Just back from IMAP’s M&A symposium in Istanbul, with my wallet empty of dollar bills, but full of Blog topics. One idea I picked up from Vuslat Dogan Sabanci, a remarkable business woman, CEO of leading Turkish media group, Hürriyet.
Ms. Dogan Sabanci used this expression describing Hürriyet’s acquisition strategy, before they bought Eastern European classifieds behemoth Trader Media East. Simple enough, you might think, but many acquirors err by building their castles on sand. Fleeing flat growth to international acquisitions. Foraying out, instead of facing the grim task of reorganizing and kick-starting the growth engine at home. Without a solid, cash-spitting biz in your backyard, there is no business model to export into another market, inherently more difficult for its foreign culture, customers and colleagues.
Anyway, for a CEO to neglect his ailing company for an acquisition is like handing the keys of the asylum to the inmates. The sweetest fruits are hanging lowest in your own garden. It is the place to find your competitive strength and skill, upon which to build your prototype business. When that works like clockwork, is the time to escape executive boredom to acquisitions to be shaped according to your home-tested success formula.
Istvan Preda
If you would like to read more, check out the latest issue of the M&A Hungary newsletter here: http://www.mb-partners.eu/mahungary.html?language=en.
I first heard about this from my favourite entrepreneur-guru, Dan Kennedy (http://dankennedy.com/) and since observed it myself: many successful entrepreneurs are fearful, that one day they lose their Midas touch and the world will find them a fraud. I first thought this was a myth, but since the recession started, I am discovering more an more former business kings losing their shirts or turn out to have been naked all along.
Take the example of a car supermarket owner. In 15 years, he had become one of the largest car dealers having sold 5 major car brands, trucks and built a seemingly sound second hand car franchise. Too bad his empire was built on bank loans, finance leases and factoring, which all came tumbling down at the first whiff of the crisis, like a house of cards.
Another one is the manager of an engineering company, who MBO’d a string of state factories from soft loans in the early 1990s. He ran these as cash cows, repaying privatisation loans. Some companies lost their markets and were closed down, but Mr. Engineering didn’t mind, as he saw an industrial property empire emerging from the ashes. When his crown jewel went into a tailspin, however, instead of cashing receivables and stock, he launched a major “modernisation” financed by a mortgage. This came too late, as the top client bailed out and the company is now going bust. The owner, who is nearing 70 and promoted his children, is in denial, afraid to admit his failure to his family.
Istvan Preda
If you would like to read more, check out the latest issue of the M&A Hungary newsletter here: http://www.mb-partners.eu/mahungary.html?language=en.
When selling a majority stake in your company, it is a good idea to negotiate minority protection in the charter of the company or a shareholders agreement. This will prevent the majority shareholders to depreciate the stake of the minority owner by invoicing unreasonably high management fees, removing the founder from management or diluting the seller’s stake by an underpriced capital injection.
Occasionally, a seller will not stop at protecting his minority rights, but wants to continue to control the company as if it remained his fiefdom. He may argue, that he can only realise the value of his minority stake in an earn-out or later joint exit, by running the company using the same strategies that made it successful in the first place.
This is almost always the case after an IPO, where even if most of the shares have been placed with portfolio investors, the founder is likely to remain the largest shareholder. Keeping control is harder to justify when the seller divests a majority stake to a single strategic or financial investor. In such case, the buyer should expect to direct strategy in order to protect and indeed make a return on his investment. This is especially the case, when the buyer leaves the seller at the steering wheel, receiving only second-hand information. Indeed, the buyer would not want to keep seller to manage his company, if he did nor want to capitalise on his skills to increase its value. Therefore, it would not make sense to remove him when he is doing his job.
However, the buyer should have the power to change management should it underperform. It often happens, that having harvested the fruits after an arduous toil, the seller will loose his bite and spend more time outside the business, enjoying his new found wealth.
Istvan Preda
If you would like to read more, check out the latest issue of the M&A Hungary newsletter here: http://www.mb-partners.eu/mahungary.html?language=en.
When structuring earn-outs, be careful what you link it to. The idea is, that if there is a gap between the sellers expectation and hat the buyer is prepared to pay, an earn-out (and additional sum), to bridge the gap. I.e., if the company is as good as, or better than what the seller is saying the buyer can afford to pay more.
But what to base the earn-out on? The most obvious would be net profit, of free cash flow (FCF), as this is what ultimately may flow to the buyer. However, FCF is hard to measure, and net profit may be manipulated by taking out leverage or paying dividends, therefore commonly EBITDA or EBIT is used to calculate earn-outs. But beware… as these figures may also be manipulated, especially by companies working on projects, that straddle the year-end. Loss making projects may be deferred as work in progress, to avoid having to recognize the loss, or work spent on earn-out year projects may be charged to future projects to boost earn-out year results. (This problem may be solved under WIP accounting, under certain accounting standards, such as IFRS, but skillful accountants may fudge that too…)
Therefore, a better way to avoid such manipulation is to link earn-out payments to EBITDA and sales. If the seller has to make his sales targets too, she will not try to boost profits by deferring unsuccessful projects.
István Préda
If you wold like to read more, you may register for the monthly M&A Hungary, here: http://www.mb-partners.eu/mahungary.html?language=en.
Dear M&A Enthusiast,
This blog is the newborn son of a similarly titled monthly periodical and the younger brother of a Hungarian language M&A blog, that you may want to check out (if only for the pictures 
) on http://cegertek.wordpress.com.
This will be no ordinary M&A blog… if there ever was one. Here, I will be focusing on – what the late André Meyer of Lazard referred to as – „the other 90%” of the M&A business. Meyer believed that a good investment banker is only trained but not made by the numbers. He is a well rounded personality as much at home with clients, as with financial research, marketing and selling. But most of all (and here is where 90% of skills lie) he is a good student of human psychology.
You see, the M&A business is like a nudist beach, where sellers as well as buyers strip naked at some point in the negotiations and show their true colours. Whether they are greedy, conceited, proud, naive; week or strong will show under the pressure of deal making. The stakes are high, the principals stressed and pretences fall away.
But enough about the prologue. Let’s dive in and see what the real M&A stuff is made of.
I hope you’ll enjoy the ride with me!
Good reading,
Istvan Preda, CFA
If you want to read more, check out a free copy of M&A Hungary here: http://www.mb-partners.eu/mahungary.html
