It’s business as usual for technology M&A argues Paddy MccGwire of Cobalt Corporate Finance. And there are profits to be had by all provided you prepare the ground properly.
Paddy MccGwire’s business horizon extends further than most – up to 18 months ahead in some cases – and usually provides a very accurate picture. As founding partner of Cobalt Corporate Finance, he has helped nurture a business ethos that places great store in cultivating potential clients that involves grooming them for sale, or advising them on a ‘wish list’ of acquisitions. And he reports that the storms lashing global financial markets have barely rocked the good ship M&A, although he does suffix this claim with a three word caveat: “At the moment.”
In his view, the credit crisis has caused hardly a ripple in the waters where he and his colleagues trawl for business. At the same time, however, he keeps a prudent finger in the air to detect which way the wind is blowing.
It’s just a finance sector problem
He accepts the banking system is in crisis, but regards that as “a financial sector problem”, which, for the time being at least, does not appear to have impacted on his ambitious plans. In Cobalt’s area of expertise – advising and arranging finance for mergers and acquisitions in the technology, media, and telecoms sectors – there is still a healthy appetite for good deals involving strong, healthy companies and, crucially, all at the right price.
“In the past few weeks, we have completed four deals, and we have a good pipeline of work coming through in the next few weeks. It‘s the same for five months or so after that,” says MccGwire. More importantly, the long view also indicates that deal activity is maintaining its robust momentum.
“People are telling us that they are looking to sell their businesses as far ahead as the end of next year,” he reveals. “They come to us to talk through their ideas, and we are asking them to come back later in the year to firm things up.” MccGwire adds: “We like to work with people as much as 18 month ahead – companies that come to us and say ‘we’re thinking of selling, what can we do to enhance the value of the business?’
Selling up and getting more
Alternatively, a company that has been approached by a potential purchaser may contact him or his colleagues. Then the questions being asked revolve around the valuation of the business and whether there might be other suitors out there willing to pay more. “There is material value to be added by preparing a company properly,” he explains.
“Sorting out a firm’s internal housekeeping is very important, and so is the strategic positioning of the business, which is pretty fundamental. “If a company is thinking about acquiring another business the question might be ‘will we get real benefit from the deal before we exit?’ ”
MccGwire’s own take on the current climate – and that is echoed by Neil Foster a lawyer active in the technology M&A field – is that the technology sector is “pretty healthy,” not just in the UK but globally. “You still have people consolidating, and making strategic acquisitions,“ he says. “We recently sold one company to a private equity-backed management team, and in the next few weeks will be selling another to a US-based UK-listed company.
“This will be at a strategic price – based on a much higher multiple of its profits than its intrinsic value, because the purchaser can see the potential benefits of the deal, which makes the company much more valuable as part of their business than it is currently on its own.”
In many cases the ‘strategic price’ can deliver a knockout blow to private equity, which relies very heavily on being able to persuade bankers to open their wallets and make cash available. When the wallet stays closed private equity transactions tend to slow down or evaporate completely.
MccGwire views the current climate as a series of opportunities. As well as completing one sub-£10 million deal recently – the sale of the compliance software firm WorkSmart – Cobalt has another £20-£30 million deal in the immediate offing, and is in the process of signing mandates with new clients.
“I take the view that it’s not all doom and gloom,” he says. “I spoke to someone yesterday who is merging his £8 million business with another £7 million business. They have good order books and there are many things they can do together. They intend to grow for the next two years, and then exit. They have a £15 million turnover business with a 15 per cent net profit and they are doing well. They don’t see themselves being hit by what’s happening.”
This could be down to the well-recorded phenomenon that persuades individual businessmen and women that although everyone else in their sector is struggling, they themselves have record order books.