Monday 21 November 2022 11:39

Square Mile insider Jim Houghton told City AM this morning that private equity players “usually know how to keep it simple.”

Unsurprisingly, economic turmoil often prompts consolidation. Companies may be struggling to survive and seek mergers and acquisitions as a way to generate value.

Not to mention the current weak pound making UK-based companies, particularly those with a global footprint, more attractive to overseas buyers.

According to recent ONS data, the second quarter of this year saw the total value of domestic mergers and acquisitions of UK companies by overseas companies rise to £16.1 billion, up £500 million from the previous quarter. .

A good time for City AM to meet with Jim Houghton, partner at M&A consultancy Waypoint Partners, to discuss what makes a good buyer.

Houghton pointed out that, perhaps counterintuitively, it’s not just about financials.

“You’d be surprised at how many buyers have a solid strategic plan for mergers and acquisitions. Instead they have a 12-month budget for acquisitions and that’s it.”

“But while bean counters might be excited by big returns and a high margin — in fact, it can be irresistible — the numbers aren’t as important as the right strategic fit,” he added.

“Buyers need a menu that prioritizes so they know the goal is the right quality and the right culture, as well as the right price.”

Jim Houghton, partner at M&A consultancy Waypoint Partners

Indeed, Houghton observed that a good M&A is never driven by a business development team, but simply facilitated by one.

“Accountants and lawyers shouldn’t dictate which companies a business acquires. People and chemistry matter enormously,” she said.

“Finance is a reason Not make a deal. That’s not a reason to make one.

Houghton also identified a number of other areas where buyers can strive to get it right.

Once you’ve identified a good strategic fit and ensured your stakeholders are on board, the key is to be disciplined. Contrary to what some might believe, Houghton argued, good M&A is mostly common sense.

“Normally the focus is on delivery by the target company, but the buyer is also ‘selling’ until the deal closes,” he added.

“M&A is about confidence and momentum and it cuts both ways.”

Jim Houghton

“It also makes sense that buyers, especially those who shop regularly, code their approach so they don’t get bogged down in the details and end up re-educating their stakeholders with every deal.

“They need key terms and red lines they won’t cross. Make the rules and stick to them.”

“And yes, there are also red flags to look out for in the 11th hour. Keep an eye out for things like principals who drop calls with a week to go and leave everything to their lawyers, or the salesman whose aftershave or perfume you can smell stronger because their body temperature has risen from stress .

Cross-border business

While numbers and financials may not be the focus of good mergers and acquisitions, Houghton noted that it’s still critical to keep them consistent, especially in cross-border deals.

“I have seen business stalled due to different terminology used by companies in the UK and China, or even involving UK sellers and US buyers. Two nations ‘divided by a common language’ indeed,” she said.

“It is crucial for buyers to capture what has been agreed in a spreadsheet so everyone is working to the same set of numbers, particularly when your path to reviewing what has been agreed can be a storm of emails and disparate messages in chat windows from your devolved team.”

Confusion

Houghton also identified that miscommunication and confusion over terms aren’t just a cross-border issue.

“You often see deal rules talking about ‘normal market’ non-compete clauses, restrictive clauses and other deal protections, but buyers and sellers often have very different ideas about what this so-called ‘normal market’ looks like,” he added. . .

“This can then lead to friction and difficult conversations as both sides realize their interpretations are so different.”

Curiously, he found, the oft-mocked private equity buyers are often the best at getting it right.

“You might not like what they’re saying, but they’ll cover all those complicated conversations beforehand.”

“Private equity is best at keeping everything simple.”

Jim Houghton

Finally, buyers should have a plan for the first three months and six months after the deal.

For many buyers, he said, the deal breaks down the moment contracts are signed and “everyone just goes back to doing what they used to do.”

This is actually one of the biggest contributing factors to managing “underperformance and post-op churn,” Houghton concluded.

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