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Capitalising on M&A opportunities

As acquisition opportunities abound, now is the time for companies to take advantage of them, says AirIT's John Whitty.

Now is the optimum time for channel companies to get involved in M&A activity, according to John Whitty, M&A consultant at AirIT.

Talking about consolidation at this year’s Channel Live at Birmingham’s NEC, Whitty said that M&A in the Channel is being driven by businesses' desire to provide more services and get more market share, revenue or profit.

Added to that, private equity has realised the potential of the ICT market, given the fact it is low risk, high growth and safe in terms of the long term contracts and revenues it delivers.

"That said, M&A isn't easy – there are many people that try to do it and fail," said Whitty. "Harvard University reckons that 98 per cent of M&A goes wrong, however, that’s not the case in our industry, where we fully understand the services that we offer and they are all very similar."

Whitty said that the quickest way for businesses to grow is through M&A rather than organically. He said that the big consolidators are bringing in greater capability through acquisition, which gives them more opportunity to cross-sell and up-sell to different customer sets.

"When you're a £1 million business, growing at 20 per cent per year is probably achievable," said Whitty. "But as you get above £10 million, then it becomes really difficult.

"To grow effectively, you need to do so through M&A. Provided that the culture of the company you are acquiring is the same or similar to yours and the way in which you add your customers is broadly in line with theirs, it’s easier to buy in that capability than trying to put together what you already have."

Consolidator appeal

The most attractive aspect for PE about investing in consolidators, said Whitty, is the fact they can buy a company at multiple times EBITDA and once it has been integrated into the business, the price that they can achieve on exiting is far greater. In many cases, he said that they can make a return six times more than their initial investment.

In terms of selling, Whitty said that most businesses choose to do so when they reach a certain critical mass or valuation, typically around £2 million to £3 million. Or, they don’t want to have a new boss, he said.

"The business will get to a stage where it needs to change – for example, it needs a sales team, an HR manager or a finance director," said Whitty. "Or, simply, the owners don’t want to take the company any further, they want to de-risk, take some money off the table or just to avoid any PE or VC involvement.

"If you are of a certain age and you have been through the Dotcom boom and bust, the 2008 financial crash, austerity and Covid, you are probably thinking about retirement and are looking to get out. If you can find the right buyer who will give you some good money for your business and get you to the beach earlier, it’s a win:win all round."

Whitty said that when businesses are acquired by a consolidator, they become integrated into its platform's tech stack along with their systems, products and culture, and have to replicate everything it does. But if those synergies aren't there, he said, the chances are that they will lose their new customers.

Start-up competitors

For every acquisition that goes through, Whitty said that another company inevitably emerges to take its place. Often, he said that an owner will sell their business only to start another one and steal their customers.

Being acquired also presents both challenges and opportunities for staff and customers, said Whitty. With a larger product portfolio, employees are required to learn new skills, while also being exposed to new promotion opportunities and the chance to grow with the company. Customers, on the other hand, will be concerned that they won’t get the type of service they are accustomed to, he said.

"If anything goes wrong, the customer almost always says it's because the company they deal with has been acquired and the new owners have changed the business," said Whitty. “They may also lose some intimacy and trust with that business, so it's important to try to deliver the same level of service that they are used to receiving."

Whitty said that M&A deals are either on or off market. That means, in the first case, he said, using an advisor to sell your businesses or, latterly, being approached by someone that wants to buy it. Both, he said, have pros and cons – doing a direct sale enables you to drive the process yourself, while you may be able to achieve a better price through an advisor, however, you also have to pay them a cut for selling the business.

"There are multiple different ways you can sell the business," said Whitty. "That may be through a share or asset purchase agreement.

"It is normally funded through either trade, PE or finance. The problem with PE, however, is that they normally put debt into the business, which is really expensive right now and means that you have to keep acquiring so that you can grow quickly in order to get cheaper debt."

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