While many businesses out there are struggling to stand still, or even to survive, for the strong this is a time to make bold moves to grow organically or by acquisition.
For strong businesses there are many opportunities to grow organically. Targeting customers of weaker competitors or using financial and market strength to buy better are good examples. Reacting quickly to the demise of competitors can be lucrative – witness the good recent results from HMV on the back of the collapse of Woolworths and Zavvi. One off opportunities often present themselves – there is currently a race amongst publishers world wide to get the definitive Michael Jackson biography on the shelves – the nimble footed will win. The key is to be responsive and reactive to the ever changing business landscape – some large businesses are not good at this. Of course not all ventures will succeed – one wants to find out quickly what will work and what will not work. There is a well used Silicon Valley mantra that says the approach should be to “Fail Fast, Fail Cheap and Move On”.
Established businesses often spend a long time deliberating over new moves and possibly miss such opportunities. In today’s climate it might be better to follow the example of the type of early stage and high growth businesses we see around Cambridge. The idea being to move from extensive planning and assessment to “just trying something”. Here the approach is to be flexible and to try new things but equally to quit if it’s not working.
This approach works well when looking at M&A deals too – if the deal isn’t going to happen you want to find out quickly and move on. Working with acquisitive clients we always focus on an early critical assessment of the transaction, and move swiftly to interact with the parties on the other side to assess the likelihood of a deal. This saves our clients time and money which can be invested in the next opportunity.
Is it worth considering acquisitions in the current climate? Yes; the really bold move in today’s markets is to take advantage of reduced valuations to acquire quality businesses.
M&A is daunting at the best of times but there are a number of studies to support the idea that those who buy during recession do much better than those who do not. A McKinsey study found that companies which moved up the league tables into the top quartile in their industries had consistently made more acquisitions than average during recession (and fewer in the good times) than their peers.
A more recent Cass Business School study found that – to quote the report’s authors “Fortune favours the brave”. Firms that made large business purchases outperformed the wider markets by 6.3%, and companies making repeat acquisition outperformed the world index by 8.1%.
At a local level of course, lack of liquidity can frustrate the acquisition plans of unquoted businesses. Banks are less willing and able to fund deals. EBIT multiples for cash flow loans have dropped significantly even when such finance is still available.
However, there is a neglected opportunity to make more use of vendor finance, where the seller of the business partly funds the deal. This might be through the acceptance of loan stock, or deferred consideration. Of course sellers must be careful in entering into such arrangements, but the evidence shows that if carefully structured it can benefit them by significantly increasing the deal value. The yield on such finance will probably also be much greater than the seller could currently achieve by placing funding in the market.
So whether you are buying or selling there are some reasons to be cheerful despite the economic downturn. If you are strong, bold moves really can pay off. And if you are selling, provided you can find a strategic buyer, good deals can still be done.