M&A experts explained to Paperjam, during separate interviews in November, that it is generally easier to get a transaction done when the mandate comes from a seller instead of a buyer.
If the seller generates a solid operating performance with a strong balance sheet, Joubin Bashiri, partner at Tenzing Partners and Gregoire d'Avout, partner, strategy and transactions at EY, consider their probability of success and getting paid as higher than when advising a buyer. In the latter process, “It is unlikely that you will be the only potential buyer for a seller with a strong profile.” Bashiri reminded Paperjam that these are long processes and his firm is paid on successful transactions.
Access to an extensive network is key
Consequently, about 85% to 90% of Tenzing’s transactions are with sellers. Once the M&A firm understands the business model of its client, it typically directly contacts 10 to 15 potential acquirers, a time-consuming exercise, to assess their acquisition strategy and to identify possible matches.
As a member of Globalscope, a network that includes 55 independent M&A firms across the world, Tenzing, a generalist, reaches out to a large pool of potential buyers. It also uses the network as a source of data, such as selling multiples in previous transactions and missing internal expertise.
Tenzing is sometimes approached by industrial groups with a build-up strategy to execute very specific (size, activity, etc) bolt-on acquisitions in Luxembourg and its immediate neighbourhood.
Besides, Tenzing periodically engages in discussions with early-stage or startup companies to raise capital, but generally, its focus is on mature and profitable companies.
A pilgrimage to find sellers
D’Avout suggested that his firm is not only awaiting entrepreneurs to come through their network, but “we are also proactively prospecting the market by identifying mature companies in sectors with good multiples.” After figuring out the main shareholder(s), EY will assess their state of mind regarding a potential transaction.
[Exit options] are more challenging, the smaller the firm is
It also takes some market flair to spot trends when targeting potential firms that may be on the block for a sale. For instance, d’Avout sees strong tailwinds in the asset servicing sector. “It is about assessing the specific businesses going well, which are independent and testing sale options.” On the other side of the deal, he noted that buyers such as banks undergoing financial challenges may see these businesses as strategic to kick start their growth.
Small is not always beautiful… for a buyer
Exit options “are more challenging, the smaller the firm is,” said Georges Zahlen, CEO at Axiomatic. He defines a small company as a firm generating €100m in turnover with less than 250 employees. He thinks that the intuitu personae of the owner is even more important the smaller the firm is. To mark his point, he noted that an owner in a small company tends to do “everything,” starting with accounting and keeping a tight personal relationship with suppliers and clients. A major risk for the buyer.
On the other hand, Axiomatic’s competition is more limited. “Our main competitors are entrepreneurs that previously cashed out or wealthy families... that often do not want to get involved in the operations,” observed Zahlen. However, bigger companies on the selling block are attracting greater competition from private equity firms or industrial buyers. Finding the sweet spot is a key challenge.
Share or asset deals?
“For a seller, the most convenient transaction is a share deal... I sell my shares and that’s it,” commented Bashiri, who also said that these transactions are, “by far,” the most common.
However, Bashiri explained that it is more “interesting financially” for the buyer to acquire assets as they can be amortised. Tenzing had one instance where an asset deal had to be abandoned, as it called into question the viability the company after the completion of the transaction.
Bashiri feels emboldened by a statistic suggesting that one-third of European firms will change hands over the next 10 years for which there are no “natural offtakers,” such as family members or an internal manager. “The figure--one-third--has been out there for the last 20 years,” Bashiri said with a laugh. To be more specific, Axiomatic is alert to the wave of baby boomers retiring.