By Bruce Teichman
Executive Vice President and Partner
Almost every homeowner in America knows that residential real estate prices have been climbing this year. Interest rates are low, which makes money easy to borrow and manageable to pay back. However, a dearth of properties for sale is what is driving the resulting feeding frenzy that has led to multiple over-listing price offers.
Owners of information technology (IT) companies are seeing similar trends affect merger and acquisition (M&A) activity in their space. In just one fiscal quarter (April to June 2021), almost 1,000 merger and acquisition (M&A) deals in the technology services sector were completed. Based on the total number of M&A transactions in that period (4,367), close to one in four of those transactions saw an information technology (IT) company change ownership. Plus, it’s unlikely that quarterly trend will stall out in the coming 12 months.
In addition to seeing high interest from independent business owners and public companies, private equity (PE) firms in North America are sitting on more than $300 billion, an all-time high. More than half (52%) of the number of PE firms plan to use capital to grow the business – up from 36% that were following that course of action last year. Platform acquisitions, the practice of acquiring companies with foundational offerings, top the list of attractive targets as PE firms seek to add technologies and capabilities through M&A.
Just as there are not enough homes to satisfy residential buyers, the number of quality companies available for sale does not come close to meeting current investor demand, and this is especially true in the IT sector.
If you are a potential acquirer of an IT company, what can you do to set yourself apart from all the others who are chasing companies for acquisition?
The Qualities of a Good Buyer
Being a “good buyer” is the most effective and efficient way to get your deal done. For example, Cogent believes a good buyer has these attributes:
- Operational maturity, the ability to grow their companies with or without acquisition, generally have the fully functioning organizational structure in place to perform the post-transaction integration of the two entities.
- Strong analytics capability, executed through internal staff or by leveraging external advisors, in order to properly model, analyze and perform both pre- and post-offer due diligence.
- Prepared for self-financing, which eliminates the funding hurdles that come with external funding sources and allows buyers to be nimbler during negotiations and to move at a pace that assures the candidate company that you are serious about the acquisition.
- Bandwidth at the executive level to allocate the time and energy to the acquisition process and especially to the acquisition candidates, with a focus on being responsive and timely.
Define Candidates of Interest
If you fit these criteria and are ready to make an acquisition, which kind of company should you pursue? Cogent recommends that you:
- Focus, at least initially, on companies in your general geography, with similar customers and services capabilities as the ‘closer they are to you’ across many fronts, the better.
- Seek out well-run companies with a good level of maturity, operational performance, and financial strength that may not be quite as high as your own, but no distressed assets.
- Look for top-line revenues that are close to half your revenue size, and typically no less than $3 million to $5 million, with 20 to 50 employees. Depending on your own customers, capabilities and size, you may be pursuing much larger candidates.
Buyers need to have a clear picture of what they are looking for and why they are looking now. For example, is the “why” behind your acquisition to expand geographically, accelerate your growth, add to your product or services portfolio, or all of the above? Are your advisors, such as attorneys and CPAs, on board with your strategy? The time to win these trusted professionals over to your M&A strategy is before you get to the table, not during negotiations.
Buyers who have spent the time and energy to define what they seek will be better able to zero in on the acquisition that meets those needs. If the scope of what you are looking for is extremely tight, you may not be able to do a deal at all. Additional points to the buyer who has a post-transaction integration plan ready to go as well.
Top Executive: Deciding Factor for Sellers
One of the most influential factors in closing an M&A transaction is the buyer’s top executive, who will become “the face” of the transaction. Whoever is leading the effort has to be a natural-born leader and people person who is charismatic, warm, approachable, energetic, fun and humble. Does that person recognize that getting 70% of the “want list” from a quality company is a win? Importantly, is the top executive ready to move when the right opportunity comes into view? Finally, the two companies’ cultures, which are set at the top of the organizations, have to match or at the very least be complementary.
That’s not to say M&A is all about the buyer. There are several ways companies that want to be acquired can make themselves more attractive as well. For example, coming to the table with financials that show your company is profitable, growing and has a deeply skilled talent pool can position you well for acquisition. Sellers generally come to the M&A process with enthusiasm but if a buyer executive drags his or her feet, that enthusiasm can wane, risking the deal. M&A deals resemble the dating process. If your potential suitor doesn’t respond in a timely way, the seller can take that as a lack of interest.
If you are considering buying a company in the next 12 months, it’s definitely time to think through why such a transaction makes sense for your organization, pull in your advisors and get started on your pre-transaction homework. Cogent believes there is a strong correlation between buyer preparedness and M&A success.