One of the findings, back in 2001, from McKinsey’s Evergreen study, was that there are a niche of companies that successfully grew through making a series of acquisitions. We called them M&A-led-growth companies. (M&A stands for Mergers and Acquisitions)
There were a few caveats.
Firstly, the pre-requisite was that the acquiring company was already a strong performer, doing the fundamentals of business well. The flip side of this was a clear result that lousy companies made for lousy acquirers. I’ve subsequently experienced this myself, and now observe that selling to a dysfunctional player should be considered an admission of defeat, lack of choice, or a purchase price that was well in excess of the value of the firm.
Secondly, the successful M&A-growth-led companies acquired a series of companies that were much smaller, and avoided trying to absorb companies near their own size. This made the shock of each acquisition to the acquirer much lower, and made the chances of integration much higher.
Combined with the first point, it’s easy to see that giant mergers of lousy companies, such as US Air and American Airlines (rejected for now by authorities) are highly likely, almost certain even, to destroy value.
Finally, companies that grew through M&A-led-growth became very good at the process of identifying, acquiring and merging the new businesses. We particularly saw that they were good at the post merger integration, and were able to capture the benefits of the merger quickly and well.
It’s now 12 years later, and McKinsey has published M&A as competitive advantage, which is consistent with our results explores the topic further.:
In our experience, companies are more successful at M&A when they apply the same focus, consistency, and professionalism to it as they do to other critical disciplines.
This requires building four often-neglected institutional capabilities: engaging in M&A thematically, managing your reputation as an acquirer, confirming the strategic vision, and managing synergy targets across the M&A life cycle.
The four areas are worth exploring:
Engaging in M&A Thematically
The McKinsey authors suggest thinking ahead and agreeing what goals you are trying to achieve with M&A versus the overall company strategy. This of course means having a company strategy to begin with, and not (necessarily) reacting to an opportunity for the sake of it.
The best way that to form that M&A strategy, in my own experience, is to integrate potential M&A into the annual planning cycle. That work should highlight any key potential partners or M&A candidates in the agreed areas of focus and the team should prioritise a potential deal pipeline. The McKinsey article advises, and I agree, not to take on too many deals at once, to focus on a particular area and to gradually build the capability to absorb.
Managing your reputation as an acquirer
In the USA and other large economies investment banks often propose unsolicited deals to buyer and seller alike, seeking fees from the transaction. While these deals may sometimes be for the better, the acquiring company is not really in control. As a company gets better at being an acquirer, it can take control of the process of finding and absorbing companies.
Businesses that handle finding and absorbing acquisitions well can earn the right and reputation to be able to acquire more. These businesses build their internal M&A and post merger capability, and very clear about their own processed with target companies. I’ve seen this when dealing with potential US acquirers, and that well-defined process can make it much easier for the target company to prepare for, engage with and with go through with a deal or move on. Good dealmakers make sure that they are working as partners on the journey to a deal. One tip not in the article – make sure advisors on both sides are experienced at doing similar deals.
In one recent pair of acquisitions that I advised on we used similar term sheets and the same legal and accounting advisors for each deal. My own involvement was able to drop as the executive team gained experience from the first deal, and as the company grows their ability to find and execute more deals will become a real strength.
Confirm the strategic vision
An acquisition or merger opportunity is an invitation to journey together for ever, and that means each side better be very clear about that direction, and how each is helping. It should come as no surprise that open communication is a start, and in my mind there should be a two-way discussion which, if done well, may result in amending the overall strategy of the acquirer. If things are going to change a lot post merger, then it’s wise to work through this well before a deal is done and agree on the future vision together. Sorting this stuff out early, before the expensive legal and accounting details are done, is important, as those details can risk taking over the process. During the due diligence process make sure that as well as counting the beans and bits, to also check that the shared vision is attainable.
In my own experience the deals that worked most effectively were based on a shared future vision which was crafted together. Ideally the side I’m advising is doing most of the crafting, but it does needs to be based on genuine benefits to all parties. Once that shared vision is agreed, it’s much easier to have conversations about the value of the combination and the plans will be post merger.
Reassess Synergy Targets
Before signing a deal, you will have a fairly decent idea of how much extra value, or synergies, the combined entity will be able to create. The synergies are the magic that makes deals happen, as they allow each parties to receive more value than they pay. The buyer gets something that is worth more than they paid, and the seller receives more money than the company was worth as a stand alone.
So it’s important to agree on a post merger management plan up front, before the deal is done, to capture the synergies. However the article points out that it’s also important to be flexible as the post merger plan proceeds.
I’ve walked into several post merger situations, as a consultant, and, well, that’s not a good sign. The worst mergers, in my experience, things like mandated head count reductions, enforced new business processes that are worse than the old ways and the inability to adapt as new information appears.
The best mergers do have a plan, but they also accept that plans change, that each company can learn from the other and that it might be best to let the newly merged teams work out their own way forward.
The latest McKinsey work is consistent with what we found 12 years ago. If you are considering either acquiring or merging with another firm, then do first look internally, and make sure you are in good enough shape to absorb the new business. Remember that trying to merge your way out of trouble will fail for you, and drag the other firm with you as well.
While it’s obvious that any seriously considered mergers should be justified by the synergies of the combination, that combination should also drive towards the overall mission and vision of your business. That means explicitly analysing how the new larger entity will deliver better outcomes for customers and end users, and not just the balance sheet and P&L.
On that note, for me, far too often mergers are justified on cost cutting relating to people, perhaps driven by individuals outside the company, or who have never been an employee in that situation. It’s a short term approach that invariably delivers worse outcomes for customers and end users, destroys morale and stifles any new developments from either side of the deal.
Instead genuine deal synergies and thus performance for shareholder comes from combining strengths of the companies rather than relying on cost cutting. Keep the staff, follow the shared vision together and expand more rapidly.
Being in New Zealand we will tend to look for potential acquisitions locally, but perhaps the best value is gained by looking offshore, especially for companies that can accelerate routes to markets.
However you do it, for well-run companies M&A-led-growth can be an incredibly effective way to grow, and done well can create tremendous value for all parties.
I’m struck that there are some basic things that those of us from the Internet sector just take for granted, and yet sometimes appear to be new ideas to those used to other sectors.
We learn these basics by being founders, being embedded in the start-up and growth ecosystem, taking part in events like Webstock and Gather and by reading sites like Hacker News, books like Lean Start-up and following and understanding stories like Amazon, Apple, Trade Me and Xero.
So without further ado, here are 10 top of mind basics for early stage companies in NZ.
Start with nothing, engage with end users and and build a prototype product, before seeking money from investors. It’s easier to invest when you can see the product and talk to the end users.
Organic Growth is better than paid growth. It allows us to scale up and improve the product, sales and customer service as required, and allows investors to see a track record of growth and a curve ahead.
Products and services need to constantly evolve, based on learning from customers through sales, observation of how they use the product and greater understanding of their unmet needs.
Usability and design is critical as it drives end user delight, and happy end users is what drives lasting revenue. The drive for end user delight should come from the top.
Monthly subscription revenue is one of the best business models, with recurring revenue from loyal customers close behind. It means that you can focus on growing the monthly revenue through product improvements and reducing churn.
IP and technology are generally overrated as a competitive advantage, with companies often worrying about patents and secrecy rather than developing compelling products. The compelling part of a technology is that it is integrated into products that sell.
It’s ok to make losses as you are rapidly growing and increasing market share. Amazon set the standard, as they still makes a loss but is worth $120 billion. They have almost doubled sales in the last two two years to $60 billion and had over $2 billion in free cash flows in 2010 and 2011, down to $395m last year. Their loss was 19 cents per share, and their shares are worth $278 each.
The technology and internet sector is already large in NZ, with 34 ICT companies in NZ earning over $50m, 18 over $100m and the tech sector itself is worth over $23b a year, and third biggest. Above all – it’s growing very quickly.
Great staff and leaders drive the fundamental value of companies.
Get on a plane and sell. Nothing beats getting face to face with customers and stakeholders, and New Zealand based companies are only one flight away from a number of key markets. We are lucky to have the worlds best airline, so use it.
Ryan Baker and Andrew Schofield have done it before, building BookIt and then selling it to Trade Me in 2010. It’s 2013, and the pair were still spending time at Trade Me up until a few months ago, but were also working on a new company – Timely.
Timely is an online service for companies who run appointment based businesses. Their website is a homage to doing everything right for cloud based businesses selling to small business.
I’ve been watching progress for a while, and today it was great news for Timely that they have attracted a round of funding from Rowan Simpson. Rowan was the logical first investor, as he has not only been part of both Trade Me and Xero, but was also a first investor in and a key part of the growth of Vend. Rowan has a knack of not just picking winners but also of being picked by winners, as all of these companies are on lovely growth curves.
In fact these companies collectively almost define a company maturity growth curve:
Despite the continued growth, Timely is still at an early stage, and will now need to build out customer service, product development and sales teams and performance. Their job is to prove that the next round of investment, which should be over $1 million, will almost certainly get more growth and returns. Unlike when Trade Me and Xero began, but like Vend, they are in a competitive market, and sowill need to carve out a global niche for themselves. Overal I seea very strong chance of success and wish them well.
Vend is a bit further ahead, and their job is right now focussed on building their team from 40 to 120 so that they can expand, build the product features and serve customers. They are recruiting for a new office in Toronto and recently opened one in Melbourne.
Xero, like Timely and Vend, is addressing an enormous global market. Their job is the same as Vend’s, to run as fast as they can while building out their sales, support and product development and operations capabilities and results. They are looking for hundreds of people at the moment, and the key for them (and Vend) is to keep the culture consistent as they grow.
Trade Me is the aging rockstar of the group, and sadly for them addresses only the domestic market with their core product. Their challenge is to find the next wave of products that will allow them to get back on to a larger growth curve – say one aimed at the rest of the world. They need to do that while also making sure they stay ahead of the pack in New Zealand. Their website used to set usability standards, but now their products seem a bit dated, if still dominant. They have significant opportunities if they can grab them, and being unleashed by the IPO seems to be helping.
Today we saw an announcement that Optimizer HQ has raised $4 million from local and offshore investors. They are apparently considering an IPO, but needed cash to tide them over for the next few months.
For me Optimizer HQ, who have 60 staff here and offshore, comes out of nowhere, from the non-aligned community or non visible community in the diagram below.
I know very little about them aside from what I can read on their websites, but it’s yet another sign that the number and size of the early stage and growth companies in the innovation sector is a lot bigger than anyone has yet recorded. The NZ Young Company Index, which VIF reports, records around $36 million of investment goes into the sector each year. My own belief is that substantially more than that is being invested, and that there is also even more substantial pent up demand from quality companies.
Sam Morgan and Rod Drury have created $1 billon technology companies in New Zealand but why haven’t we produced more?
Why haven’t we created more companies like Waze, the Israeli start-up now worth in excess of US$1 billion?
I see that the question is simply one of timing. When will we will see the billion dollar valuations?
For me many of the candidates for the next generation of billion dollar companies following are already known, and in turn there is a deep pool of companies following them that we are only just finding out about. Let’s look at some examples from a very wide pool.
First off the rank is Ebos Group, who is buying (merging with really) an Australian pharmaceutical wholesaler and will increase their own NZ market capitalisation to $1.35 billion. Ebos supplies hospital and healthcare products and is not really a technology company, more of a sales and marketing company to Australasia, but still it’s an impressive feat and it’s our first billion.
Diligent Board Member Services is very popular with boards, who in turn are insiders when it comes to investors. That may mean their $670 million valuation is high, but they are on a healthy growth curve, and I see little reason why that would not continue. So while the market value may fluctuate up and down I expect it to exceed a billion at some stage in the next several years. Earlier if the hype continues.
SLI Systems, who recently IPOed, are also on a long term growth curve, albeit much steadier. The NZX is valuing them at $205 million for now, and their revenue run rate was reported in their prospectus as just $18 million, with small but positive EBITDA. Their growth path is not as steep as Xero’s, but the recent injection of cash will help them expand, and given time the increased penetration of their intelligent search tool for retailers should drive their market cap towards $1 billion.
Let’s go private.
Buckley Systems Limited (BSL) has been collecting awards over the last few years. They are owned by founder Bill Buckley, and while it’s hard to find the revenue numbers, this source puts them at $100m a year a year ago, and growing quickly. They dominate the market for precision electromagnets used for implanting ions into silicon chips, as well as the latest LCD screens used for computers, tablets and phones. They are also getting into medical systems. They are large, profitable and growing at an incredible rate. Arguably BSL is already worth close to $1 billion, but even if not it’s clear that some day they will be.
Datacom is another well known tightly held private company, and surprisingly large. They showed revenue of $788 million in the 2012 financial year and profit after tax of $25 million. If they continue with their 10 year annual growth rate of 14% for revenue then they will report over $1 billion in revenue in just two years. Their profit margins are relatively low versus revenue given that this is IT services, but just as clearly they are on the path towards a billion dollar valuation over the coming years. They have 4000 staff, commissioned a $90m data centre in NZ and purchased a Western Australian company earlier this year, and are clearly able to sustain their growth by continuing their expansion into and beyond Australia. They did lose that Ministry of Education payments business to Novopay, but managed the trick of looking very good as a result.
Jade Software spun off Wynyard Group earlier this year, which in turn is looking for $65 million in an IPO. Wyynard are projecting $21 million in revenue in the 12 months to December 2013, and to grow at over 25% in the following year. They will take a while to get to a billion in value, but are clearly on the track.
Vend, who raised $8 million for a fairly decent post money valuation is well known to Brian Gaynor and Milford, who invested (as I did in a personal capacity). Vend were approaching $3 million in annualised revenue in May, and continue to grow rapidly (400% in 2012) into a market that is even larger in potential than Xero’s. It’s not an uncontested market, but with a Paypal relationship and by targeting the more serious end of the market Vend are caving out a solid global niche. They will take a number of years before hitting a billion in value, but I am placing strong odds on them making it.
There are more cloud based services like Xero and Vend in the next wave of companies. Some appeared in the HiTech awards this year including: Timely, an appointment booking system in the cloud; BIMStop which is expanding quickly in the USA and looks to have a good chance to dominate their 3D CAD objects market; and Green Button who provide computational cycles in the cloud. I can recall having conversations with all of them while they were in a very low or pre-revenue stage, and it is great to see them rise through the ranks. A quick browse through the past year category winners tells me, at least, that the quality our best Hi Tech companies is ever-increasing. From the 2012 Hi Tech awards the pick for me was Compac Sorting Equipment, and from 2010 it was Serko.
There are a host more coming. Three companies who I have been introduced to recently are Pet.co.nz. BookMe and OnceIT. Shane Bradley’s Pet.co.nz is, in my opinion, going to take over a substantial chunk of the pet food market in New Zealand. Don’t try to stop him, but do try to find another niche and copy what he is doing. BookMe is growing rapidly by helping NZ tourism operators find customers from NZ and offshore and OnceIT is helping NZ fashion designers reach new markets here in NZ. I don’t understand the OnceIT name, but then I am not in the target market.
It’s been around for a lot longer, but Sam Morgan’s vWorkApp is one example of a very interesting cluster of location-technology based businesses founded in New Zealand. The jury is still out, but I do see some big winners will emerge from that space.
Other Trade Me Alumni are also responsible for a few interesting companies. Nigel, Jamie and Cameron built StarNow into a substantial business, and Nigel quietly launched RubberMonkey a bit later on, between movies and soundtracks. Rowan Simpson was an early investor in and advisor for both Xero and Vend, invested in Fishpond and has just released an email app with very high potential – Triage. Phil, Richard and other Trade Me investors started Movac, a fund that has in turn invested into several companies, of which the pick for me are Green Button and PowerbyProxi.
The Xero ecosystem is another great source of inspiring companies. Aside from Vend, three of my favourites are Unleashed, a product of Massey’s eCentre, TradeGecko – a kiwi start-up based in Singapore, and let’s throw in GeoOP, another location-technology based business.
I could go on for a while, but let’s end with some larger companies that I ‘ve met through the Better By Design program. FrameCad have ambition to power the building of millions of houses, ZeeTags is one of my favorite companies with one of my least favorite websites (for now) and Waikato’s Dairy Goat Cooperative seems to dominate the global niche of goat milk nutritional powders. The last two prove that while we cannot escape our farming roots, combining technology and agriculture is a great niche for New Zealand. Waikato Milking Systems is another agri-tech example who have been through the BBD program and are growing quickly, including into China. I met them through Define Instruments as we are a supplier.
But let’s end with Gallagher Group, who are our very own conglomerate, and while relatively small at around $200m in revenue in 2013, seem to be positioned to become a far more substantial company. As always I checked out their stand at Fielddays this year, and came away impressed at their product range, design consistency and professionalism.
– Lance Wiggs
Funds managed by LWCM
We are currently travelling around New Zealand, presenting Punakaiki Fund and answering questions at a series of public and private events. We invite you, and anyone else who you feel could be interested, to attend one of our confirmed public events: Continue reading →
Today’s press release:
Punakaiki Fund share offer now open for applications
Auckland, 2 September, 2013 — Punakaiki Fund, which intends to invest in Internet, technology and design-led businesses, is open for investment applications.
“We are delighted to be open for business, especially as we have just reached over 600 potential public investors expressing an interest in investing over $9 million,” said Punakaiki Fund director Lance Wiggs.
Punakaiki Fund announces IPO to invest in emerging New Zealand technology companies
New company offers public access to early-stage private company investment
Auckland, 22nd August 2013 – Punakaiki Fund today registered its combined investment statement and prospectus (the “Offer Document”) for an initial public offering of ordinary shares, seeking to raise $20 million, with the ability to accept oversubscriptions of up to an additional $30 million, to invest in New Zealand’s vibrant internet and technology sectors.
Punakaiki Fund intends to invest in early stage and emerging New Zealand internet, technology and design-led growth businesses, generally well before they reach the public markets. The minimum investment for the offer is $2,000, making an investment in Punakaiki Fund accessible to a wide range of New Zealanders. Continue reading →
Lance Wiggs has been appointed to the Physical Science and ICT Investment Committees of Return on Science.