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Talk to people about the current climate for mergers and acquisitions (M&A) and you get a mixed message. The credit crunch and its impact on the print sector are serving in equal measure as spur and brake. Some ageing owner managers are looking at a tough market and thinking it's time to throw in the towel. Firms that want to continue are looking for ways to boost competitiveness, and many are deciding on acquisitions as one way to do so.

The crunch is exposing the weaknesses in businesses, says BPIF McInnes Corporate managing director Marcus Clifford. It’s promoting a dialogue behind the scenes. People are exploring ‘what ifs’, which will result in tangible activity later.

Other analysts think that we’re more likely to see concentration than consolidation, meaning that some firms go to the wall without finding a buyer.

If a business has got the right clients, attitude and specialisations it may be attractive, but people are pursuing deals less aggressively, says Nicholas Mockett of corporate finance firm Europa Partners.

M&As shouldn’t be considered in isolation but as part of a firm’s overall business plan, says Clifford. Acquisition is risky, he adds. It’s also a process rather than an event with the need to consider the lead-up and activities after the deal.

According to Clifford, nearly half of all acquisitions don’t realise the expected benefits because the necessary post-deal integration isn’t carried through.

The West Island Print Group, a firm in Freshwater, Isle of Wight decided two years ago that it would aim to grow the business through acquisition, focusing on the label sector. We talked to other people in sheetfed and no-one was making any money, says chairman Mark Medland.

Choosing your target
To prepare to go on the acquisition trail, Medland bolstered the firm’s management with a finance director and a managing director to free him up, and then drew up a list of criteria for his target. He wanted a firm producing similar products, with sales between £500,000 and £2m, situated within three hours from Freshwater. With a target company type in mind, he went to BPIF McInnes Corporate for help.

It acted as a go-between, he says. It’s a sensitive question so we thought it was best to have an intermediary.

The firm is in the midst of carrying out a deal at the moment, but it took a while to get to that stage, having looked at many companies along the way and reached an advanced stage in the deal previously.

We had two companies where negotiations fell down over the owner’s aspirations of the business’s worth, says Medland. They wanted too much. A realistic approach is necessary.

When it comes to putting a value on a business there are two accepted ways. If a company is trading profitably then it’s a multiple of earnings, says Clifford. Otherwise it’s the value of the trade and the assets.

Clifford believes it’s dangerous to talk about multiples. You could have said they were within a certain range a couple of years ago. It’s not a pat answer these days as buyers’ perspectives have changed.

The size of a deal will influence where to go to get funding. Most investment banks like to do bigger deals, says Mockett. My focus is the mid-market £20m-£1bn, much smaller than that and it’s difficult to get the value add.

For most deals in print, the options will be commercial banks with a mix of asset-based lending, equity and debt and it’s tougher to get due to the credit crunch.

Two years ago finance wasn’t a problem, says Medland. Since the credit crunch has kicked in we’ve found it difficult to raise funds.

The key to getting those funds comes back to having a rock-solid business plan.

Finance drives M&A activity, it’s the key to understand your business as a buyer, says Clifford. Risk, especially financial risk, is central to the M&A process, which means due diligence – hiring experts to look into every nook and cranny of the target firm.

One topic that invariably comes up as part of that process is pensions.

Pension liability is always an issue, says Mockett. If it’s a final salary scheme, it’s most problematic. If it’s defined contribution, less so, but there will always be due diligence on the pension fund.

Once you’ve settled on a price and are satisfied with the results of the due diligence there’s the need to consider what happens after the sale, especially the role of the management of the vendor.

Continuity
Medland says: It’s much safer if the management of the company want to remain. New management is another risk factor and brings the added problem of a lengthy and risky recruitment process.

Finally there is the need to consider the post-acquisition integration.

Any time you make an acquisition, especially of a competitor, you will get sales attrition, says Mockett. Many customers don’t want 100% from a single supplier, so you may lose sales. There’s always a need to take out costs. It needs management time, and may need specialist external expertise.

Just like buying a business, the success of selling a business depends on planning. At the most basic level, according to Mockett, you should ensure your auditors are extra thorough, sort your tax planning, address any contracts and think about succession.

As for due diligence, it’s rarer to check out the firm buying than the one being bought, although if it’s a paper (shares) deal, rather than a cash one, you might want to be more thorough.

There are aspects to due diligence too, which can affect not just the price paid but also the seller’s ongoing relationship with the firm. The results of commercial due diligence – the quality of the order book and the relationships with customers – are hard to verify, and buyers are increasingly asking the old owner to stay for a while with the promise of a final payment once certain targets are met.

The seller has to be prepared to look at methods of payment that puts some of the risk back onto them, says Clifford.
He believes that if you want to make a clean break, it all hinges on planning for your eventual exit and ensuring the firm is thriving with no unfinished business: Have the business in good order; the less tidiness there is the more the buyer will want to tie the seller in.

PENSIONS' POTENTIAL TO IMPEDE ACQUISITIONS
One of the first things that you look at when buying a company after the profit and loss account is the pension liability. The real issues arise from defined benefit, or final salary schemes, and in particular the size of any deficit in the fund.

The problem is that an acquisition is an event that crystallises the deficit in the pension scheme, which needs plugging.

Often the shortfall in the fund adds too much to the cost of buying a business to make the deal viable. Anyone looking to buy a company with a final salary scheme in deficit will want to take that into account, says Christopher Smith, managing director of Halstan, who also chairs the BPIF working group on pensions. It will deter buyers as it may be more than the firm is worth.

The BPIF is currently surveying its members to establish the true extent of the problem, but acknowledges it’s only going to get worse. Firms are hit by the double whammy of having to fund their own schemes and pay the Pension Protection Fund (PPF) levy, which is a safety net providing some protection to the members of schemes from failed companies.

Contacts
www.pensionprotectionfund.org.uk
www.thepensionsregulator.gov.uk