Sunday, 4 September 2011
Finding a Buyer: It is Rarely the One You Expect
When presenting your M&A advisory credentials to a prospective client, the part that typically has the most impact is illustrating that, either you already know the perfect buyer, or that you can find the perfect buyer for your prospect (i.e. you have done deals in the space which implies that you know the buyers in the space). Some M&A shops taut the fact that they have a database of many (for example, more than 5,000) active buyers. My experience is that the highly anticipated buyer is rarely the actual buyer.
One reason for this is that the private M&A market is a highly illiquid market. What does this mean? It means that when you decide to sell your business, you initiate a process, and that process will approach many qualified buyers during a fairly short timeframe. During this timeframe the highly anticipated buyer may:
· be engaged in other acquisitions
· be engaged in a financing
· be engaged in a strategic review where acquisitions are put on hold
· be on an extended business trip/holiday
· not be interested or able to acquire
· be engaged in being acquired themselves; or maybe
· your business is no longer a strategic priority for them
There are many reasons why the highly anticipated buyer may not be interested or able to pursue an acquisition when you approach them. Once you have started the process you can’t wait for the company that you thought would be your next buyer to be ready. You have to make the best of the universe you are addressing to bring to the table a number of capable and interested purchasers.
The other reason why the highly anticipated buyer is rarely the actual buyer is that it is sometimes impossible to predict the rationale for the buyer’s interest. One type of buyer that can be a very good buyer is called a “platform buyer”. A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology. As an example, we were engaged to sell a pattern recognition company in the field of product quality control. This technology would scan a production line and “kick-out” products that did not meet certain criteria. In this case, the ultimate buyer was the US defense department, who paid a strong premium and who then used the technology for facial recognition for national security purposes. Who would have predicted that? ... but having approached large technology companies that we also defense contractors ultimately led to this outcome.
Getting back to my first point...having done deals in the space or knowing more than 5,000 active buyers is of course a plus but other factors that are important are getting the right team on the file, making sure they have the time to spend on it and it is a priority for them. What foremost an M&A advisor needs to do in any and all cases is run a thorough and diligent process. As I have noted before, you might start by sending 200 teasers, then 20 CIMs, get 5 EOIs, have 3 management presentations and then go exclusive with one. This experience is not unlike any other sales or business development funnel and as anyone in these fields knows, success comes from a thorough diligent and tenacious approach.
Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.