Mid-markets spearhead M&A boom

Mid-market companies are expected to spearhead the mergers and acquisitions charge over the coming months, presenting fresh challenges to directors unfamiliar with M&A, writes Elizabeth Pfeuti


In business, confidence is one of the most important commodities a board can have. Without it, company directors would never make a decision, never try to branch out, never aim to grow.

It is fortunate, then, that confidence has begun to creep back into British boardroom – and the economy is both a cause and a result. The UK’s economic output has already surpassed its pre-recession peak, it is growing at one of the strongest rates of all developed markets and the Bank of England has suggested that interest rates could hit 5 per cent within ten years.

But where is the evidence it is not just smoke and mirrors?

It can be seen in merger and acquisition (M&A) activity. In the first half of 2014, some 1,764 international deals were completed, according to Thomson Reuters. That’s equivalent to 9.6 deals a day. April, May and June saw the highest number of deals done since the last quarter of 2012. Some 23 per cent of these deals occurred in Europe and UK mid-market companies are pushing this revival along.

“The mega-deals are the minority,” says Steve Allan, M&A practice leader in Europe, the Middle East and Africa at consulting firm Towers Watson. “Most deals, by number if not value, are done in the mid-market.” Of these 1,764 deals completed in the first half of 2014, 1,705 were carried out by mid-market companies. Clearly, there are thousands more smaller firms than “mega-caps”, but why are they moving now?

“There has been an uptick for various reasons,” says Derek Shakespeare, co-head of UK M&A at Barclays. “There is a lot of cash on corporate balance sheets; there have been limited opportunities for companies to invest in recent years and, since the financial crisis which began in 2007/8, many companies have been dealing with their own internal difficulties and some are only just ready to focus externally.”

Valuations are also helping M&A, according to Mr Shakespeare, as both sides of the deal feel they are getting a fair price. This is a symptom of supportive markets as investors are willing to get behind directors and acquiring company listed share prices have been rising after announcing they would be raising cash to fund a deal.

With investors’ backing and a brighter economic outlook, companies are looking for growth. If that cannot be attained organically, they must look to new markets, new regions, even new industries and this usually means finding a new partner.

LACK OF EXPERIENCE

But not so fast. Despite the sky-high volume of deals, many mid-market companies are inexperienced in M&A and there are many pitfalls to avoid.

“For mid-market companies that do infrequent deals – say once every two or three years – each time they are dealing with different economic and potentially political environments, and the target is going to be different,” says Mr Allan.

The mega-cap corporations often have large, in-house M&A teams. These are unheard of in the smaller end of the market. Even serial acquirers in the mid-cap market have practices and processes in place and learn from their mistakes, but they are in the minority.

“Even it’s not a big deal per se, it is a big deal for them and in transformational deals everything has to change. The company won’t have expertise in-house or won’t even have staff who have been through a similar scenario recently, if at all,” Mr Allan adds.

ADVISORY FIRMS

UK companies are lucky, however, as the country leads Europe, according to experts, in the availability of top-quality advisory firms in human relations, tax, accounting and financials.

Despite the sky-high volume of deals, many mid-market companies are inexperienced in M&A and there are many pitfalls to avoid

“There are a lot of checks and balances built into the system,” says Mr Shakespeare. “Even if a company only carries out one deal in its lifetime, it should have a diverse range of people on its board who have experience in the field and will ensure the company gets the help it needs.

“Unlike 25 years ago, many boards of even mid-sized companies have business school graduates in their ranks. Executive teams are much more highly qualified and have been taught more about these matters than ever before. As a result they should be more aware of the potential pitfalls and be able to use their advisers more thoughtfully.”

The biggest pitfall for company directors is failing to construct a long-term plan.

“The danger is that company directors just focus on getting a deal done,” says Mr Allan. “Success is not closing a deal. Success is seeing if, five years down the line, the new company has met its objectives. Directors also have to be honest. In 12 months it might look like nothing has changed, but it is during that time that the workforce has to be listened to, communicated with and informed.”

Should company A (the acquirer) and company B (the target) both have an accounts payable team, both will be worried about overlap and potential job losses.

“It is too easy to say that things are not going to change,” says Mr Allan. “Everyone has access to 24-hour news and can find out even more easily if it will or not.”

Without effective communication, directors could see the best people cut their losses and go, leaving the company high, dry and in a worse place than when they began.

“Above all, directors have to consider why they are doing the deal,” he says. “How it will affect the workforce, how value will be generated and ultimately how it will change the business.”