Privately Owned Businesses in Ireland have performed well over the last five years or so and M&A activity in the sector is strong.  We have also seen many companies investing in opportunities away from their core businesses, for example the Sisk Group acquired a number of companies in the Health care sector over the last two years and the Bandon based Fleming Group investing a reported $32 million for a controlling stake in a bio-energy company in the American state of Iowa. Furthermore, we are seeing an increasing number of acquisitions outside of Ireland.  This is highlighted in the Ion Equity M&A Tracker Survey, which shows that 56% of the number of M&A transactions for the first 9 months of 2007 was foreign acquisitions by Irish Owned companies, up from 48% of transaction for a similar period in 2006.

So what of the well documented “credit crunch” and how has this impacted on M&A activity?  The Ion Equity M&A tracker Survey shows that value of M&A in the first nine months of 2007 increased by 82.5% over a similar period in 2006, an indication that the Irish M&A market has remained strong to date and indeed is growing. However experts believe that the credit crises has not yet impacted on the M&A figures as most of these deals were in the ‘pipeline’ when the crises emerged.  Therefore, they believe that the credit crunch is likely to impact in 2008 with an anticipated slow down in M&A activity.  This will have a greater impact on the Private Business sector as they rely heavily on debt financing in their M&A transactions.

There is no doubt that the feedback from the banking community is that they are open for business but that “caution” is the underlying sentiment.  Caution translates into more security required, lower loan to value lending and more robust business plans.  In other words, banks in general will remain supportive of expansion but your business plans need to be stronger, the acquisition case more compelling and it is likely that the portion of debt to equity required will be much lower, and therefore a greater requirement for non debt finance.

Will this ‘cautious’ debt financing cause M&A activity to slow down in the Private Business sector?  The answer is probably yes, but it need not be the case as there are alternatives.  A number of these alternatives could be summed up in a word – “Partnerships” and these partnerships can come in different disguises.

Take an example of a Family Business where the Owners have no succession plans for their business.  According to the recently published PWC report, 66% of Irish Family Businesses have no succession plans and this compares to 51% across Europe. In this situation the business is probably key to the locality and so it is difficult for the Owner to let go with fears of the impact of a sale might have on loyal workers, etc.  Similarly a buyer may find it difficult to acquire due to the credit crunch.

A solution for the owner and the buyer is to form a “partnership” whereby the buyer acquires between 60% and 75% of the Family Business and enters into an option to acquire the balance at some point in the future.  This allows the vendor to reduce his or her involvement in the business, receive funds from the sale yet remain involved to ensure that the business is transferred safely.  The buyer on the other hand does not have to come up with 100% of the acquisition price on day one, yet have sufficient control to allow borrowing to be secured on the assets and cash flows of the target company.  Furthermore the buyer retains the goodwill and knowledge of the seller for the all important hand over period.  This is particularly important where the buyer is entering a new market or is diversifying away from their core business.

Another partnership solution that will assist in these credit challenging times is to partner with private equity investors.  Private investors, who have traditionally invested in property, are seeking alternative investment options with the decline in the property markets in Ireland and the UK. Some private investors have turned to investing into private business transactions to assist acquisitions and/or expansion.

The “equity” investment can take many forms such as an investment instrument with a fixed rate of return that is secured behind the bank debt. This can either be a preference share or loan note that can be redeemed at a premium at some point in the future. Further security may be gained by having the preference share/loan convertible into equity shares if the preference share/loan is not repaid.  An alternative is to issue ordinary shares in the company whereby the investor owns an minority share.  The buyer will have the option to acquire this back from the investor at some point in the future. Sometimes the investment term can be a combination of both of the above, i.e. a preference share/loan note with a fixed rate of return plus a small equity share, thereby allowing the investor a share of the growth of the company.

A further partnership option is where two or more like minded Private Companies come together to invest in an expansion strategy.  For example, where two similar companies who share a common key supplier, may come together to acquire that supplier.  This will secure the supply of the key materials or services as well as enhance the return of both entities.  Alternatively, like minded businesses may come together to enter into a new market.  This will allow all parties to pool their resources and knowledge there by increasing the likelihood of success.  The banks will feel more secure as the risk is diversified between two or more parties and so a higher proportion of debt to equity may be available.  Finally the participating companies may be able to leverage the equity off of the assets in their own companies and the burden will not be as much as it is split between two or more parties.

Therefore in summary, the credit crisis has not materially affected M&A activity to date. However it is widely believed that it will have some negative impact in 2008 due to a ‘cautious’ lending approach by banks.  This challenge can be overcome through creative structuring of the transaction using ‘partnerships’ or similar arrangements.  These partnerships will not only help secure the required funding in cases where debt funding may be tight, but partnerships may also bring industry knowledge, management skills and commercial security to the investment.  Hence they can bring to a transaction valuable non finance investment in addition to capital, the combined I refer to as ‘smart money’.

Frank Coombes is founder and director of Coombes Corporate Finance, a corporate finance house that focuses on the Privately Owned Business sector. 

Contact Frank at 021 2427185
or email me @ fcoombes@coombesfinance.com

Acquisitions! One may ask how relevant this is with the doom and gloom of the “credit crises”, however a recently published survey carried out on privately owned business shows that over 70% of participants forecasted growth in their business over the next 12 months.  This growth will be delivered through organic growth and through acquisitions and it is the latter this article will address.

The key place to start is to identify the type of company you wish to target and so you need to set out target selection criteria, addressing questions such as:

What sector are you targeting – are you looking for expansion of own business sector or diversifying into a new sector?

• Do you want to expand your existing market or do you want to move up or down the supply chain?
• Do you want to expand into a new geographical area?  In recent years, many Irish companies have acquired in the UK and in Central/Eastern Europe.
• What size of company should you target?

These are important questions to answer and in doing so you need to ensure that any selection ties back to your overall business strategy/vision and that any potential acquisition enhances the value of your existing business.

Once the criteria are established, then you need to research based on these criteria using a combination of your own knowledge and desk top research.  The power of the internet and search engines comes to the fore here, with financial and non financial information being readily available.  From this research you should be able to shortlist some key targets.

When completing this research, you need to look at the “culture” of any target business to ensure that it matches your business culture and by culture I refer to service culture, attitude towards customers, attitude toward staff, etc.  These are very important and often overlooked but if there is a mismatch of culture, then the post acquisition integration will become very difficult and may jeopardise the success of the transaction.

Once the target(s) have been identified, you then approach the owners and establish if they are interested in a transaction. I would advise to use an external advisor for this process so that initially you distance yourself from the approach.  Such enquiries are usually made on a no names basis and only when a level of interest is established that your name is released.  However once interest is established, it is then important that you get to meet the vendors at an early stage, to establish the fit of the target company to yours, again not forgetting the culture elements mentioned above.

Then the negotiations will start, establishing what type of deal can be done.  I would advise you to remain flexible and open to ideas during this part of the process.  In my experience, an owner manager selling his/her business is interested in the financial value, but often fringe non financial issues are as important if not more important than money – items such as looking after their staff, the company name which may by the family name, supporting local charities, etc. Therefore, it is important to establish value expectations at an early stage, but it is also important to listen to the vendor and establish the important fringe items that may help you clinch the deal.

Once a deal is agreed in principal, write it down in the form of a Heads of Agreement (“HOA”) detailing key terms.  These HOA will be non binding on both parties with the exception of giving you exclusivity to complete the deal and the negotiations should remain confidential.

You then need to complete your legal, financial and other types of due diligence.  These should be completed by suitably qualified professionals, remembering that due diligence is done to protect your investment and identify any potential issues that may arise post acquisition.  During this time you should also be identifying the source(s) of funding to complete the transaction.  Despite the recent credit crises, banks remain open for business and they will fund good sound proposals, and so it is important to present the opportunity professionally identifying the benefits of the acquisition such as synergies, etc.

If you are happy with the due diligence, then a Share Purchase agreement needs to be drafted by your legal team and agreed with the vendor.  This will include the agreed terms and various warranties that are designed to protect you and your investment.

On closing the acquisition, there is often cause for celebrating and it is important to celebrate the event, both for you and the vendor. However, soon realism sets in that the real work now begins in integrating and making a success of the acquisition.  It is wise that during the due diligence phase that you plan this integration, identifying funding requirement, business process integration, cultural differences, staff remuneration differences, etc.  If this is done at due diligence stage, then post acquisition integration will be easier and more successful.