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Twenty-First Century M&A |
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Philippe Der Megreditchian was chief executive and partner of leading private equity companies in Russia, where he lived and worked for 16 years. He recently founded and manages a Paris based financial information service called OnLineMA, which provides investors with access to global mid-market opportunities including venture capital, private equity and company sales.
The recent financial crisis has sharply changed the financing options for mid-market and developing companies as the market balance has been driven from one side of the pendulum to the other. In 2008, cash stockpiles from easy credit and windfalls from high natural resource prices created hungry buyers allowing sellers able to dictate terms unthinkable in more rational times. The sale of a solid mid-market company in a western country would generate dozens of bidders and less attractive businesses still had ample options. Normally cautious and even conservative investors, such as private equity funds had to either invest or return funds to their shareholders, found themselves accepting terms never considered in the past.
The crisis has created a buyers’ market and investors that have cash reserves are waiting to see where the bottom will be. Credit can no longer be relied upon to finance a company purchase, limiting the options for a leveraged or management buyout. The crisis also comes at a time when investors have unprecedented options to look outside their traditional market regions to find synergies with their investment strategies. Better businesses in emerging markets have become broadly sophisticated and have adopted stronger management tools, enabling them to find and develop better acquisition candidates.
Well into the 21st century the operation of much of the M&A services industry has been slow to adapt from a mid-twentieth century model. Tradition certainly carries value and basic principles will always be cornerstones for successful service providers: cultivation of sturdy relationships, attention to detail, independent judgment, freedom from interest conflicts. However, to attain or retain market, leadership will mean enhancing the service set offered to assist sellers and buyers. This means more than the purchase of an iPhone or putting up a website. Fortunately, today’s low cost of technology adoption means that even a small M&A boutique can compete and even lead technologically, and the tools that are and will be available can free the banker to spend more time on personal relationship building with clients.
While the need for personal hand-holding by experienced professionals, particularly with nervous business sellers, will always be a part of the industry, current market conditions and new technology are changing the landscape. Globalization is already a substantial influence and the market for a mid-sized business is no longer limited to neighboring states – there is now much greater potential that a buyer could be found on the other side of the globe. Growing businesses in emerging markets may now be potential buyers if there are strategic synergies, with funding from high rates of organic growth or non-traditional resources.
In an era of specialization, successful strategic or financial buyers are likely to know a lot about a target business and its industry potential. Investors looking at developing markets may also be more flexible about information requirements and able to rely on their internal expertise in an industry to evaluate an opportunity rather than expecting a pre-packaged formal set of documents.
Current market conditions require that the traditional timeline for M&A transactions be condensed as strategic and financial investors look more broadly for synergies with their own mission and goals. They require a means to an overview of real opportunities in the global environment and to obtain meaningful business and background information.
The traditional M&A service model has placed the search for a buyer or investor at the end of the process, with the M&A professional preparing extensive deal documentation for distribution to circle of buyers and investors. The global market has made this process less practical. And it is usually in the client’s interest to access as broad a market as possible, sooner rather than later.
There are a number of tools that could now be applied to streamline the M&A process including virtually free technologies that should already be in daily use by bankers, sellers and investors:
1. Skype – this service and a good quality video camera should be installed for every person in the office that requires a telephone. With good broadband Internet service, the voice quality is no less than telephone and the video, depending upon the camera, is adequate. In addition to very significant international and national phone call savings, the video feature can significantly increase dimension of personal communication.
2. Google Maps and Google Earth – both can be used on many levels from travel planning to information gathering during due diligence.
3. Flip Video Camcorder – shirt pocket HD video that can be plugged into a USB port for instant transmission worldwide. Every traveling analyst should take one for site visits and interviews with key players.
4. Virtual data rooms – allow examination of key information from a distance, reduce paper handling and can increase security of sensitive information. The technologies for systematic documentation and examination of information should rapidly develop.
The technology is already available to implement other technologies to bring down transaction costs and help investors to expand their horizons:
1. Advanced teleconferencing – HD television and faster broadband communications will drive down the costs to have multi-site meetings with video quality that is so good that one can almost taste the cup of coffee on the table half the world away.
2. Street View Walk Through – Google Street View already provides the ability to walk down the streets of major cities and get the flavor of a neighborhood. This same technology can be applied to create a real-time HD walk through of a manufacturing plant, construction site or office. An investor could meet and interview line managers and workers from the home office.
3. Translation technologies – services like Babelfish already provide rough translations of text, usually adequate for basic understanding. Translation and optical character recognition technologies are areas that will benefit greatly from the vastly lower costs of data storage and computational power.
The potential to develop a new approach to M&A has been provided by the transformational technologies of 21st century technologies. These technologies can be used to enable efficient, multi-dimensional communications methods to bring together strategic and financial investors with target companies on a global scale.
Although nothing can replace personal contacts and local presence, the tools of today’s technology provide a more efficient way to access opportunities more broadly and with greater detail. In addition, after first contact they can facilitate negotiation among parties at different corners of the globe, reduce the wear and tear of travel and monitor investments at a distance more efficiently.
The opinions and sentiments expressed herein are those of the author only and not necessarily those of Marchmont Capital Partners or any other person. This article is published for the first time by permission of the author.
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