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October 2008

Doing deals in the crunch - or not

I don't usually go in for economic predictions.

Last week I submitted an article for a business magazine on doing deals (mergers and acquisitions, management buyouts etc) during the cruch.    Writing it early last week I tried to be reasonably upbeat - some deals will still be done, although being honest at the bigger end, or the more marginal end raising finance has become more difficult.   Since then the financial system has melted a little more.  

So when the magazine gets mailed out at the end of October will things have got better, will I look balanced and wise, or if it is this bad or worse will I look rather over-optimistic?    Who knows?  Watch this space.

Times are hard.................

............if the British Venture Capital Association ('BVCA')  has had to start charging £150 for access to its list of members. 

This had been available free, in a useful on-line search-able format which helped advisers such as us to target appropriate private equity or venture capital funders for propositions.    Most corporate finance advisers will cough up.   Yet the BVCA targets this information at entrepreneurs - that's the tab in its website navigation that leads to the information.    How many entrepreneurs, or management buyout team members will want to shell out as private individuals?   I shouldn't think they will and so instead they will go to folk they know, or have already heard of.    Less obvious venture capital firms will just not get the enquiry.   

Perhaps I am missing the point but it does seem odd for a trade association (with some recent bad press on private equity to overcome and more than £1M of cash in the bank per its last accounts) to expect its members customers; the entrepreneurs to pay to find them. 

I can't think of another trade association that protects its members from potential customers in this way.    Curiously unhelpful.

Cambridge Enterprise Conference

I attended the 9th Cambridge Enterprise Conference yesterday, which we were sponsoring.   AaaaaCECtulipredcopy Lots of interesting content with, I thought, a rather more practical slant than in some previous years.    Some nuggets that I thought worth noting were:-

  1. Eddie Andersen of Pentech Ventures spoke about bootstrapping.   Having bootstrapped your start up company, you should continue to behave that way even after venture capital  funding.
  2. Once again I was impressed by how good speakers can hold the attention of the hall with few or no slides - a lesson for all the powerpoint junkies out there.   Special mention then to Martin Brennan who told the fascinating story of the JB7with no slides,  and Peter Finnie of Gill Jennings & Every who had only three slides to explain the value of Intellectual Property as a strategic asset. 
  3. Rebecca Harding proclaimed herself to be an optimistic economist.   Some cheer to be taken - amid the wreckage of banks collapsing all around us - from the Global Entrepreneurship Monitor showing the uk level of entrepreneurship holding steady, in contrast to most other developed countries.
  4. Simon Galbraith of Redgate Software spoke on the contribution to success made by corporate culture.   While stressing the need to find "round pegs for round holes" he warned that the search for "fit" as part of the recruitment process was a call to prejudice - good point.     He reckons that people want great colleagues, the opportunity to do the work of their lives, a sense of belonging, wonderful management, and to be fairly paid.

So farewell then Financial Assistance..............

We completed a management buyout last week, and as part of it we had to work through - with the lawyers - an arcane process called a Financial Assistance whitewash.    Company lawhas prohibited companies from giving assistance for  the purchase of their own shares.  Most commonly this would arise in a management buyout where the bank funding the transaction would lend to the Newco formed to effect the transaction - but of course the security for the lending was provided by the target.     The granting of the security being financial assistance.  It could also arise in plain vanilla M&A deals if for example fees were being paid out of the target.  

Some lawyers saw financial assistance lurking behind every bush - much to the frustration of the other advisers.      We closed a deal earlier this year involving a number of companies, where we had to whitewash the lot,  as the buyers lawyers saw financial assistance everywhere. Ca2006

So Financial Assistance was prohibited, but private companies could go ahead anyway provided they went through whitewash - essentially a declaration of solvency for the next 12 months, supported by an audit opinion.    This provided extra work for the legal and accounting professions, and I guess was supposed to protect the creditors.

The 2006 Companies Act provided for its abolition, and it is finally about to happen from 1 October.    So the whitewash will become a thing of the past,  deal costs in MBOs should decrease marginally without this extra step, and a  fewer trees will be felled to produce the legal documentation.

It remains to be seen if the banks will insist on some similar procedure to be incorporated into their due diligence processes as they have probably taken some comfort from it to date.   But there are other provisions to protect creditors and regulate directorbehaviour.  And it remains unlawful for public companies to give financial assistance. 

So farewell then financial assistance................