Capitalise on public companies’ renewed appetite for mid-sized businesses

Thinking of selling your company? Peter Gray, partner at Cavendish Corporate Finance, outlines the positives and negatives of going down the public buyer route.

Public companies’ appetite for mid-sized businesses has been probably never been greater.

Buoyed by the improved economic outlook, rising equity markets and significant cash on their balance sheets, listed companies are increasingly looking at acquiring mid-sized firms to help them enter new sectors, develop niche areas and drive their growth.

However, selling your business to a publicly listed company rather than a financial buyer is a very different process with its own set of hurdles and pitfalls to avoid and negotiate.

Certainly there is clear evidence that public companies are back hunting for acquisitions. A recent survey of mid-cap public company directors commissioned by Edison Investment Research revealed that one in four directors plan to make an acquisition in the next six months, compared with only one in five at the start of 2013.

At Cavendish Corporate Finance, we have also seen a significant increase in public companies’ interest in M&A activity and in the calendar year to date, close to 30 per cent of the M&A transactions we have advised on have involved listed (mainly overseas) companies acquiring private businesses. This compares with only around 10 per cent of all transactions for the whole of 2012.

When making acquisitions, trade buyers are looking for strategic fit.   When you are looking for listed companies which offer a good fit for your business, you therefore need to think through how your products or services can add value to target acquirers and help fill a gap in their growth strategy. Show how your business will enable them to enter new markets, develop new products or services and offer synergies that create long-term shareholder value. Find the right fit and you should be able to command a premium valuation.

Although there is no reason not to approach a number of different categories of potential acquirers contemporaneously – and we typically do – there are pros and cons of dealing with quoted company acquirers relative to other categories of buyer such as financial buyers.

In terms of financing, publicly quoted companies will usually be relying on existing cash on their balance sheets or from committed lines of finance from their banks.  This can make them more deliverable than a private equity house whose offer is conditional on financing a deal, in part, with bank debt.

In a situation where a public company does need to raise additional funding to finance the acquisition or needs to obtain shareholder approval for the transaction, these are major negatives from a deliverability perspective and will count against it in the selection of preferred bidder.

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There are also some important differences in the due diligence process which a trade buyer will conduct relative to a due diligence exercise by a financial buyer. Most importantly, while both categories of buyer will undertake rigorous financial due diligence, a trade buyer from your sector will know your business and the space in which you operate a whole lot better than a private equity house and will therefore need to conduct little/if any commercial/market due diligence, even in a case where they are an overseas buyer.  This can also often make a deal with a trade buyer more deliverable, relative to a financial buyer.

From a confidentiality perspective, one needs to be a bit more circumspect with a trade acquirer relative to a financial buyer.  If you are dealing with a buyer in your sector, you may want to withhold certain confidential information e.g. gross margin by customer until you are well advanced in negotiations as if the deal does not happen the purchaser might use the information to hurt you competitively.  This even applies where the purchaser is an overseas company as they may be considering as alternative options acquiring your company or entering the UK market on a green field basis.

In terms of legal negotiations, larger public companies will typically have big-ticket law firms representing them so you will need to ensure that your lawyers are of sufficient quality and have sufficient M&A experience to match them.

Offers received from public companies usually involve cash consideration but you may be asked to accept a combination of cash and shares. The latter may result in your securing a higher overall price but it will typically involve you remaining with the business for a period of time following the transaction and you may be restricted from selling your shares within a specified timeframe.

If you are minded to accept shares as part of the purchase consideration, you should consider the various hedging opportunities available to you including CFDs and spread bets to either mitigate or eliminate the possibility of incurring a loss on the shares during your holding period.

Finally, if you are dealing with a trade buyer, some redundancies may be inevitable post sale and you need to be prepared for this.  Typically, a finance director is most vulnerable to redundancy post deal but in other situations, for example, where the purchaser’s main interest may be in some valuable IP which you hold rather than your existing business, redundancies could be much more extensive and you need to decide whether this is consistent with your objectives in selling the company.

Time spent thinking through these guidelines could help you negotiate any hurdles and maximise the price for your business when selling to a public company.

>See also: Investment for business growth: Taking on capital for acquisitions

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