Speed merchants
Like comedy, the real skill in business is timing. And for some companies the punch line is best delivered when all about seems to be gloom and despair: they’re the ones looking to strike out with quick, opportunistic deals – accelerated mergers and accusations.
Rather than pondering whether to buy or sell for months on end, accelerated M&As are hatched, done and dusted within weeks, or even days. They are often driven by the distressed nature of the vendor.
Accelerated M&As are becoming a big topic for discussion in corporate finance. The process is planned to realise value when there is increasing pressure on the vendor’s cash flow or profitability, and the value of the business could diminish rapidly if stakeholder action is not taken.
In selling the shares or assets of a business, the objective is to deliver a substantially higher value over and above what is usually achieved in an insolvency situation.
Peter McLintock, head of corporate at Hammonds in Birmingham, argues that distress is not the only reason why a business may want to sell.
He says: “Management time is finite, and in a situation where they have enough fires to fight on the core business they may feel that a sale would free up valuable management time.
“Also the business may provide services to the current group, but independent of that structure it may be able to provide similar services to a wider audience. Spinning out the business turns a fixed cost into a variable one for the seller, which is useful in hard times.”
McLintock says an elongated process in these circumstances can be disastrous, and the speed of an accelerated M&A is it saving grace. He adds: “Contracts can be lost, suppliers can get wind of what is going on and withhold services and customers may desert the entity – all destroyers of shareholder value.
“Also if the sale is one sided, and there’s less to gain for one of the parties, the deal can become protracted. This is less important in a bull market, or if the business is being sold for a song, but for both sides to feel it is worthwhile pulling out all the stops it needs to be a collaborative process between a willing seller and buyer.”
Adrian Jones, corporate finance partner at BDO Stoy Hayward in Birmingham, thinks accelerated sales processes offer a solution to struggling businesses. Losing a major customer or breaching banking facilities often triggers an accelerated sale.
Once a business has examined all the options available, be that refinancing, restructuring or cost reduction, and can see no action that will secure the business, a quick disposal will often be preferable to administration.
BDO’s special situations team has advised on 19 accelerated deals in the past two years including the sale of Batemans Opticians to Vision Express, and of All Sports to JD Sports.
Jones says: “Accelerated sales are successful when working with businesses that are fundamentally sound but are experiencing difficulties for reasons such as funding, pension liability, lost custom or sector dynamics.
“The preservation of the business and value drivers will produce greater value than an asset realisation-driven approach to an administration.
“Administrations maximise value to creditors, often by changing the dynamics of a business. Some business activities may stop to stem cash losses, but this could reduce the attractiveness of the business to potential buyers.”
Jones believes that it is spotting a “strategic population of purchasers”, which differentiates accelerated sales processes from administrations.
He adds: “Accelerated sales are proactive in the way that strategic buyers are found, and if a controlled auction can be managed the resultant value can often far exceed that attained under an administration.”
Matthew Proudlove, corporate finance director at accountancy firm Cooper Parry, says: “To make this process successful the adviser needs to bring home the main strategic benefits to the buyer to ensure that sale proceeds are not reduced by the difficulties faced by the business.
“There’s inevitably a trade-off between speed of transaction and value realised. Although deteriorating trading will be obvious to the buyer, it’s essential that the adviser’s process does not give the impression of a distressed sale under the control of funders.”
Proudlove argues that businesses should consider all the funding options before going down the accelerated sale route. He says: “Owners must recognise that shareholder value is linked to debt structure and, as well as delivering increased headroom, alternative solutions can provide reduced risk and enhanced equity returns.
“Although distressed performance may be the catalyst to an accelerated M&A, there can be alternatives and owners should ensure they are not pushed down this route without taking advice.”
But why wait to be asked if you want to buy a troubled business? Some experts have seen a trend of buyers initiating the process.
Andy Durbin, partner at accountancy firm Smith Cooper in Derby, says: “We’ve seen an increasing number of approaches from trade making unsolicited offers for businesses. The strong and bold businesses are making the most of the market. Those with a good cash position will be even stronger in 2009.”
However, Durbin adds that businesses looking to restructure and buyers alike will struggle to raise debt in 2009. He says: “It’ll be difficult unless there’s security with the business, and banks are looking more closely at management teams. But I can see the venture capitalists girding their loins and getting ready to make acquisitions in quarter two and quarter three.”
Gavin Cummings, corporate partner at solicitors Browne Jacobson, agrees. He thinks venture capitalists will transact some equity-only accelerated M&As because the banks show little sign of loosening up.
He adds: “There’s still activity out there; it’s just of a different nature. VCs are talking about fully
integrated transactions without any debt.
“Twelve months ago they would do equity and debt with a plan to sell the debt down. Now they realise that if they can’t sell the debt on, the only option is to do the whole deal themselves and make use of deposits while interest rates are low.”
And a bi-product is that with no bank involvement, a reduced number of parties and advisers will inevitably speed the process up further.
But Cummings thinks accelerated M&As will be driven more by necessity than strategy, and the banks’ early year policy may be the catalyst for activity.
He says: “The first two months in the year are always interesting because this is when the banks are seriously reviewing their portfolios, particularly in the retail sector. But vendor-driven deals are unlikely to realise a good price as people are tight on multiples at the moment.
“If business owners think that we’ll be in a recession for 18 months and they can hold on for that long they are likely to try.”
Matt Upton, M&A partner at Ernst & Young’s Birmingham office, advises owners to think carefully before instigating an accelerated sale.
He says speeding the process up is more likely to reduce the number of potential buyers than increase the audience as reduced access to information will discourage some suitors.
Upton adds: “If I’m selling and I tell you that you have two weeks to buy, you don’t really know exactly what you’re paying for. It’s all well buying at a lower multiple, but if you don’t know whether the business has hit rock bottom how do you know your multiple is as low as you think?”
“Many buyers would struggle to see why they should do this rather than look at a pre-pack in administration. At least then they can leave behind the bits they don’t want.”
Upton says many vendors come to the market too late, and he advises owners to undertake scenario planning around the possibilities of needing more headroom or planning for sale.
He adds: “It is critical to be aware of the scenarios. These discussions can be difficult. It is human nature to muddle through. But selling a business is selling a business, whether you do it quickly or slowly, and if the bank calls in a debt when you’re not ready, you are on the back foot as a seller.”
There’s no doubt that 2009 will be a fascinating year in the transactions market. Periods of change drive
transactions and the corporate finance community is positioning its clients to move swiftly to take advantage as opportunities arise.
And the likely winners will probably already know who they are.
