Portfolio Exchange 2020: Pursuing M&A opportunities
With M&A a key pillar of Inflexion’s growth creation strategy and over 20 acquisitions completed by the portfolio so far this year, Inflexion Partner Flor Kassai hosted a Q&A on pursuing M&A in today’s backdrop.
M&A used to be done over a series of face-to-face meetings to build up a relationship and trust over a period of time. As this is no longer possible with COVID-19, how are you adapting?
Stewart Kay, British Engineering Services: We’re not put off by COVID-19; we are in a fragmented market so there is a lot of opportunity. We have around 50 targets in our pipeline, and hope to announce one soon. It is important to understand what are you looking for, as it can be easy to go too broad. Keeping focus and doing the hard yards is key.
Frederik van Tuyll, Ocorian: We are increasingly putting the word out there that we are looking to do M&A. It can get you a lot of traction to say you’re actually looking to transact, since a lot of people have effectively put business on hold.
How do you gain conviction and agree pricing in today’s remote backdrop?
Andy Scaife, ONP: I’d put this down to courage of conviction in two areas: Firstly, has it materially affected how we do business? For us, no. And secondly, it’s about operational capability and bandwidth – most businesses are stretched at the moment so you need to consider if you have the capacity to transact. We are also paying pre-COVID-19 prices. It’s more about certainty of strategy and these being the right deals to do, so we are thinking a few years ahead.
Frederik: I was in Hong Kong during SARS and my experience means I knew we’d come out the other end eventually. I could see the impact on our business, which isn’t now but comes a year later. I therefore had confidence on how our business would trade.
Stewart: Don’t do it if you don’t have the right feeling in your gut, even if all the diligence stacks up. Your instinct is invaluable.
If you feel it’s the right target, prepare to play fair. Businesses fear they won’t get fair value now, so we have to be brave and say ‘no, we won’t just base a price on the last 12 months; we believe your story, know your business, and so are looking several years ahead’.
They are surprised we are willing to pay a pre-COVID-19 price, but it is giving us a real advantage as we aren’t getting outbid by someone else after doing lots of work. It’s ultimately making our efforts more worthwhile.
How do you manage a successful integration during a period like this?
Stewart: I used to think I have to integrate everything on day one, but now I realise I just need to do the basics on day one. If you overly rush it, the cultural side can suffer. You need to live with the business for a while to get to really know it, especially as you’ll find some people are great and diligence may not have highlighted them. You can’t assume that because you’re the buyer, you’re better at everything. You really need to communicate everything and take your time since winning hearts and minds is key to a successful integration.
Andy: Integration is not a one-size-fits all, and so our strategy varies for each acquisition. You need to look carefully at the business and enter the post-acquisition phase understanding what you do want to integrate and what you don’t. Some of our plays are strategic verticals, and there the usual integration won’t work. The cultural side of it is more important now than ever and you achieve that through a lot of communication.
Frederik: I find that the bigger the acquisition, the more important it is to integrate quickly, not least because of potential synergies. I take more time to integrate smaller ones, especially as the culture can be very delicate. Whatever the size, I always start integration planning before I sign the contract.
How can Inflexion support you in this?
Frederik: Inflexion can help with all parts of M&A, from sourcing the deals to appointing advisers and arranging due diligence. They have been very useful for us in financial modelling. They also kept us focussed on deliverables during the integration. You need to be careful you’re not relying on them to make the decisions for you and work as a team to achieve the best results.
Andy: When Inflexion are at the table with you, you have great collective brain power which is very useful. Inflexion have done many deals across a variety of sectors so being able to run your thought process past them and learn from their experience gives you confidence in your decisions.
Stewart: Inflexion have lots of experience in doing deals and you can bounce a lot of ideas off them. I don’t need to be told what to do, but I often need a sounding board and they are great for this.