Don’t Quibble, M&A is About Establishing Trust

Life Sciences has been one of the hottest verticals that language service providers (LSPs) have pursued over the past 2-3 years. Global clinical research spend is expected to hit USD 60bn by 2020.

Life sciences remains a crucial and growing segment for large language service providers like Transperfect and now contributes 27% of group revenue for RWS. The latter has intentionally built its market share through high profile acquisitions of first CTi and then LUZ over the last two years.

Kurmann Partners AG, based in the life sciences hub of Basel, Switzerland, advised LUZ in their USD 82.5m sale to RWS in February 2017. It is a boutique M&A advisory firm specializing in Life Sciences and related industries. It has closed over 100 transactions since 1987.

At SlatorCon Zurich, which was held on December 5, 2017, Dr Christoph Bieri, Managing Partner of Kurmann Partners, presented to participants the M&A process and provided actionable insights for closing a deal based on his experience.

A medicine is a molecule connected to a huge amount of documentation

He started off by discussing the importance of translation to the pharmaceuticals industry. Bieri summed it up by describing medicine as “a molecule connected to a huge amount of documentation.”

Watch Christoph Bieri talk to Slator co-founder Andrew Smart and discuss the challenges of the M&A process.

He estimated between 100,000 – 500,000 pages of documentation are required for submission to regulators just for the clinical trials alone.

From initial research to clinical trials to product collaterals and marketing to post-approval reviews; the entire process of developing a drug on average costs USD 1.6bn and 10 years of development time.

So although translation is a support process, it is a crucial one to get right given that it can hinder the approval process or land the company in trouble with the regulators if it is not done right.

Looking in from the Outside

Dr Bieri then gave an ‘outsider’s’ perspectives into the dynamics of the language industry using the classic Porter’s Five Forces framework.

Source: Kurmann Partners AG

While he commented that he was not entirely sure about the ease of entry into the industry as well as level of threats from substitute products given that he was not from the language industry, his firm did perceive that LSPs have low bargaining power and conversely, the buyers of translation services typically possess a high level of bargaining power.

He also commented that their experience was that price competition between LSPs was very high.

His firm’s assessment was that the industry is quite competitive and fragmented, and therefore, could see a lot of consolidation going forward. He also expected to see the replacement of smaller players by bigger ones.

M&A Process from a Seller’s Perspective

Dr Bieri gave the audience an expert overview of the M&A process which typically takes between four to six months for his firm to conclude. (Kurmann Partners operates in the mid-market segment where deal sizes are between USD 15-300m.)

He broke the process down to four stages over two phases which are summarized by the table below which he presented.

Source: Kurmann Partners AG

For Phase 1, he pointed out the pros and cons of different types of buyers. He classified them into four types: private equity, direct competitors, same industry but not direct competitors, and players in adjacent markets.

For private equity buyers, he commented that they are fast and professional. But on the downside they are all about getting a good deal. They may come up with many tactics to get one out of the seller and walk away easily if they find another target more attractive.

For direct competitors the biggest risks are antitrust laws and also inadvertently showing your competitors everything without a deal being closed in the end. On the flip side, you have buyers from adjacent or related industries that pose no such risks but may not understand the seller’s industry well enough to build the trust necessary for a deal.

The most typical transactions Kurmann Partners sees, however, are players within the same industry but are not competing directly in the same geographical or client segments. In the case of LSPs, it could an Asian LSP buying a European one or a Media specialist buying a Life Sciences specialist.

Preparation, Trust and Strategic Fit are Key

Once there are interested buyers and the M&A process enters Phase 2 which involves potential buyers, Dr Bieri highlighted the following key points to note for sellers.

Firstly, the longer the closing drags, the higher the risks of leaks or disruptions that could impede a deal. In that regards preparation work is very important to ensure the process flows smoothly once buyers enter the picture during the external phase. During this phase the rigor could also interfere with day-to-day business so he recommends spending enough time on preparations to minimize the impact.

I’ve never seen the first (offer) or an unsolicited approach to be the best price

Secondly, the due diligence process may be very laborious and even frustrating to some sellers, but the whole point of this part is really to establish trust through transparency and making the buyer comfortable with their target company.

Thirdly, Dr Bieri views price valuation as a somewhat subjective process and highly sensitive to the input parameters. Based on his experience, he shared that, “… offers which we typically receive from strategic acquirers vary between 20-50%.”

Instead of looking at just financial models and figures, his personal opinion is, a seller will get the best price by finding a buyer with the best strategic fit and also conducting a limited auction.

“… if there is a strong strategic rationale for a transaction, buyer and seller will typically find common grounds on price and contractual terms,” Dr Bieri said. He also commented that, “I’ve never seen the first (offer) or an unsolicited approach to be the best price.”

For both the seller and buyer, a M&A is much more than just six months of prospecting and negotiations. For the seller, it is about what “would be the best future for what I have built in my life” and for the buyer, a decision that can lead to synergistic growth and/or integration headaches.

For a copy of Dr. Christoph Bieri’s presentation, register free of charge for a Slator membership and download a copy here.

M&A Inside the Process

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