Over the course of 40 years of investing in growth companies, we have found that acquisitions can be a powerful way to achieve growth and add strategic value. When portfolio companies decide acquisitions are an enabler of their strategy, ECI can help in terms of both finding the right bolt-ons and making them work.
Finding the right businesses
In our experience, acquisitions can be an effective enabler of the company strategy. Having clarity on the plan for the overall business allows the role of the acquisitions to be clearly articulated and executed. Typically, they can support the strategy in a number of ways:
First, they can add scale to an existing platform. For example, CarTrawler’s acquisition of Holiday Autos in 2013 added considerable transaction volumes to the business’ existing B2C operation. The team identified Holiday Autos (a previous ECI investment) as a deal that would provide significant synergies with CarTrawler, as well as a highly valued consumer brand.
Second, an acquisition can help a business rapidly enter a new product category.
For example, during ECI’s investment in XLN - a provider of telecoms services to SMEs - the business acquired Card Processing Solutions to provide complimentary card processing services to its existing customer base. This enabled the business to broaden its SME proposition.
Finally, the right target company can enable a business to effectively enter a new geography. Clarke Energy’s international growth has been bolstered by acquisitions covering Bangladesh, South Africa, Botswana and Mozambique.
Fourth’s acquisition of Adaco in 2012 allowed the business to access the attractive US market, along with a complementary product and customer base.
As part of the strategic planning process, we have helped teams form a view of what type of acquisition they are looking for, as well as identifying and approaching attractive targets. Using various techniques and tools, alongside the ECI network, we build detailed market maps that provide a close to whole of market view. We then collaborate with teams to triage the list of companies down to a shortlist of the best targets and devise the best approach to unlocking the opportunities. This whole of market view serves as an invaluable framework for assessing the relative attractiveness of various targets and therefore informs how enthusiastically or otherwise a particular business should be pursued, rather than getting excited about the one or two businesses being sold right now.
A good example of this was during our investment in Citation.
A central part of the strategy to develop the proposition for SMEs was to make an acquisition in an adjacent, complementary area that would fit well alongside the core health & safety and employment law offering. We identified and screened 106 potential targets, arriving at an initial shortlist of 18. From this list, we prioritised QMS, an ISO certification business, as an attractive target that had the brand, product offer, and scale that the board felt would help Citation successfully enter into a new market. The ECI team supported Citation on the initial approach, through negotiation, due diligence and integration planning, culminating in the completion of the deal in May 2015.
Whilst much work and thought can go into finding and acquiring the right business, the most important thing then becomes unlocking value. Thorough planning is critical to making the deal work. Without this, companies can fail to fully realise the benefits, or unexpected problems can divert attention from business as usual. We work closely with teams to ensure that this process is robust, well thought through, and well-resourced. The following considerations can help maximise the value of an acquisition.
Clarity around what will deliver value and how the acquisition will run alongside the existing business: Is the deal about cost synergies, or cross-selling products? Are there areas of underperformance or resourcing that need to be fixed? Will the businesses be run as two separate sites or as one office? In some instances, the acquisition can be allowed to run separately and slowly integrated, whereas in others – for example, if the business is underperforming – it makes sense to conduct the integration quickly. With CarTrawler, the rationale behind the Holiday Autos deal was to acquire a customer base that could be run through the existing platform, so it was important to execute a clean switchover of the websites and booking engine on day one of the deal.
Understand the risks: Of course, the rationale for any acquisition is value creation, but in the early phases the most important thing is to understand any risks and ensure a plan is in place to mitigate them. Identifying potential issues around the main processes such as cash collection, risks to key customer contracts, or any service problems before the deal should be the focus early on.
Resource accordingly: It can be easy to underestimate the amount of work or complexity involved in managing an acquisition, especially if it is the first time a company has done one. Planning early, understanding the work required, and being realistic about management bandwidth are critical considerations. This is an area where we at ECI have worked alongside teams to both identify the requirements and help resource accordingly. Over the years we have built up both our own experience, as well as a network of advisors who can provide the necessary focus and expertise to ensure that the integration plan is effectively executed, and the team can still focus on running the business.
In summary, we believe acquisitions are an effective way for a business to deliver sustainable growth and strategically develop into new markets and product categories. We have a strong track record of partnering with teams through this process to help identify, diligence and integrate target companies to deliver strong returns. Based on our experience, there are a few things to bear in mind:
Well-planned acquisitions can have a big impact on exit valuation
- They can take longer and require more time investment than is often estimated
- Planning integration well in advance of the deal closing is imperative
- It can be easy to over-estimate some of the synergies
- Make sure the existing business is stable and can provide adequate time and attention
- And finally…don’t forget the day job!
Please contact Joe Garrood or Suzanne Pike for further information.