M&A Growth Strategies

The next section of this presentation is actually on growth strategy or in particular m&a growth strategy, and for managers and company owners in the pursuit of growth. There’s typically only three options available to them and determination of which to choose is often dependent on the availability of resources, and so organic growth as we know a build strategy is often limited to that extent and so you’ll see when a company grows so two do they need to invest in staff to grow the staff base or other assets to facilitate that higher level of operations. So, borrow to borrow this is either by via contract supplier agreements or subcontractor agreements or even through a joint venture arrangement where you know you need to bring in some combination of resources to deliver the value to the customer and then clearly a buyer strategy is sort of the topic of this part of the presentation.

Which is an m&a strategy where your goal is to acquire the resource of the resources of another entity in entirety and you know the key the key point here to make is in terms of you know resource gap is the feasibility of the integration, and often when you see m & a transactions that fail or that don’t deliver the value expected at the front end is because of difficulty integrating the business post transaction and so what are the drivers of an m a growth strategy i said that i’d come back to you on on buyer synergy and and this is where i’d like to to give you a bit more of an understanding about how that works so the theory behind bias energy is a a single business is worth more to one buyer than the rest of the market and and by nature in practice they should be able to pay more than other people because they can extract greater value from that business a low cost of debt you’ll see up until covert in any event a lot of the private equity funds have probably done quite well over the last decade just because if they pursued a leveraged m a strategy the cost of debt has declined meaning the serviceability of the acquisitions.

They’re making has become more more easy to achieve but also asset prices have increased over that same period so they’ve delivered quite strong returns as as interest rates have steadily fallen and now as we know where we’re sort of potentially heading into negative territory and a fragmented market this is the the simple idea here is that you’ve got multiple businesses in the same industry but none of them are very big so let’s call them they’re all single state businesses and and few larger national businesses the the graph here that i’d like to take you through is actually an example of how all of this comes together and if you think about you know the numbers at the bottom of that page one two three and four as individual businesses.

Each earning a million dollars in ebitda now we know as advisors hypothetically for this industry we know uh that a business earning a million dollars in this industry is is typically going to achieve in a competitive sale price process a sale multiple you know equivalent to say five times or five million dollars and so if you were to run a competitive sale process you would expect multiple offers in and around that five million dollar mark except for the buyer with with additional synergy in addition to any of the other buyers is that they might look at that same businesses or this same group of businesses and see well actually once they combine the target acquisition with their existing resources they can knock out you know say 10 to 30 of the cost base by removing doubled up expense items you know think accounting finance administration and also generate a higher level of revenue with the same resources by able to by being able to you know cross fertilize the contracts of the target company with with the the acquirers greater resource platform and so for this business at five times the the companies these these targets are actually worth six million dollars and so i’m not suggesting that this buyer would pay six million dollars but certainly if if there’s a group of buyers and they’re all at the same level if anyone’s got the ability to increase their offer within reason above the others it’s it’s the group that’s got the synergy and so carrying on from that if you imagine that each of these acquisitions are made by a buyer with a you know a roll-up strategy in a fragmented market and they’re buying companies one two and three and four which are all single state operators all selling for let’s call it five times earnings or five million dollars and then on day one or or after some sort of integration period you know at least three of those companies they can they can extract 1.2 million dollars in earnings so at time at the time of sale once the roll-up is complete they now got a business that’s got combined earnings of 4.6 million dollars it’s a national business let’s say.

As we know from the discussion previously you know larger national businesses that have higher margins uh and and larger level of earnings actually trade for higher multiples and so on sale of the combined entity you know the the acquirer might be able to expect a seven times multiple rather than five and so you can see that the sort of arbitrage that you get um by pursuing a strategy like this particularly if you’ve used a leverage strategy whereby you know let’s say you’re you’re funding each acquisition with 50 debt meaning when when you do uh realize the value that you’ve created upon exit uh the return on equity is going to be you know far superior then than if you just used pure equity to fund the acquisitions so hopefully that gives you a bit of an understanding about some of the drivers behind an m a strategy.