Growth through purchase – the fundamentals of a takeover

Growth through purchase – the fundamentals of a take over

John Kelly OBE has over 15 years of experience at the senior level in the hospitality sector. He is most well-known for his role in leading the buy in of The Gala Business from Bass in 1997 for £300 million, backed by PPM Ventures. At the last leadership forum, John gave some salient advice to those looking to grow a business through M&A.

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JW

 

Alongside his day job as one of the co-founders and partners of Dunelmia Partners LLP, John Kelly OBE has many years’ experience in the M&A market, particularly in the hospitality and gaming sectors. Lauded as one of the strategic thinkers in the buy in of the Gala business from Bass in a deal worth in excess of £300 million, John was also the driving force behind the much-publicised Gala acquisition of Coral.

Beginning his presentation with the self-deprecating advice not to expect too much “new information” from him, John went on to deliver an extremely insightful and thought provoking presentations to a group of completely enrapt professionals.

Observing that the opportunity to expand can often come at the most inopportune time, John commented that he wouldn’t advise small or young businesses to “hold back” from growth through purchase however he made some shrewd observations on the practice, especially important for the “first time buyer” to note. In his career John has over seen the spending of some vast sums of money including £235 million on the purchase of Ladbroke’s Casino Group to £2.1 billion for the Coral Group. While it may be fair to think that John’s mind set may have altered somewhat depending on the numbers involved, in fact he says there are certain inevitable truths which must always be considered.

Keep the home fires burning

One alarming accredited statistic states that 65% of all M&A activity results in a reduction in value of the purchasing company, so before ever embarking down the route of M&A ask yourself: “Does this merger/acquisition need to be done?” If there’s only a 35% chance of positively impacting on the value of the business, be certain the answer is yes.

Categorically stating that of the 5 largest M&A processes he was involved in during his time at Gala, two of them brought no value whatsoever to the business. “Hindsight is 20/20 of course and hopefully, the other three made up for these plus, plus, plus but nonetheless they were tough lessons to learn”

“No one has any intrinsic ‘right’ to be successful, however diligent you are in the planning stages or however hard you work in implementing a strategy.”

Upon entering a negotiation however his biggest concern remains the same – the lack of focus that can so easily creep into the day-to-day operations of the existing business.

“The logic behind expanding an existing business is that you have a successful, viable, profitable model which can be grown. If you lose focus on the daily operations of that business because the team are focused elsewhere, then you are defeating the whole purpose of expanding and growing.”

“The process of negotiating a merger or acquisition can take as long as nine months depending on the personalities involved. If the focus is lost for that long, it may well be detrimental to both the original business as well as the target”

“It’s understandable how people can lose focus. I for one know perfectly well how exciting the world of M&A is! The negotiating, the ‘ducking & diving’, constantly on the move and always learning more about the business I am hoping to acquire. It’s very easy for the MD or the COO and the CFO to take their eye off the ball on the boring day-to-day stuff and get wrapped up in the process of a merger – but what happens when the process is finished and it’s back to the grindstone to find you’ve lost some excellent talent; sales haven’t been driven; people further down the line have lost focus. All that can be detrimental”

To combat this issue, John has always set about creating a small “acquisition team” of two to three people which did not involve the people involved in running the business. The CFO has to be involved in this team, but where we could we would bring in someone to assist with the responsibility of negotiating terms and leaving the operational team to get on with running the business.

The second group put together was a “steering committee” to analyse the process every fortnight or so to oversee the process and to give commercial, professional and experienced opinion on where the former committee was ‘up to’ in the process.

Managing the information trip-wire

Observing that a lack of information can often lead to a deluge of misinformation John would strongly advise towards liaising with unions and other workforce representatives. “I have been tripped up many times by media and (uninformed) information. When people don’t know or are unsure, that’s when they’re at their most lethal as they’re scared and liable to say anything”

“Leaks” during negotiation are almost inevitable, and some sectors are considerably worse than others for passing out information at an inopportune time. Typically speaking, the teams on the buying and selling side will not let information pass beyond the negotiation table as it’s in their best interest to keep the details private until all the facts are laid bare and the deal is nearing completion. It’s the people “in the know” who aren’t necessarily personally vested in the process who tend to ‘leak’ most readily.”

The capital structure

Regardless of whether you’re a £1billion company buying a £15million entity or a £10million business buying out a £500,000 operation, the impact on capital structure always needs to be considered capital structure is going to be impacted upon. The integration of that acquisition is inevitably going to interrupt and disrupt your capital structure.

The main reasons a business embarks on any M&A activity vary from straightforward growth opportunity through buying new concepts through to expansion into a new country or area. However it’s important not to let ‘tunnel vision’ affect a sober consideration of the business. “When I look at things from the Chairman’s vantage point – that is to say, not involved in the minutiae of deal-making – I can see how debt-ratios, equity-ratios; distribution of equity to management all these things get passed over until the end of the deal. This is potentially disastrous for the company in the aftermath of the M&A deal” It’s easy to think almost solely about the front-end issues of profitability and market share, but if these other issues aren’t paid attention to, the fall out after the deal is done can be enormously disruptive.

Relationships with the target managers

Whether the plan is to ‘keep on’ the management team of the target company or not, it is nevertheless essential to get them onside. These are the people who know the business you’re buying inside and out. They have access to information and real-time data which could directly impact on any M&A process.

Beware “the thrill of the chase”

“It’s very easy to get wrapped up in the emotional pull of wanting to buy a business you have “fallen for”. It’s a passionate and enthusiastic time, especially for an entrepreneur who has spent time and effort building a business and now finds themselves in a position to buy out another entity. Unguarded, emotion can lead to poor decision making and a dangerous situation where practical reasoning and careful consideration give way to unabashed enthusiasm”

“You have to maintain objectivity – which can be considerably harder than you’d ever imagine”

Managing the information trip-wire

Observing that a lack of information can often lead to a deluge of misinformation John would strongly advise towards liaising with unions and other workforce representatives. “I have been tripped up many times by media and (uninformed) information. When people don’t know or are unsure, that’s when they’re at their most lethal as they’re scared and liable to say anything”“Leaks” during negotiation are almost inevitable, and some sectors are considerably worse than others for passing out information at an inopportune time. Typically speaking, the teams on the buying and selling side will not let information pass beyond the negotiation table as it’s in their best interest to keep the details private until all the facts are laid bare and the deal is nearing completion. It’s the people “in the know” who aren’t necessarily personally vested in the process who tend to ‘leak’ most readily.”

The capital structure

Regardless of whether you’re a £1billion company buying a £15million entity or a £10million business buying out a £500,000 operation, the impact on capital structure always needs to be considered capital structure is going to be impacted upon. The integration of that acquisition is inevitably going to interrupt and disrupt your capital structure.

The main reasons a business embarks on any M&A activity vary from straightforward growth opportunity through buying new concepts through to expansion into a new country or area. However it’s important not to let ‘tunnel vision’ affect a sober consideration of the business. “When I look at things from the Chairman’s vantage point – that is to say, not involved in the minutiae of deal-making – I can see how debt-ratios, equity-ratios; distribution of equity to management all these things get passed over until the end of the deal. This is potentially disastrous for the company in the aftermath of the M&A deal” It’s easy to think almost solely about the front-end issues of profitability and market share, but if these other issues aren’t paid attention to, the fall out after the deal is done can be enormously disruptive.

Relationships with the target managers

Whether the plan is to ‘keep on’ the management team of the target company or not, it is nevertheless essential to get them onside. These are the people who know the business you’re buying inside and out. They have access to information and real-time data which could directly impact on any M&A process.

Beware “the thrill of the chase”

“It’s very easy to get wrapped up in the emotional pull of wanting to buy a business you have “fallen for”. It’s a passionate and enthusiastic time, especially for an entrepreneur who has spent time and effort building a business and now finds themselves in a position to buy out another entity. Unguarded, emotion can lead to poor decision making and a dangerous situation where practical reasoning and careful consideration give way to unabashed enthusiasm”

“You have to maintain objectivity – which can be considerably harder than you’d ever imagine”

“I’ve been in a situation where I sat opposite a table from a business leader who was clearly so personally committed to buying a business that he ‘couldn’t see the woods for the trees’. The person is so wholly determined to see the process through that the seller could add an enormous stipend to the asking price or a clause into the terms of the sale, and the buyer agrees because they have lost their perspective”

Other items to add to M&A process

1. Do not underestimate the importance of heads of terms; once agreed they become the blueprint to all the advisers, and if effort is put in early, huge amounts of time (and costs) can be saved later2. When using or negotiating key terms like “normalised working capital” in connection with an offer do not assume they mean the same thing to everyone. Try to use illustrations or worked examples to avoid arguments

3. On any deal agree fees with professionals and especially abort fees up front. Get this out of the way early!

4. If you are considering a cross border acquisition (buying a business in another country) BEWARE! The rules of the game will be different and post completion you need local people on the ground on your side to make sure things actually do work post deal. Don’t make the mistake of just parachuting your own people in from the UK

5. Always read documents and reports and ask if you do not understand anything. Your professional team need to know what is important to you and may make incorrect assumptions if they don’t hear from you

6. Do not try to make things happen inordinately quickly – unless of course you are in a competitive situation and your competitor is all set to write out a cheque. You and your colleagues need time to digest information, ask questions and get a feel for the business. The “process” should facilitate this, not work against it

7. Never throw your toys out of the pram more than once. IF you feel the need to do that make sure you’ve chosen the right time and the right battle!

Sheldon Cordell
Chairman

Joelson Wilson LLP

Maintain objectivity and stay behind the game line – it’s one of the most fundamental parts of being able to comprehensively look at the project and judge that you have made all the right moves. “If you can get to the end of the process without letting emotion take over then more likely than not you have made the right decisions”The end is in sight, and exhaustion comes into playThe process of M&A activity almost always ends on a Sunday night, with everyone involved having slept little or not at all for the three days preceding. Why? Stamina and forward motion. “One of the great truths about the process of buys outs is that once it has neared the end of the deal, no one wants to ‘fall at the last hurdle’. Rather than taking a break over a weekend, and losing that momentum, there reaches a point in the negotiation where all involved want to ‘put the deal to bed’ – and that means not sleeping until the terms are agreed!”

“On the day I signed the papers in a £2 billion deal for Coral, I honestly hadn’t actually slept in three days. Perhaps not the best state of mind for someone in that position to be sleep deprived, but I did not want there to be a delay and I didn’t want anyone to have time to reconsider.”

Exhaustion is manageable, you just have to have the right people around you. Trust the team and the people you’re working with, step away from the table for a while and leave the professionals to it. Get some sleep!

For more information on all of the initiatives run by EP or to get (more) involved with the community, please contact Arlene McCaffrey

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