I had a great call last week with Randy Grigg of Ridgecrest Advisors. Randy is an IT M&A adviser based in St Louis Missouri. We compared notes on our experience and discovered that we have very similar businesses and experience – Randy in the US and myself in Europe. Where we complement one another is in the area of cross border M&A. I can act (and have acted in the past) for North American Corporations acquiring in Europe and Randy has acted for European Corporations making acquisitions in the US.
This led me to think that a post covering some of the off the radar criteria for cross border deals into the UK (based on my experience) might be of interest and help to you (my audience).
Here is my Six Minute Strategist – six key “off the radar” points to think about…
Firstly three “Macro” factors…
While the US is a vast multi-regional market, the UK market is much more concentrated in geographic terms. From a new market entrant’s perspective you must be aware of the very strong regional characteristics that are to be found in the UK. People are very proud, and rightly so, of their local villages, towns and cities. They are even more proud of their football (sorry, soccer) teams. Expect and respect these regional idiosyncrasies.
Putting these emotional issues aside, my advice to a new market entrant is to find a business which is within a one hour drive (UK terms < 50 miles) of which ever major UK airport has the best connection to your own regional airport. If you are going to be managing this business from the US, you and your colleagues will be flying in on a regular basis. It will be so much easier if you can be located somewhere practical. Taking my first point into account, do not make the mistake of acquiring a business and then moving its 200 miles to be more convenient.
There are three key investment criteria, which make for a successful deal. They are management, management and….management. When you make your first market entry deal you are making an investment in the management team who are going to run your in-country business. Often the incumbent team will be focused around a successful entrepreneur who may never have worked “for” anyone else, let alone a company.
Here is the catch-22. This individual and his team are going to be the core focus of your British management team but you may have very different business and cultural values. Lets assume that you do not replace him, which would probably be the highest risk strategy. It will be important to work closely with him, including dinners and late nights at the bar, and make him really feel like part of the team. A transition period to help him adjust to the new business environment will be required but do not make the mistake of not setting out to him how you want to change things from the start. The approach should be – this is where we need to get to by [year end]. Now lets work together to make this transition successful.
The other major issue is to start your management succession strategy planning from day one. In the worst case, the founder may not make the transition successfully and one day (possibly within 12 months from deal close), you will get the “this is not working for me” call. Better than this, you may want to move the founder to a larger strategic role as your business grows with subsequent acquisitions. Having a new MD ready to take over day-to-day management will be strategic and smart.
When looking to make acquisitions in the UK, it is important to recognise that business valuations may differ from the US. This is not to argue that the valuations of business will be higher, only different. A few years back I spent months working with a North American client who rejected a string of interesting acquisition opportunities on the basis that the price being asked was too high when based on their own local valuation metrics.
Part of this is of course exchange rate sensitive. When the US $ trades at $1.20 to £1, acquisitions will look good value but remitted profits will lower in US$ value terms. At a $1.50 exchange rate, the price goes up but the value of remitted profits in dollar terms is more valuable. I am not saying only make acquisitions when the $ is strong and then hope its weakens, just be aware of the significant impact on capital that the exchange rate can play in the background. (Year on year it is of course possible to use hedging strategies to protect against exchange rate exposure, but that is a treasury matter not an M&A deal issue.)
Three local idiosyncrasies…
In conducting your strategic analysis for market entry, it is important to recognise that the factors driving the UK market for your product and services are going to be very different to your US business. It is important to learn and understand the background factors affecting the business. At any particular time, some sectors will be hot and some will be not (hot – i.e. cold).
At the present time, the public sector is looking problematic. After years of growth in central and local Government spending, thrift is the watchword of the day. This can create an opportunity if you can demonstrate efficiency savings and high ROIs. It is important to think through where you want to be positioned and where your potential acquisition targets are positioned. Historically the profits may have been strong but if this was based on a group of customers who have decided to reign in their expenditure – the future will be less positive. Perhaps this is one reason why the business is for sale.
Remember if you walk into a room, look around and have to ask who is the patsy – its probably you!
It is important to have a good understanding of the market structure when entering a new market. Each national market has its own characteristics and complexities and the UK market is no different. It is important to understand where your acquisition fits in, as this will have a significant bearing on its competitiveness.
A good starting point is to understand the national profile for companies based on their turnover for which ever sector or market the acquisition operates in. This does not have to be a major piece of research – more simply put – if your acquisition turns over £5m does this make it a small/medium/large player in its market? Typically the Long Tail pattern works here in the UK where sub £5m companies in the services sector are really seen as lifestyle businesses. On the basis of £100k revenues per employee (which is a useful rule of thumb for IT/Telco Services businesses but not software companies) – meaningful size really kicks in over £10m revenues/100 employees – where typically 80% should be in some way fee earning or customer facing and the balance back office and support.
Another way to look at the market is to look at the competition. I would divide this into Public, Private and Venture backed companies. The latter are normally private companies but the difference in ownership is a sufficiently differentiating factor to put them in a separate section.
Another way to segment the market is through sector verticals, technology partners and/or internal skill sets. I will do another post soon on business segmentation, which is quite a complex subject in its own right.
This final point is designed to encourage the market entrant to either get a good local adviser or to hire a local country manager with extensive experience of the UK market – or both!
The contact base and ability to transact in the local market cannot be taken for granted. Although it is often said that a common language separates the British and Americans, there are still considerable work related and cultural differences between us and it is helpful to be sensitive to this.
Always end on a call to action!
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