sure that an acquisition fits your long-term strategy and do take care to under take thorough due diligence. Do make absolutely sure in your financial due diligence that there are no financial black holes. Take great care to produce detailed cash flow forecasts to assess the liquidity risk of the business.

But please don't be put off by our cautionary note. Now could be the best time ever to make great acquisitions – we are here to help you get it right.

Company Sales

The corollary of our observations with regard to the acquisition market is , of course, that business sales must be harder and cheaper. This is true to some extent but we have an increasing number of the "baby boomer, greying generation" approaching us to help them to sell their businesses.

Whilst it is clear that vendors need to be realistic about the value of their businesses, that price earnings ratios have reduced considerably and that there are fewer purchasers with the liquidity and appetite for acquisition, the market for private businesses in the £1m - £20m value bracket is still far from stagnant.

If you are thinking of selling, then we will give you an honest appraisal of the current value of your business. We will help to prepare it for sale, assist with the Sale Memorandum and then help to find a buyer. It is this last part of the jigsaw to which increasing attention needs to be paid. This is where the extensive connections, the highly sophisticated databases and the experience of the team at Hyde are likely to come to the fore.

Management Buy-outs

In reviewing the somewhat depressed company sale market it is important not to overlook the possibility of a management buy-out ("MBO") whereby a business is sold to the existing management team (as opposed to a management buy-in whereby a business is sold to an outside management team).

We have engineered quite a number of MBOs in recent times and, in a market where it may be difficult to find an outside buyer, the existing management have inside knowledge of the business and may well be in the best position to take the business forward. Indeed, selling to the management team is sometimes the preferred option of the existing owner.

In times of funding difficulties it may be necessary to assist the MBO team by leaving a certain amount of money within the business for a period but MBOs can represent an attractive alternative to an external sale. Do not think that MBOs are the preserve of multi-million pound businesses – the majority of MBOs carried out by Hyde are in the £1m - £5m value bracket.

Mergers

We have observed a marked interest in merger activity between SMEs. A successful merger can lead to cost efficiencies, increased profits and new market penetration. If you are struggling to make progress at this difficult time then it may well be the right moment to be considering and seeking out a strategic merger.

However, while the idea of a merger may be attractive, great caution is required and it should be remembered that the "bride and groom" have to live together afterwards. The considerations of "fit" become of critical importance when it comes to a merger if you want to avoid the risk that you may otherwise "marry in haste, repent at leisure"!

Phoenix Businesses

"Phoenix companies" (when a new business is started from the failure of a former business, usually run by the same management and with a similar name) have had a poor reputation for many years, largely due to a number of "dodgy" directors literally leaving their creditors high and dry before buying a business back from the Liquidator / Receiver.

The Enterprise Act 2002 created more of a new "rescue culture" providing businesses with the opportunity to start again and enabling the profitable elements of a failed business to survive.

If you are running a business that is encountering difficulties, then an alternative to a forced sale for a nominal sum and losing many years of hard work may be to consider a phoenix. If you think that this may be an option, then sound financial and legal advice at an early stage is essential.

A Final Thought

Whether you are looking to buy, sell, merge, or simply survive the credit crunch, do not forget that the companies which are best able to convert sales into cash are the most likely to survive. You can trade at losses for years but you can only run out of cash once - there's never been a greater need to address working capital (WCap) management. There is a tendency to think of poor WCap performance as a financial function but it is really an operational issue.

If you want cash to make an acquisition, are looking at the WCap requirement following an acquisition, or are simply looking to run your business more efficiently, do not forget that it is never wrong to tighten up on customer payment terms. In the current environment a recent survey of 500 businesses showed that 47% are already tightening credit control for existing customers and 44% are conducting stricter credit assessments for new clients. There can be quick gains by tightening credit terms, offering early settlement discounts and chasing debtors. Longer-term, (and why this is an operational as much as a financial issue) do not, for example, let salesmen extend generous terms and conditions simply to secure a deal.

Also don't overlook that the reverse is true for payables. Ensure that each department understands the cash impact of their actions
- buyers chasing volume discounts need to be aware of the WCap impact such as extra stocks on the books. Of course, you don't want to be squeezing your suppliers so much that they get into difficulties and there has never been a more important time to be working in partnership with them.

And finally, whether you are selling the company or simply your products or services, don't forget the old adage "A sale is never a sale until the cash is in the bank".

If you would like to explore any of the above further, please contact John McCartney or Malcolm Coomber on 020 7292 7800.

Hyde Corporate Finance is part of the Hyde Partnership, providing joined up advice across consulting, accounting, tax and marketing issues.

If you would like to explore any of the above further, please contact John McCartney or Malcolm Coomber on 020 7292 7800.

"They are down to earth, approachable people who were always available when we needed them and their advice and commitment played a key role in getting the deal done successfully."

Martin Urquhart, Tri-Q

If you would like to discuss any business planning, forecasting or cash-flow issues in light of securing funding for your business, or would like to be introduced to our banking contacts, please call Rob McLeod on 020 7292 7800.