Return of the deal: how to make takeovers work for your business - Sunday Times

With a ‘wall of money’ ready to be unleashed on mergers and acquisitions, what should buyers do to ensure their purchases are a path to growth, not a dead end?

The deal is back, and not a moment too soon. Earlier this month, the chief executive of audit giant PwC delivered a relatively under-reported piece of good news — that there is a “wall of money” ready to be unleashed in a rejuvenated market. Meanwhile, this month’s World Economic Forum in Davos was full of talk of private equity houses gearing up for a flurry of takeover activity.

With inflation coming down, interest rates normalising and the confidence levels of entrepreneurs and chief executives higher than they have been for a while, this could be a big year for the mergers and acquisitions industry.

Compared to organic growth, M&As can seem both complex and risky. But, when approached sensibly, this is a faster path towards bigger profits. You are adding complementary products, expanding geographically, bringing in new expertise or technology, and gaining a competitive advantage.

Some of the best acquisitions are when a small business has been bought for a minimal outlay and turned into something extraordinary. Whitbread sold Costa Coffee to Coca-Cola for £3.9 billion in 2018, having bought the brand for £19 million in 1995 when it had only 39 shops.

Simon Arora and Bobby Arora acquired B&M for £525,000 in 2004 and, over the following two decades, turned a lossmaking chain of discount stores into a listed company worth more than £5 billion.

Bernard Arnault’s LVMH bought SEPHORA in 1997 for €100 million and today it is worth an estimated €20 billion (£17 billion).

When M&A is less successful, it’s often due to misguided strategic rationales. Sometimes the buyer pays too much, or it is too keen to make the deal happen, or it underestimates how tricky integration will be. Even more frequently, leaders get their priorities wrong; the goal should not be trying to eradicate a competitor or bolting on a new business that is too far removed from what the buyer is already doing (the “core” business).

The first and most important piece of advice is to use acquisitions to expand your core business. A great example of this is Rentokil, run by Andy Ransom. In the past four years, it has acquired 56 different pest-control companies and it has now successfully integrated operations in more than 80 countries, including Terminix in the US, which it recently acquired for £4.5 billion.

A similar strategy is called “buy and build”. This is commonly used by private equity firms, which start by buying a larger “platform” business and then do lots of smaller bolt-ons. Typically, a company such as a small local chain of vets or dentists — something with existing capabilities — is acquired. Then several similar businesses are bought across the country and folded into the core. This approach helps a company to expand rapidly in three to five years, acquiring skills and expertise that would normally take decades.

Third, be careful about acquiring something just because you don’t have it. I’ve seen leaders, fuelled by growth ambitions, acquire a business that doesn’t fit with what they already have. (I have certainly been guilty of that myself.) It’s almost as if, bored by incremental growth, they are looking for something big and shiny to give them an extra spark. While diversifying might double the size of the business, entering into an unfamiliar arena — whether a new industry or location — is fraught with risk because you don’t know the market you’re headed into. Far better to do one or two things really well.

Trying to be big just for the sake of it is vanity, not sanity.

Do your due diligence and properly define your ideal investment. What kind of company is it? How much money does it make? What are the strengths of its products? What employee structure and culture does it have and how easy will it be to integrate those with yours?

Never underestimate culture. If you pride yourself on being a daring and creative organisation, perhaps steer clear of a company that is highly efficient and risk-averse. Merged teams need to work well together.

And don’t just think about buying businesses; think about selling bits of your operation that no longer fit the core. BT offloaded its costly sports division into a 50:50 joint venture so it could focus on the network infrastructure-rebuilding programme that has been at the heart of its strategy. More businesses should have the courage to ask themselves if what they are doing today should, in fact, be put on their “not to do” list.

That might be a faster path to growth than trying to expand on too many fronts. Sell, return the money to shareholders as a dividend, or reinvest. A great, proactive example of this is Richard Caring’s rumoured plan to sell a large stake in his excellent, 40-strong Ivy restaurant chain, which is valued at about £1 billion. Not bad, considering there was just the original central London site ten years ago.

Finally, make the time and effort to integrate properly and communicate that integration effectively. Stay true to your values, don’t get seduced by grandiose visions, and always remember what you’re good at, what you represent and what you want to be. And, most importantly, ask yourself what the source of value is in the deal. The more vague your answer, the less chance there is of sustainable success.