Lower valuations in 2010 provided opportunities for AIM’s most acquisitive companies to grow.

While 2010 did not see the boom in fundraising many hoped for, lower valuations provided opportunities for AIM’s most acquisitive companies to grow.

It would have been difficult for the IPO market on AIM to plunge to a lower nadir in 2010 than it already had in the preceding year; and sure enough, there was an upturn.

There have been 51 IPOs on AIM, raising some £839 million so far this year, compared to 24 raising £454 million in the same period of 2009. But again, IPO money was dwarfed by secondary fundraisings, which brought in £3.4 billion from January to October, slightly down on the £3.6 billion secured during the equivalent period last year.

While investor exuberance may be lacking on the small company scene, there has been plenty of corporate activity, with 224 acquisitions or disposals by AIM-quoted companies so far in 2010, a number that already exceeds that seen in 2009.

The combined maximum value of those deals is £470 million, according to data from Growth Company Investor.

Aside from the conspicuous example of telecoms group Daisy, there have been plenty of other AIM-listed companies that have succeeded in advancing their consolidation strategies during the year.

One such business is the consultancy Green Compliance, which has made eight acquisitions so far this year and, according to chief executive John Prowse, has more in the pipeline.

The company’s most recent buy was Pestfree Environmental Services, for some £1.6 million. Before that, it acquired another pest control business, Envirocare GB, and water treatment specialist Pure Group Management, both in July.

Profit focus

Prowse explains his strategy: ‘The areas I believed we should focus on were water hygiene, fire protection and pest control, because they offer the best margins in the marketplace. There’s tight legislation underpinning all of them that means that people have to do work in order to stay on the right side of the law.’

Green Compliance listed on AIM to raise funds for its acquisition plans, initially raising £10 million in December 2009, followed by an additional £4 million from a smaller fundraising at the end of May this year. The company also used around £3 million cash from a £5 million revolving facility that it arranged with HSBC.

The acquisition strategy has been based on a plan to cover specific sectors rather than opportunistic purchases, as Prowse says that none of the companies being acquired have been distressed sales. He adds, ‘We’d like to stay focused on these core areas. I think we’ve got a good cross-selling opportunity as long as we keep the products quite tight.’

Another formidable consolidator in its marketplace is veterinary business CVS, which has completed 45 deals this year. Finance director Paul Coxon says the group provides a welcome exit route for older vets who own their own practices and aim to retire. ‘We don’t actively pursue people to sell; we wait for them to come to us,’ he adds.

For CVS, AIM has provided a platform to raise funds as an alternative to bank debt. ‘We’re now funding from cash. Our plan for the future is to continue to acquire practices using cash generated from our operations. In years gone by we did use bank debt, and in the very early years we were private equity owned,’ Coxon reveals.

A significant driver of deals for many is lower valuations. Quite simply, now is the time to pick up a bargain.

Insurance underwriter Randall & Quilter Investment Holdings has made five acquisitions so far in 2010 as part of a buy-and-build strategy to expand its service offering. Chief executive Ken Randall comments that the company saw its chance to move in for the kill as prices fell.

‘One impact of recent market moves is that multiples are not what they used to be, so we believe that there are companies available at attractive multiples at the minute,’ he says.

Nest egg

Pensions consultancy Mattioli Woods – which in August acquired City Trustees and its associated company City Pensions for £1.75 million – is also using acquisitions to expand its service offering. It specialises in small self-administered pension schemes (SSAS) and self-invested personal pensions (SIPPs).

‘The rationale behind the acquisition of City Trustees was to broaden our offering within the SIPP market,’ says marketing and sales director Murray Smith. ‘We are looking to use City Trustees to go out into the advisory market and build up an administration book.’

At the time of the deal City Trustees had a turnover of around £800,000 and was not profit-making. Smith comments that Mattioli Woods plans to make the company profitable within a year but adds that City Trustees will continue to trade as a separate entity.

‘Most of the acquisitions we’ve done to date have been smaller competitor businesses bought in their entirety,’ says Smith, ‘but this one was a strategic acquisition for us.’

IPO activity has intensified over the past month or two, and there are those who expect 2011 to bring the torrent of fundraisings that was wished for in 2010. Whether or not that comes to pass, it’s clear that some companies already quoted on the market intend to be very busy during the year ahead.