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COVER STORY
Hold on to cash, it’s king
NIC HUMPHRIES – CEO AND HEAD OF TMT, HGCAPITAL
✯
I think the starting point to get deals done on to the capital in order to support our
from a private equity point of view is to use platform acquisitions with bolt-on deals, which
available capital to invest. Some firms have are a core part of our strategy. Ready cash
invested all the capital they have access to always helps when people are selling up. In the
or haven’t raised any new funds. If you past, vendors may have debated earn-outs or
haven’t got capital, it’s a pretty bad start for share exchanges, but actually having cash
investment. When the markets are down, cash helps us a lot as people are often selling for
is suddenly scarce so you need ready cash to be liquidity reasons and want the cash.
able to clear deals. Another way to get deals done in this
Typically, private equity funds reserve climate is to spot businesses that have
around 15 per cent of their funds at the end of fundamentally strong growth prospects. When
the fundraising to support their portfolio you identify these kinds of companies, then
companies. With our last fund, which raised you can back them with all-equity deals. This
£950 million, we took the decision last year, in is because you don’t need to put debt into them
consultation with our investors, to reserve 30 because returns will come from the business
per cent as the recession was looming. We held structure, not the financial structure.
“In the past, vendors may have debated earn-outs or share exchanges, but actually
having cash helps us a lot as people are often selling for liquidity reasons”
Square the circle with share deals
MIKE TAYLOR – CEO, INNOVISE
✯
The key thing say, “let’s do a deal in shares”, you are source of motivation to the management
in businesses effectively saying, “defer your exit and team. The buyer also mitigates the risk. A
worth £5 align your plans with ours”. If you have lot of value can be tied up with the vendor,
million to £10 got someone looking for a retirement sale, their knowledge and skills, and if these are
million is that I don’t think you will get much interest in not transitioned smoothly and effectively
they rely on a shares-based deal unless it is the only deal into the enlarged organisation, then the
the quality of that can be done. They will want to exit at value of the acquired business can be
their senior the time of sale and they will want cash. severely reduced.
management.
I don’t think
you will find a
“A shares-based deal will appeal to someone who is
business of this scale where you can coming to the sale because they have hit a glass ceiling”
genuinely say that the individual vendors,
or the directors, are no longer important.
Once the strategic fit is there and the A shares-based deal will appeal to You live and learn as you go through
numbers stack up, either the acquired someone who is coming to the sale because acquisitions. I prefer to look at deals with a
company is already making money or there they have hit a glass ceiling. In my share component somewhere between 25
is scope for it to make more money through experience within the IT services sector, per cent and 50 per cent – unless it’s a
synergies and economies of scale within the this tends to happen when businesses reach retirement sale. This is about the right level
expanded enterprise. values of around £2 million, £5 million and to incentivise the team and goes some way
It is about the management team, their £10 million. to addressing the risk and reward balance
aspirations and why they are selling – I At these stages, the management team between buyer and vendor. This way, the
think this is critical to acquisitions. may either have had enough or need vendor secures some cash immediately for
If a transaction is going to be funded in additional infrastructure to take the business all their hard work in building the business.
large part by shares, the motivations of the to the next level. In this case, shares deals However, they still have skin in the game to
directors are critical. In essence, when you make sense because they provide a fresh stay interested in its future performance.
20 Mergers & Acquisitions
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