Speaking at SlatorCon Zurich, Dominic Emery, Managing Director at investment bank Raymond James, walked the SlatorCon attendees through the blow-by-blow of executing an acquisition or sale.
Emery’s team at global investment bank Raymond James specialises in mergers and acquisitions (M&A) for technology businesses. One industry that’s been high on Raymond James’ radar is the language industry, as “more and more [M&A] is happening in this industry.” In this, he echoes both Ubiqus President Vincent Nguyen’s and Slator Co-Founder Florian Faes’ assessment. Emery pointed out that that “market conditions are currently very hot,” which is influencing valuations.
Emery highlighted that “preparation is absolutely critical” and can determine “successful delivery of not just the deal but the value you will create after the deal.” In the execution of a deal, said Emery, there are three main ways a process develops, all of which have different implications for the seller and the length of the process, which can typically last between three and six months.
Preemptive, Auction, or Focused
A preemptive approach is one where the buyer approaches the seller to buy a business ‘off market’. Although it cuts out a lot of the upstream leg work of finding a possible buyer, the seller might wonder if “this really is the best price [I can get],” Emery said.
On the opposite end of the spectrum, Emery explained, if the seller goes to auction and markets the business as part of a wider auction process, the company could generate exposure to buyers from all over the world, but become involved in a lengthier and more complex process.
In the middle sits a more focused approach, Emery explained. The seller approaches a few of the most sensible people who should be buying your business, i.e. those who are likely a good fit based on size, geography or vertical expertise. Emery cautioned, however, that “you need to make sure you are accessing them, but not at the expense of the leftfield buyer who might deliver a knock-out price” which is often where an adviser can make the most difference.
What Drives Valuation
Emery often has conversations with people possibly looking to sell a year or 18 months down the line and who want to know “what do I do with my business in order to maximize my business when I do decide to sell.” Specifically, he said, “the two things that are always asked are do I need to maximize the profits I’m making or should I just be growing….which of the two is it?”
When weighing up which route to take, the most common consideration for seller tends to be deciding “what is the best thing to do here, both for getting the best possible price but at an acceptable level of risk to my business?” Emery said.
“Growth is the number one driver for valuation in the market today”
Overwhelmingly, “growth is the number one driver for valuation in the market today,” Emery stated, but yet, there are still instances where buyers invest in a company that has no profit because they see value. For example, Emery said, “how do the guys at Sequoia look at a business that makes no profit when investing in Lilt? How do the investors in IPOs on the Australian Stock Exchange look at a business that makes no profit, and still ascribe value to it?” In evaluating a high-growth company vs. one that is more profitable but growing more slowly, both “might be equally as valuable but for different reasons,” Emery added.
Aside from the state of the business, it’s also important to consider whether “you have the capacity in your business to undergo M&A….because processes don’t simply ‘happen’. They take commitment from both sides. And often willing advisors in the middle. Committing that time and resource can distract from the business,” Emery said, as he encouraged sellers to consider whether they can free up the time needed.
For buyers, the decision making process is comprised of two steps: Firstly, a yes/no decision as to whether or not they want to buy, a binary decision that Emery said is likely to be based around strategic relevance, i.e. whether there is “industrial logic in bringing the capabilities that you have into their group.”
Secondly, there is the question of how much to offer, which is based on factors such as a company’s revenue model, client relationships, operational excellence and culture. If there are “things that you have in your business that the buyer doesn’t that they cannot easily replicate, such as NMT, you can become disproportionately more valuable to them,” Emery explained.
Beyond this, buyers are prepared to pay above market rate if the deal has potential to bring additional synergies, e.g. “tech, international access… management team and thought leadership,” Emery said.
They Won’t Stop Investing
Discussing the impact that the wider market can have on valuations, Emery commented that “it would be foolish to say that the broader market has no impact.” Macro examples he gave include Brexit, the fact that US valuations are currently very high, and the “China – US situation [that] has to have an impact… at some point.”
When the market is down, “what we see is a flight to quality,” said Emery and, in a slow market environment, “businesses solving mission critical problems for their clients are often more cushioned.” M&A activity in the language industry shows no signs of slowing, however, and Emery concluded that “the private equity industry has trillions of dollars that are looking to find a home in high quality investments [and] they are unlikely to completely stop investing.”