Gambit Corporate Finance LLP
Acquisitions are a valuable tool in the world of corporate development. Executive teams at public companies are tasked with, and publicly examined on returning growth, increasing profitability and creating greater shareholder value.
There are regular headlines of multi-billion-pound mergers and acquisitions, the rationale behind them and their predicted success or downfalls. The sheer size of these publicly discussed transactions gives SME’s the impression that mergers and acquisitions are exclusive tools for large corporates and are unsuitable to fulfil business objectives on a small scale.
This is not the case.
The fundamental rationale behind mergers and acquisitions remains true regardless of scale. The fact that large public interest companies place such importance on mergers and acquisitions to ultimately benefit their shareholders is evidence of why they should be used universally. Private equity firms, with a sole purpose of delivering value growth, utilise acquisitions for their investment companies at all levels of the market. M&A is a tool that can inject immediate growth, scale and critical mass, increase or protect market share, provide access to new markets and geographies, exploit complimentary operations, create synergies and improve efficiency – all of which are value enhancing outcomes that businesses of all sizes benefit from.
Despite the widespread benefits of mergers and acquisitions, they are largely ignored and severely underutilised in Wales. In the five-year period from 2015 to 2019, information collated by Gambit Corporate Finance shows that UK headquartered companies made over 12,000 acquisitions. Welsh companies attributed less than 200 deals to the UK total.
Whilst Welsh companies lagged significantly behind the UK, several Welsh firms have benefited from strategic acquisitions. Premier Forest Product’s multiple bolt-on acquisitions in recent years have helped near double turnover, now exceeding £140 million, bolstering profit margins simultaneously. Veezu’s strategic market consolidation via acquisitions have helped it become the UK’s largest private hire taxi operater. Acquisitions also supported Brickability to its £150 million IPO in 2019.
Although current economic conditions are tough in certain sectors, M&A can still be a vital tool for growth, and in some cases, survival. Evidence shows that in previous downturns, businesses that utilised M&A with deliberate strategies and discipline delivered excess returns. Market disruption will also create opportunities, and acquisitions can be used to exploit them. As with other economic downturns, acquirers can benefit from depressed valuations, business owners reaching retirement (and unwilling to wait out another economic cycle) and distressed situations. These opportunities are heightened by the anticipated changes to Capital Gains Tax in the Spring 2021 budget.
During such economic shocks, acquisitions can help enable and accelerate strategic shifts to help take advantage of new trends and market norms. Even with current economic challenges, there are more funding options than ever to take advantage of, with debt capital available for proven management teams and business models at historically low costs, and equity funds actively seeking to increase investment in Wales with record levels of dry powder to deploy.
Business owners and directors should look to take advantage of such conditions and encompass defined acquisition strategies into longer term business planning to create greater value in the Welsh SME economy. Much can be learnt from the value enhancement strategies of larger and public corporates and experienced investors, and acquisitions shouldn’t be excluded. Disciplined self-assessment, clearly identified criteria, strategic screening, controlled execution and efficient integration will create significant value enhancement regardless of size, location or sector.