Acquisitions by those who’ve made them
Eight experts talk about why buying businesses worked for them
Terry Burt, Chief executive and founder, 2escape2:
IT services group 2escape2 was established in 2002 by Burt and chief operating officer Mark McVeigh. With £6.6m backing from Gresham LLP secured in 2003, the company acquired five businesses in 10 months as part of a buy-and-build strategy.
I built up 23 transactions between 1994 and 2000, then sold my previous business at the top but – because nobody knew it was the top – people were telling me I was selling up cheaply. Then, after the transaction was complete in October 2000, I went for a year in a corporate, which was a great experience, but by the time I came out the world had changed. Everyone told me it was a terrible time, yet I believed it was a good opportunity because valuations were so low. However, I had to get in quickly as all these things are cyclical. As things started to pick up, where there had been no buyers, suddenly there were four or five. So I aimed to get as much done as fast as possible.
In IT, where there’s no organic growth, the only way you’re going to get an acquisition to work is through cross-selling rather than integration. I screwed-up in the 1990s trying to put things together, which didn’t work. I put three accounts departments together and ended up with no cashflow for six months because they were all fighting for turf. And with one company I took over, I wrote to the clients to tell them about the new name and so on – and as a result, we got all these terminations. So why change things?”
Jeremy Middleton, operations director Media Square:
Media Square, is a £10m-plus AIMquoted marketing communications and services group. The company made five acquisitions this year across all its divisions.
This meant that acquisitions were our only option. It wasn’t easy. In the early days, nobody would take shares. However, whereas originally it was our creditors who gave cash, now institutions take our shares and we use the funds to buy, which is cheaper than diverting from our own cashflow.
In terms of a motivation for the owner-managers of the business you’re buying from, it just depends on what you’re acquiring. We’ve gone through eight acquisitions in the past 18 months and the motivation for them has been survival or a route out of difficulty. They could go to the pub and say ‘I’ve been bought out’ or they could go to the pub and say ‘I’ve become part of a bigger group but I had to go through receivership to get there’.”
David Leyshon, Managing Director, CBSButler:
In 1993 Leyshon joined Butler International Inc, a US-owned technical recruitment firm, before he successfully pursued an MBO. Last year the business acquired competitor CBS Appointments for an undisclosed sum.
That is because it’s about people, rather than brands. I fully understand taking an aggressive acquisition policy in order to get your presence up, but making successful acquisitions in our industry is hard because even the database – which used to be the part of the deal backing up your case – is no longer unique. In some cases it has fallen by the wayside completely. I would expect the target company to aggressively try to prevent you stealing its clients when you buy it. Particularly in niche areas, taking that business is going to be difficult. For businesses being acquired, I do think it’s going to be hard for them to achieve the sort of valuations they would have had in the late 1990s. We’ve seen a big change in pricing in recent times.
It’s claimed the future for our industry may well be online – though I think there will always be a place for traditional agencies – and I’m not that familiar with putting a valuation on these type of businesses. In my experience, those who were there first have predominantly cleaned-up, and therefore the smaller job websites are probably not really worth looking at. That said, I’m sure there are bargains available.”
Tony Reeves, chairman and CEO, The Hot Group:
AIM-listed online recruitment company The Hot Group has an aggressive acquisition strategy, with five made last year and five already made this year. Reeves was also the man behind high-street temp agency Office Angels, which he established in 1986.
That is much easier with online businesses than with their traditional counterparts. However, acquiring online companies is only worth it if they have at least a £2m turnover, otherwise you won’t make money. But they tend to be rare, which is why we’ve been fairly aggressive: opportunities are limited.
Many online recruitment companies have been set up by techies rather than recruitment experts, so they’ve spent a lot of money getting brand-recognition on the internet, but a few years down the line they’re only turning over £500,000 a year, which is not enough. Quite simply, we’ve said, ‘if you join with us and take a chunk of shares instead of cash, we can demonstrate that it’s going to be worth a lot more in the long term’ – and we’ve done that successfully with several of the acquisitions we’ve made. It’s not a difficult sale.
Roy Abrams, CEO, Aspect Group:
Roy took over the running of web services business Aspect Group in 2002. After some smaller deals, in April 2003 he was approached by competitor Nettec, eager to sell and realise the cash pile they owned. As a result the new group is now turning over £6m.
In 2002 I came back from the States with a new venture but the whole dot com boom-and-bust was barely over and there was still a downturn in technology. Whereas before I had ‘how much, how fast’ pressure to deal with, all of a sudden there was a ‘man-with-a-suitcase’ syndrome where we were knocking on all these doors and nobody really wanted to know. Financiers for acquisitions were nowhere to be seen.
We were then in the position of looking at companies to buy but we couldn’t use our paper or get institutional support, so we had to purchase for cash.
Having gone through the process, one thing I find fascinating is how mass-acquirers – like some of you sitting around the table – manage to acquire so many businesses in such a short space of time. In terms of the volume of deals, I would imagine it takes a lot of time to organise yourself so that it doesn’t impinge upon your running of the business.”
Gary Laurence, founder, Hurtress:
Specialist recruitment company Huntress has gone from startup to a turnover of almost £30m in three years in a shrinking sector. To date Huntress has made two acquisitions, with a third in the pipeline.
I was a director of a public company for about four years and, because we had a very high-rated paper, we made 26 acquisitions in 18 months because we were able to persuade people to believe in our story, and we acquired a vast number of businesses by parting with very little cash.
But when you’re a private company, you’re in the position of having to raise money for the acquisition either by cash or by agreeing to dilute your own shares via a share swap. Huntress’ strategy is to go out and acquire teams of people. We’re acquiring their expertise and our expectation for them to perform in a similar area is much higher than if we’d gone for an unknown who we then had to train up.
We’re very, very careful in how we conduct ourselves but the fact remains client-relationships rest on individuals and, while they do transfer over at some point, on several occasions I’ve come to an agreement with a CEO where it’s handsoff for a period of six months on an agreed list of 100 clients. That’s fine because we’re in it for the long term.”
Edward Naylor, chief executive Naylor Industries:
Naylor runs a Yorkshire-based manufacturing business, which makes building materials and employs 250 people with a turnover of £22m. He recently launched a new plastic pipe business, which has since made three acquisitions in quick succession and is busy integrating them.
The primary focus is to get hold of a product or a bit of kit. We’re talking about £1m-type deals, which allow us to fast-track new products without huge lead times, and extend a product line without getting BSI approval.
In our game people come as an afterthought. We’ve ended up acquiring one or two by default and in struggling businesses the people we had perceived to be a plus have turned out not to be.
However, one thing I have learned, is that in manufacturing acquisitions the role of the VC is vital. I raised £4.5m from Aberdeen Murray Johnstone and they became a 38% equity shareholder, which gave us an injection of finance in a very conservative and desperately bureaucratic business. I’m not sure I’d like them to look at things any differently than they did in 2000 when we took them on board. I’m pleased I kept the majority share but certainly from a manufacturing perspective they gave us a step up which was absolutely crucial at the time. They add a professionalism to our business and, with a representative on our board we’re now run on PLC lines, more professionally than a £25m privately owned company would be.”
Adrian Moss, founder and CEO, Deal Group Media:
Adrian is a former Pricewaterhouse Coopers accountant who, despite having no marketing background, started Deal Group Media, which now boasts big name clients such as John Lewis and William Hill. He completed a reverse takeover of marketing services company IBNet plc last year in a deal valued at around £7m.
There was a company in the UK called IBNet, which was on AIM, having just floated and was treading water and making a loss. So that was a great route to give us an additional revenue- channel and a flotation.
Negotiating the equity split in reverse acquisitions is acknowledged as being tricky. We were a £7m to £8m turnover company, with a record of massive growth and these guys were doing nothing. Yet to get them to accept a 99/1 split, which I felt it warranted, was hard. We started at 65/35 and ended up 70/30 and even now it galls me. There’s an emotional barrier and had I pushed harder they would have walked. They would rather have had nothing than be seen to do a deal.
We’re now about a £30m market cap company, and I’ve been told I can buy anything I want as long as there’s an attractive rationalisation and cost savings as well as the potential to cross sell. It’s a great experience going on AIM and the cost of doing an IPO is the same as a reversal ersal – so why bother?”