The Autoparts industry activity is fundamental for economic value in the car making and aftermarket chain. Due to the excess of liquidity in the market, investors seek to increase their international presence. Currently this industry is very attractive, this is thanks to several reasons such as:
Increasing average age of the vehicles. In USA and Europe, the average age of vehicles is around 11 years, a trend that has been increasing.
Decreasing trend in the passenger car sales for EU and USA. This makes the automotive aftermarket stronger and might be caused by a change in consumer habits.
Regulations. Original Equipment Manufacturers (OEMs) cannot prevent their suppliers to distribute their products as spare parts to independent distributors.
E-commerce growth. Accessibility and a more widespread use of electronic platforms to make purchases of car parts.
M&A in the Autoparts Industry
During 2018 and 2019 the number of closed deals in the autoparts industry activity has decreased, however, it is expected to upsurge in niches during 2020. The deal count for this industry has behaved the same as the global M&A activity. But as expressed before, because of the already explained drivers, the deal count resistance is expected to shift into a growth pattern.
Even though the global automotive industry is entering a new cycle of decreased activity, we expect a resistance inside the automotive components niches that are engaged in innovative solutions. This includes autonomous driving systems, LED lighting solutions and electrical applications.
Future Prospects
The Autoparts industry activity is always in a continuous transformation process. By 2030, it will be electrified, autonomous, shared, connected and yearly updated.
External Factors
40% of the mileage driven in Europe could be covered by autonomous vehicles in 2030.
Mobility habits will change. By 2030, more than one in three kilometres driven could involve sharing concepts.
Due to rising population figures and mobility demands, vehicle age will continue to increase. It could rise by 23% by 2030 in Europe, 24% in the US and 183% in China.
Vehicle Inventory
By 2030 it is expected that Europe’s vehicle selling inventory will reduce from 280 million to 200 million vehicles.
This symbolizes a decrease of over 25%. For the US it would be of 22%, and 50% for China. However, vehicle age should be raising
Autonomous driving and electrification will have a mutual impact. By 2030, more than 55% of new cars will be fully electrified.
Redistribution of R&D Investment
Companies that invest 25% of their R&D Budget in software applications are rewarded with strong growth.
New Challenges
Between 2020 and 2025, manufacturers and suppliers will be battling against sinking margins while at the same time they will have to invest heavily in customer-orientated innovations.
New breed of auto components.
Does your business play an important role in the Autopart Industry?
The autoparts industry activity is expected to grow and change in the following years. If your business is inside this sector it might be the perfect time to consider selling your company. On the other hand, if you are interested in expanding your business, investing on the autopart industry could be the smartest choice. Either way, don’t hesitate to contact one of our specialized advisors to get more information.
The rules of the game have changed. Digitalization is part of this new consumer generations’ DNA. Businesses must adapt to the requirements this concept demands in order to provide an added value to their customers. Thats why Consultancies and digital marketing agencies synergy is increasing.
Furthermore, understanding clients’ minds and way of thinking has become one of the basic principles of success for every business. Digitalization and data analysis have made this possible by turning “Costumer Behavior” into something measurable.
Today, information is considered one of the most valuable currencies. Whoever has the means to get, and derive insights from it, will count with a significant advantage in the business world. This is the reason why consulting firms’ interest in acquiring Digital Marketing companies has grown.
What do consultancies look for in digital marketing agencies?
As these consulting firms are to big to adapt to this fast paced and ever changing environment, they are now focusing in absorbing growth niche companies in the likes of:
Businesses that work with software and tools specialized in the creation and execution of online targeted advertising.
Businesses specialized in the simplification of the marketing process through technology and automating tools, such as:
CRM technologies.
SEO tools.
Costumer analytics Software.
Loyalty Programs.
Social Media optimization tools.
The consulting firms’ race for the acquisition of Digital Marketing companies
Half of all acquirers of marketing services businesses in the past 4 years came from a non-traditional marketing background. In which consulting firms played a highly active role.
¿Why is this?
Consultancies and digital marketing agencies synergy can be explained in 3 basic points:
In a digital world, large consulting projects are increasingly framed around enhancing the customer experience.
Consultancies are looking to build out their marketing-focused operations and gain port of the market share.
As digital ad spending continues to grow, industry experts predict the trend of consultancies buying up agencies will only accelerate.
The full report “Consulting Firms’ appetite for digital marketing and ad agencies increases” provides more detailed information about the impact and characteristics of this phenomenon. Download it here below:
The last step of an M&A process is known as the sale and purchase agreement or SPA. It’s time to finalize the agreement and sale price of the firm once a buyer has completed the entire due diligence process and evaluated the company’s current condition for sale. In order to include all of the terms and conditions of the transaction, this document will be formalized into a public deed and finally presented before a notary.
The buyer and its legal counsel are often in charge of creating the initial SPA. There are, however, some exceptions, such as how auctions operate. The participants are given a draft in this situation and will finally return it with their changes and offers.
Excellent care and attention must be taken when creating the SPA. A paragraph in the contract can make the difference between a successful or failing deal. The optimum situation at this point is to receive guidance from a knowledgeable counsel. From one with a track record of success in structuring contracts for business acquisitions. In light of this, the SPA is not a straightforward contract. In actuality, it is complicated.
Find out more about the documentation required during a sale here.
In light of this, the contract of sale is not a straightforward document; instead, it is incredibly intricate. The most common query is: What information should be in the contract? A variety of assets and obligations, connections, current contracts, etc., are all integrated into the document. As a result, the sheer volume of pages in the first version of the document overwhelms many business owners. The critical components of the contract for a business sale are covered in this article.
What is contained in the company SPA?
1. Description of the transaction
This section describes the transaction, such as the sale of assets or a business. It is crucial to clearly and concisely express each person’s true intentions by utilizing straightforward language.
When selling assets, it is important to be specific about the pertinent assets and liabilities transferred in the transaction. It will also be specified whether any property that the seller regularly uses, like a car, a parking space, or even their home, is excluded from the sale.
If the transaction involves the sale of stocks and shares rather than assets, a section describing the specific items being sold is included (for example, all the stock or only a specific number of shares). When numerous firms and shares of those companies are involved, the boundaries of the transaction are further defined in great detail.
2. Terms of the sale and purchase agreement
The price is the first significant aspect that is mentioned in the document, along with the conditions that go with it. These conditions include:
Variable payments based on the achievement of goals.
The payment currency.
Events that will result in price adjustments. Since the final price will be based on the balance at the closing date of the agreement.
Although it is not necessary for this specific transaction, the contract additionally specifies whether the surplus cash is included in the deal or given to the seller as dividends.
3. Representations and warranties of the sale and purchase agreement
Seller’s representations
On the one hand, the seller promises that the business’s circumstances are true and correct. The following are some of the events that the seller must vouch for:
The company is owned by the undersigned, and they have the power to make the sale and enter into the contract.
They do not violate any law or other previous contracts.
The company has such a number of shares.
Copies of the articles of association have been delivered to the buyer.
The financial statements are correct.
The company has not substantially changed its operations since the due diligence.
All tax payments are up to date and correct.
You own the patents and trademarks.
There are no outstanding lawsuits against the company.
No hidden liabilities.
Liability guarantees
The damage, inconvenience, or loss caused by faulty, false, or untruthful information may be made up to the company’s buyer. This is taken into account while creating liability warranty conditions.
For the retention of a portion of the purchase price or the deposit of that portion, a bank account known as an escrow account is often formed as well. In other circumstances, a simple bank guarantee is accepted.
On the other hand, the company’s contingencies that are already included in the price are described so that (once the buyer knows these contingencies before paying the price) the seller is exonerated with respect to the damages or claims that these contingencies may cause to the buyer. In many cases, a price is put on these contingencies.
When the operation is based on the pre-closing balance sheet, and the data will be adjusted after closing, the representations and warranties will most likely cover the interim period between the two balance sheets.
Important information to consider
Be mindful of the following:
Any other associations, relationships, or beneficiaries between the sale subject and third parties.
Any disputes or claims by third parties.
Any loans or credit on the subject of sale.
If a warranty is of particular importance, it may also be necessary to ask all other shareholders to make it explicit.
Any conflict of interest.
A breach of statements made in this section will result in a breach of contract and liability for the party at fault.
4. Limitations on Responsibility
Usually, the seller’s liability for obligations to the Treasury, Social Security, or third parties is restricted. There are deadlines for filing responsibility claims, except for circumstances involving taxes, employment, social security, or administrative contingencies, where the deadlines correspond with the legal deadlines.
To prevent any minor disputes, the contract typically establishes a minimum level of responsibility over which the seller’s accountability can be discussed. The sum for each transaction will depend on its magnitude and be determined by how comfortable the parties are with the agreement’s structure.
5. Conditions of the sale and purchase agreement
Non-compete clauses are one of the terms of the sale and purchase contract. These provisions are meant to stop the seller from starting a competing business and stealing your clients. It assists in safeguarding the reputation of the business.
Sometimes, a contract of sale is made with the understanding that certain conditions must be completed before closing, such as acquiring approvals, contract assignments, or the seller performing specific tasks beforehand (the sale of a plot of land or its appropriate legalisation in the corresponding register).
6. Annexes
The contract’s annexes are a section with legal significance. Some of them are due diligence, financial statements, patents, and certificates of compliance with the Treasury and the Social Security Administration.
ONEtoONE Sell-side services
Selling a company can be a frustrating and long process. The experience advisors of ONEtoONE could guide and support you during the whole sale procedure, making the maximum value out of the firm and finding the buyer that can pay the most, wherever they are. Find out more about our sell-side services.
If you are considering selling your company prior to the purchase contract, you will have to go through different stages that will help you maximize the final price. These steps can be decisive for the future of the company. If you need the guidance of a reliable team during the process, do not hesitate to contact us.
One consequence of the world’s increasing computing power, expanding computer use and the ability of computers to capture and share different types of information is the generation of big data. It is data that because of its core properties is difficult to analyze with traditional data analysis techniques and software.
Despite the analytical processing challenges it poses, new techniques are being developed which make it possible to analyze this kind of data more effectively and allow it be used by individuals, companies and governments in many different business and scientific fields. This will likely have an important impact on many areas of M&A, such as in the definition of M&A strategy, business model validation and valuation.
This article will provide an overview on the matter by looking at a few types of analytical techniques and consider the potential impact of this kind of data analysis on M&A.
Overview and Big Data Analysis
While it can have many different qualities, its key attributes are:
Volume. it is characterized by large volumes. According to one general estimate that was published in October 2017 – the distant past in terms of global data growth – there were 2.7 zettabytes of data in the digital universe. This unimaginably large number is the equivalent of 1 trillion gigabytes.
Velocity. it is characterized by the extremely rapid pace at which it is generated. According to one report, 2.5 billion gigabytes of data were generated every day in 2012. With more than 3 billion people on line, millions of Google searches are now generated and hundreds of hours of videos are uploaded every minute.
Variety. it is also characterized by its great variety. In addition to text, this big amounts of data are also comprised of audio, video and changing combinations of data transmission methods.
Data with these properties are often very difficult to process with traditional data analysis techniques. This means that a great deal of the potential ability to use this data is lost.
Due to the challenges of processing data, various techniques are being developed to process big data. One example of this is the Apache Hadoop system, a set of open source programs which includes a component called MapReduce which reads large amounts of data, reduces it in a form that makes it suitable for analysis and then runs mathematical functions on the data.
Apache Spark is another open source data framework for data analysis. Apache Spark can perform some data analysis techniques 100 times faster than MapReduce.
A program used in statistics is R. R is very useful for data mining and for data visualization.
Big Data and M&A
It will very likely it will soon have a large impact on M&A. The following are some key ways it may change how M&A deals are identified and executed.
Strategy development. There are numerous potential M&A strategies, ranging from realizing operational synergies, creating long-term value, turnarounds of poorly performing companies and risk arbitrage. While strategy selection is defined by the particular goals of the company executing an M&A strategy and the skill sets of the M&A team members, it is also heavily influenced by numerous market factors that determine if a strategy should be launched, when it should be launched and how likely it is that it will be successful if it is launched. These factors will increasingly be able to be reduced to data points that companies can use to make strategic choices.
Acquisition targets. Finding targets to carry out an M&A strategy is often a very time consuming process which fails to identify suitable targets and closed deals. Low M&A execution rates are due to various factors, including limited search parameters, search biases, due diligence challenges and buyer/seller price expectation mismatches. With big data it will be possible to drastically improve M&A target searches and pre-screen targets more effectively, which should improve successful deal close percentages.
Business model validation. A significant challenge in analyzing a potential acquisition target is validating a company’s core business model. Particularly for acquirers who are not located in the same market as the target company, it can be very difficult to obtain real time market information and predict what that means for a company’s business prospects. With big quantities of data data, it will be possible to obtain far more detailed analyses of factors such as how fast a target company’s market is growing or shrinking, how cyclical market patterns compare with historical patterns, the amount of customers that are in a market or positioned to enter a market and their preferences and how the market is reacting to the target’s or competitor’s products.
Valuation. Often a major roadblock to executing M&A deals is valuation. Even setting side common biases for buyers to discount firm and asset values and sellers to inflate them, valuation is very challenging due to the fact that it often involves trying to forecast the future. Using big data in connection with market-based valuation techniques, such as EBITDA multiples, it will be possible not only to extract multiples from much wider market data bases, but more quickly and reliably perform comparisons between a target company and the company’s valuation reference set to make appropriate EBITDA adjustments. For valuation models that are based on discounted cash flow analyses, it will become easier to prepare cash flows, identify risks to those cash flows based on existing market information and prepare stronger assumptions about how those risks will affect those cash flows.
Shareholder activism. The existence of data in real time about a company, the execution of company’s business model and a company’s competitors will likely significantly change the relationship between a company’s founders, executives and outside investors. Rather than shareholder activism that is driven by periodic financial reporting, it is likely that increasingly available information will significant shorten the intervals between market events, company actions and shareholder attempts to influence what steps in the market a company is taking or plans to take.
Conclusion
As the amount of data in the world grows, technology will attempt to store the data, break it into intelligible pieces and use the data for different purposes. It is likely that the aforementioned data analytical techniques will have a large impact on M&A given that it is heavily impacted by data points that can be extracted from the market. In light of this, companies as well as investors should try to stay informed about data analysis developments so they can incorporate them into their M&A strategies and increase the likelihood that M&A deals will create lasting shareholder value.
To meet the challenge of feeding a growing world in the face of strained food production resources, climate volatility and massive urbanization trends, it is necessary to link more capital with agriculture projects. One emerging financing trend that has the ability to significantly broaden the base of the agriculture sector investment pyramid is crowdfunding.
Through crowdfunding it is possible for agriculture project sponsors to directly reach large numbers of individual investors, broadening a project’s capital structure and experimenting with more creative investment terms and conditions.
While crowdfunding has great potential, agriculture companies as well as investors considering this financing option should not lose sight of the basic considerations that apply to other forms of investments, including what the relationship between the company and an investor will be, investment risk and return and the need to match capital investment and repayment cycles with the underlying business realities of a particular project.
The article provides a brief overview of crowdfunding, looks at the use of crowdfunding in the agriculture sector and considers the potential of agriculture sector crowdfunding in the future.
Overview of Crowdfunding
Crowdfunding is a technique for financing business, artistic or other projects and initiatives by pooling often small amounts of capital from a large number of people, in many cases through fundraising platforms that are set up on the Internet.
Crowdfunding can be structured in different ways and imply different obligations and rights for the promoters of projects, the platforms over which fund raising efforts are carried out and investors. The following are some commonly used crowdfunding structures:
● Equity. In an equity crowdfunding structure, in exchange for an investment, an investor receives an equity interest in the venture funded. The terms and conditions of the equity investment generally vary on a case-by-case basis.
● Debt. In a debt crowdfunding structure, capital from individual investors is pooled and then lent to a borrower. Key terms and conditions of the debt investment are based on the general lending parameters of the platform and the risk profile of the borrower.
● Coin. In a coin-based crowdfunding structure, the investor receives a coin or right to receive a coin based on the expectation that a market will be created for the coin in which it can be valued and traded.
● Reward. In a reward-based crowdfunding structure, the investor receives some type of reward for his investment. The nature and value of this reward can vary widely.
● Donation. In a donation-based crowdfunding structure, donations are made by the investor but the investor does not receive anything in return for his investment.
Crowdfunding has grown in importance as a financing tool. The largest crowdfunding platforms, such as Kickstarter and Indiegogo, have collectively raised billions of dollars in equity financing. It has been estimated that, as early as 2020, the crowdfunding market as a whole could reach US $90 billion.
As the crowdfunding market has grown and demonstrated its viability as a financing option, more and more types of businesses have sought crowdfunding options, including fashion, insurance and real estate.
Crowdfunding and Agriculture Projects
There are now several crowdfunding platforms in the market with an agriculture sector focus. Examples of these platforms include AgFunder, Cropital, the agriculture funding platform of Symbid and Harvest Returns.
Going forward, crowdfunding has the potential to play an important role in the agriculture sector for several reasons. The first reason is that agriculture projects can require a large amount of capital that can exceed the investment thresholds of smaller investors. Crowdfunding can give smaller investors the opportunity to participate in promising agriculture ventures of different sizes and in different parts of the world.
The second reason is that crowdfunded capital has the ability to fill the often large space between debt financing and equity investment. This space exists because the time it takes to arrange equity financing often significantly exceeds what food production cycles require, risk and return mismatches and disconnects that often occur between food production and profitability cycles and investor capital deployment and capital return timing expectations.
Limited access to equity capital, and particularly equity capital at the higher end of the risk spectrum, poses a major challenge to small and medium-sized agriculture companies who need higher risk capital so that they can create cultures of innovation and take healthy risks which can allow them to offer new agriculture solutions, create production efficiencies and significantly build firm value.
A third reason is that many consumers are increasingly concerned about where their food comes from, how it was grown and the food’s quality. Crowdfunding provides opportunities for individual investors and consumers to become more directly involved in earlier stages of the food production cycle. Further, the fact that by definition all food sector investors are also food consumers creates the possibility of paying investment returns not only through capital but also through food products that the farm has produced. This can help to convert producers and consumers from people who are on opposite sides of the food chain to partners.
Issues to Consider in Agriculture Projects
While crowdfunding poses great promise for the agriculture sector as a whole, agriculture companies that are considering crowdfunding as a financing option should keep in mind that, rather that constituting a silver bullet financing solution, crowdfunding for many firms will best be used as a complement to traditional debt and equity financing sources.
Further, while some types of crowdfunding do not require investment funds to be paid back, basic laws of investing economics suggest that no funding source will last for long if it is not based on a reasonably fair exchange of economic value. Accordingly companies should carefully structure capital raises so that they will lead to successful business ventures that ideally create a stage for long-term and mutually beneficial company-investor relationships.
From the investor’s perspective, the ability to invest directly in companies whose investment offerings have not been thoroughly vetted creates real investment risk. Agriculture is a sector with real risks and some companies, due to their teams, business models and commercial arrangements may be significantly better placed to manage these risks than others. Accordingly, investors must be on their guard to thoroughly analyze investment opportunities, and if necessary seek the assistance of third parties in doing so, so that investors clearly understand potential risks and returns.
Conclusion
Crowdfunding is set to become an increasingly important element of agriculture sector finance. This type of funding option has the potential to expand agriculture capital markets, allow agricultural firms to build value more efficiently and involve people more directly in food production. At the same time, companies as well as investors need to analyze crowdfunding options carefully to make sure they make economic sense, are carefully structured and ideally lead to mutually beneficial investment relationships.
The often volatile process of M&A is a time that requires steadfast leadership, which is able to create a sense of stability whilst everything around the company is changing. In fact, it has been reported that aside from financial results themselves, senior leadership team effectiveness is considered the most important element in determining overall company success. One of the biggest factors to consider as a leader during any M&A process is that the mentality of your employees will not be 100% focussed on their individual tasks, and perhaps will be feeling a certain element of insecurity. In unpacking this notion a little further, a leader must consider that an M&A process can place added pressure on workers, with uncertainties over the likes of job security, salary, roles and overall worth to the firm (amongst others) being common occurring questions appearing in their minds. As we all know, mental distractions can genuinely be detrimental to one’s own productivity and overall standard of work. Thus, the importance of a leader re-establishing a stable workplace during and post an M&A process truly goes without saying.
What It All Comes Down To
As we have wrote about in previous articles, understanding the human factor in M&A, let alone in business overall, is absolutely essential to the overall success of the operation; especially from a leadership perspective. It is vital to know your employees, build relationships with them, and understand how they are feeling about their place in the firm. In turn, one of the most effective practices that a leader can adopt is when they are willing to level themselves with their employees. It could be something as simple as having a non-work related conversation with them regarding a shared interest, to something more extensive as the leader organising an office-wide initiative like a team-bonding event that includes company management. The idea behind it all is to remind leadership and employees alike, that everyone in the company is human after all, and that the best foundation for future success is a strong sense of company harmony and morale.
Within this frame of knowing your employee, it is essential to understand their individual strengths. As it were, it is commonly understood that if someone is working with their passions, strengths and interests, that they will almost certainly be more effective and efficient with their work. In turn, if a leader is able to harness and ultimately leverage the individual strengths of their workers, they will go a long way in ascertaining a strong sense of company pride, belonging and arguably most important, an all-encompassing sentiment of stability; a hugely coveted concept during what are inherently unstable times of M&A transitions. But there is more to it than just stability. With their interests being promoted, employees will naturally feel more motivated to work for their leader. This is a special setup to maintain, a symbiotic working format in which leadership is happy to back in their employees, and employees are secure in the knowledge that their boss is fully in support of their endeavours. All in all, it leads to a healthy workplace, whereby little time or attention is lost on anything other than the work at hand.
Leading the Company Further Ahead
This being said, there is more to do than to just ensure stability within the company. At the end of the day, you have not gone through all of this effort to complete an M&A process not to reap your deserved rewards from it. Resultantly, it is also very important to keep growth at the forefront of the company’s mentality. Importantly however, the pursuit of growth and improvement as a firm can often be used as a galvanizing tool in which employees can become even further dedicated to the cause. As a leader, if you can effectively portray the vision, goals and overall pathway ahead for the firm, then one might just find that their employees are even more committed to achieving beyond their previous performances than ever. What’s more, the employees will know that if they show their willingness and shared passion for the new company vision, that they will have more job security within the firm. In turn, by clearly voicing the future strategy and direction of the company, you will be signposting exactly what the employees can expect and should be aiming for going forward.
The snowball effect then transitions toward that hallowed achievement, synergy. After all, this is the target of any merger or acquisition; but of course, they do not just appear. To truly unlock the full potential of your merger via synergies, company leadership must conduct the necessary groundwork that has largely been covered in this article. As such, this can be a drawn-out process, and it might take years until the company is recording the financial returns desired as a result of their corporate transaction. However, M&A is a long-run game and when successful, the unfolding synergies are able to drive the company to newfound heights and capacities. Thus, it is up to leadership to incorporate strategies that seek to enhance the propensities for the various synergies to come to fruition inside their business. This starts at the most individual of levels and reaches right up until the most central of corporate strategy as a whole. Overall, an M&A operation is an almost unrivalled opportunity for companies to increase their capabilities, strength and focus on new areas. In turn, it is essential for company leadership to be diligent in their actions, ensuring that no stone is left unturned so to uncover every available synergy from their merger or acquisition.
One business trend that will likely gain significant strength in the coming years is technology-driven M&A. These are acquisitions or joint ventures whose fundamental purpose is to create or protect firm value through the acquisition of technology. While the search for technology has always been an M&A strategy, its importance has grown as the pace of technological development has accelerated, the use of technology in our lives has increased and technological disruption of industries has become more common.
Technology-driven M&A transactions have, as with all M&A strategies, potential advantages and disadvantages. On the one hand, they can help companies jump often lengthy innovation curves, rapidly expand into new business areas and maximize the sales potential of products and services. On the other hand, acquiring technology can be very expensive, implementing technology can be challenging and there can be significant uncertainties as to the impact of technology on a business and whether the acquired technology will remain relevant and competitive in the face of other technological developments and market changes.
This article briefly discusses the increasing pace of technological development, provides an overview of three models of technology-driven M&A and looks at some advantages and disadvantages of tech-driven M&A strategies.
The Accelerating Pace of Technological Development
While technological development is by no means a new phenomenon, arguably we are witnessing the greatest acceleration of technological progress and impact of technology on human lives in history. There are four related reasons for this which have combined to create a virtuous cycle of technological progress.
● Increased Dissemination of Technological Knowledge. Information about technology and technological development is being disseminated at increasingly rapid rates. Due primarily to the Internet and the explosion of knowledge-sharing economies, it is possible to learn about technological developments, discover how to replicate them and work on ways to improve them faster than ever before. The Internet has gone a long way to convert the world into an open technological laboratory.
● Improving Technological Development Finance and Economics. Investment in technology has rapidly increased due to growing global wealth, deeper and more efficient capital markets and the increasing interface between investment capital and technology development. This has been combined with the falling cost of many key building blocks of technological development, such as human labor, access to information, computer-driven research and the cost of technology development-enabling devices such as computers.
● Increased Use of Technology. The use of technology in our daily lives has increased. Due to increased Internet penetration rates, the Internet of Things and trends such as technology convergence, our lives are increasingly intertwined with devices, such as cell phones, which rapidly evolve. This has increased technology absorption rates.
● Economic Conversion of Technology. Due to increased knowledge about technology demand and immediate access to large amounts of technology users through the Internet, the chances of converting technological development into short-term financial gain have improved. This has created the rise of companies such as Google, who channel large amounts of resources into technology research and technology ventures. The shrinking loop of technology development and economic conversion creates strong incentives for the constant push for new technological applications.
Three Types of Technology-Driven M&A Strategies
The rapid pace of technological development has had a major impact on businesses and how businesses view the path to value creation. As an M&A strategy, the acquisition of the right technology can allow a business to grow at rates that can be significantly in excess of growth strategies that rely on other growth drivers.
There are three key types of technology-driven M&A transactions.
● The first type of technology-driven M&A strategy is used by businesses who are looking to acquire innovation to defend their current business model, strengthen elements of their business or transition into new business areas. One example of this strategy is where a petroleum company seeks to acquire a company with renewable energy technology.
● The second type of technology-driven M&A strategy is utilized by technology companies who have technology at different stages of development but who not have the necessary resources to complete the technological development or who do not have a platform to monetize the technology. This strategy can allow technology companies to shorten product launch cycles, significantly expand their access to potential customers and greatly accelerate their ability to deliver their products and services to those customers.
● The third type of technology-driven M&A strategy is used by financially-driven investors who attempt to use technology to create financial value consistent with their overall investment strategy. Technology can be used with every type of financial M&A strategy, ranging from turnaround strategies to long-term value growth to risk arbitrage.
Advantages and Disadvantages of Technology-Driven M&A Strategies
Technology-driven M&A strategies have advantages and disadvantages. At the company level, the key advantage is the right technology can significantly improve business performance. This, is and of itself, can create a series of positive developments, including increased productivity, profitability and investment.
A second key advantage of technology-driven M&A strategies is that they externalize different parts of the technology development and commercialization phases, which can create overall economic efficiencies. For an industrial group, it can be economically efficient for a large portion of technology development to be carried out by third parties. Similarly, for a technology firm, it can be economically efficient for other parties to develop and maintain the channels necessary to market technology.
On the other hand, technology-driven M&A strategies can pose several challenges. To begin with, acquired technology may not fit precisely with a company’s business model or may be difficult to implement, which can create operational inefficiencies as well as efficiencies.
Second, even if technology fits precisely with a company’s business model and can be readily implemented, technology may become obsolete or markets may shift toward different technological applications, eliminating the benefits of the technology acquired.
Thirdly, because of the uncertainties involved with the integration, implementation and durability of technology, it is extremely challenging to value. Unlike investment funds who might hedge the risks of technological investment by investing in many technology ventures, for a single company a major technological investment may constitute a significant bet of its available business development capital. Furthermore, given the uncertainties of technology investments, financing parties may only underwrite investment in technology at significantly higher costs than more secure CAPEX or other investments, which can put firms under financial pressure, particularly if it will take a long time for technology-driven benefits to be realized.
Conclusion
As the pace of technological development and the integration of technology in our daily lives continues to accelerate, technology-driven M&A will become an increasingly relevant M&A strategy. While this strategy has advantages and disadvantages, it should be carefully considered by companies looking to maximize the potential of their business model and drive overall firm growth.
In our financially interconnected world where there are few restrictions on where M&A deals can be carried out, one major practical transaction challenge that investors and companies face is the valuation of companies and assets in emerging markets.
Emerging market valuation can be difficult due to several reasons, including:
– the key revenue and cost drivers of a company’s business may be highly exposed to microeconomic or macroeconomic variables that are rapidly changing
– there may be a limited number of transactions in a market involving a particular asset or company type which creates a high degree of uncertainty about what an asset or company is worth
– there may be country risks, such as political or social risks, which create significant uncertainty about how the business environment a company operates in will change in the future.
These difficulties often lead to situations where companies or assets are significantly overvalued or undervalued, creating unrealistic investment return expectations, investor and company tensions that negatively affect a company’s performance and, most importantly, inefficient patterns of capital allocation and repayment that can restrict business and economic growth.
This article briefly defines the concept of an emerging market in the valuation context, discusses some emerging market valuation challenges and sets forth guidelines that companies and investors can use when they face valuation challenges in these markets.
What is an Emerging Market?
While the term “emerging market” is often used as a shorthand way to refer to countries that are entering a phase of significant economic growth, from a financial valuation perspective the concept of an emerging market is often not so straightforward.
The reason for this is that every country is in reality comprised of many different markets, and these markets are in a constant state of flux with some markets growing, others in a state of relative stability and other markets in a phase of decline. Even with respect to markets that are in a phase of decline in terms of total market size or profit margins, the application of new technologies may cause these markets or sub-markets to enter new periods of high growth.
For the purpose of valuation, it is therefore helpful to identify three types of emerging markets:
– the first type of emerging market is a country that is undergoing a phase of rapid economic growth. This is growth which is significantly better than historical growth rates and has been sustained for at least several years. To provide one example of a classic emerging market, since 2002, Ethiopia’s annual GDP growth rate has exceeded 10% many times
– the second type of emerging market is a sub-market in an economically mature market, such as the United States, that is currently undergoing a phase of rapid economic growth. An example of this type of market is green vehicle technology
– the third type of emerging market is a market which is the result of the combination of two markets, such as the financial sector and technology, producing the fintech market.
These emerging market types highlight the point that regardless of how a market is labelled, the actual market realities a company operates in can be highly dynamic and complicated.
Valuation Challenges in Emerging Markets
Valuing assets and companies in emerging markets presents significant challenges, both from market-based as well as cash flow-based valuation approaches.
Market-Driven Valuation Approaches
A common way for companies to be valued is to derive valuation metrics from the market, such as based on the relationship between company sale prices and company revenues or EBITDA. However, in emerging markets there can be very little transaction history regarding a company or asset type, so these metrics may not exist
Cash Flow-Based Valuation Approaches
Another common way for companies to be valued is to forecast the company’s future cash flows and then discount the value of those cash flows by a discount factor based on risk. In emerging markets, however, this can be very challenging to do because first, as suggested above, there may be not enough transaction history to extract a discount factor. More importantly, emerging markets often experience high degrees of volatility and accordingly cash flows and risk levels can be highly susceptible to change, either moving to more stability, lower risk and lower growth rates or becoming significantly riskier and at times even collapsing.
Emerging Markets Valuation Principles
To face the challenges of emerging market valuation, it is helpful to keep the following points in mind:
– Definition of Market. The first point is to accurately define the market that the relevant company or asset is in. It is often the case that a company in an ostensibly highly stable market is actually positioned in a sub-market experiencing significant growth which may be not be reflected in the valuation metrics applicable to transactions in the broader market. Similarly, a company in a highly volatile emerging market may actually have a business model which is highly stable and insulated from a significant amount of market volatility, such as a company in an emerging market whose sales are based on long-term contracts with highly stable buyers.
– Definition of Company Relationship to Market Drivers. The second point is to analyze the relationship of a company’s business model to market drivers. For some business models, such as construction, there tends to be a high correlation between the company’s business model and a country’s GDP growth. Other business models, however, may benefit during periods of macroeconomic volatility, such as those based on debt renegotiation or selling discount products and services.
– Use of Other Markets as Valuation Reference Points. In the absence of sufficient transaction history in a market for valuation purposes, it is useful to use metrics in other markets as a starting point. While different markets can have very different realities, many business models of companies in the same industry, even if they are located in different jurisdictions, are structurally similar which can help define income and cost structures and profitability.
Once this is done, it is then necessary to compare the company to be valued with companies in the reference market to see whether the reference valuation parameters should be adjusted upwards or downwards. Some key factors to consider in this comparative analysis are:
– The profitability of the company to be valued compared with companies in the valuation reference group;
– Risks to the company’s current revenue and cost structure compared with risks that affect the company’s valuation reference group;
– Size of a company’s potential growth market compared with companies in the valuation reference group; and
– Ability of a company to take advantage of that growth market compared with companies in the valuation reference group, based on such factors as strength of the companies’ leadership and management teams, the nature of competitors in the market, barriers to market entry and regulatory factors that promote or restrict competition.
Conclusion
Due to the integration of global capital markets and low economic growth rates in mature markets, investors will continue to look for investment opportunities in emerging markets and companies in emerging markets will continue to search more developed markets for investment capital.
While investing across markets at different stages of development presents significant valuation challenges, through a careful analysis of market realities and comparing the structure and prospects of a company’s business model to companies in a reasonably selected valuation reference group, it is possible to obtain a valuation of a company or asset in an emerging market that is fair for investors as well as target companies. This is necessary to match investment capital with investment opportunities and create continually more efficient markets.
The importance of conducting an effective integration process post-acquisition cannot be overstated. From ensuring that new company employees are comfortable within the workplace, to putting time into updating any internal company processes that need revising, the difference between a successful and failed merger can often be derived from the effort placed upon integration. The reality of the matter is that one of the greatest benefits of M&A is being able to incorporate your acquisition’s strengths into your own company’s processes, and in turn, you truly wouldn’t be doing your hard work justice if you failed to do so post transaction.
Practice What You Preach
One of the absolute fundamental facets of integration is training. In turn, it is crucial to approach this task with a great sense of practicality, and to not perceive it as a chore which simply requires a box to be ticked. Putting enough time into training any new employees, as well as older established employees, with all of the newly implemented processes and systems is essential to the future success of the merger. Resultantly, it is vital for the likes of top management and HR to implement a thoroughly thought out training process, which combines both group and individual tasks. In doing so, you are able to develop employees in a range of conditions and contexts, working with various issues from handling pressure situations to how to operate the company’s online portal. By applying such a comprehensive training program, it will go a long way in safeguarding the company’s continuity and progress in its newly merged and or expanded form.
Beyond the training phase, it is important that the principles, concepts and processes that have been taught are not neglected or forgotten about going forward. To ensure that all the time, money and effort placed upon the training does not go to waste, it is recommended that the company implements some solidified evaluation processes, whilst maintaining a high level of dialogue between HR, employees and top management regarding the new procedures. As a result, it becomes easier not only to track individual and department performances, but to also isolate the particular processes that are working well, which need improvement, and which need to be scrapped altogether. The fact is that not everything you try will work, and in turn, discovering that a certain practice doesn’t actually work for your company should be perceived as a positive thing. As such, you are now one step closer to ascertaining what is the right combination of processes and practices for your firm; categorically, understanding what doesn’t work for you can be just as valuable as understanding what does.
Patient Determination
In saying this, these things do take time and as has been alluded to previously in our article regarding the human aspect of M&A, it is important to maintain a decent level of patience. Without taking an absolute laissez-faire approach, it is important to remember that Rome wasn’t built in a day, just as your company post an acquisition won’t reach its ultimate heights instantaneously. It takes time for working relationships and processes to be developed and understood, for strategies to come to fruition and ultimately, for the newly merged company to reach its potential. With this in mind, it is important to not place too higher expectations on your company within the short term, after your acquisition. There is no problem with being bold and ambitious, but it is more about playing the long-game, in which you are not too discouraged if results don’t go exactly your way in the initial stages of the post-acquisition period.
Arguably the most important factor throughout this entire process is the upholding of a clear vision, which the entire firm has agreed upon and bought into. So long as your company has its sights set on a certain outcome, a collection of goals, or even a mentality that is able to unite the firm, then the company will solider on as a team; a collective that is determined to achieve success together. After all, it makes it so much easier for individuals and teams alike to achieve success when they know exactly what that success may look or feel like. Resultantly, a newly merged company’s vision for success and where it wants to be in the future should be the very foundation for what binds together each individual inside the firm. For nothing truly brings people together than a shared desire to achieve something big. Thus, from the moment a company signs off on an acquisition, their mind’s must turn to the all-important notion of integration. In fact, it has been suggested that “ideally, the acquiring company should begin planning the integration process even before the deal is announced.” In doing so, it becomes clear to top management as to how they can best go about implementing their new vision into the firm’s ethos as fast as possible.
Did you know the owner of the company that you want to purchase can finance the operation? It´s is not a hoax, it´s a form of financing known as vendor finance. Undoubtedly, this is the best type of financing to buy a company. keep reading to discover why!
How to Get the Seller to Finance Your Purchase
Once you have found the best business to buy, understanding the needs of the seller is key to create more possibilities to be able to structure an agreement that fits both. When there are liquidity crisis environments, sellers find that if they want to sell their companies they should help by facilitating financing, that is, allowing part of the payment to be paid through deferred payments.
You would think that the seller is the one that is most interested in the operation being done and the one that should have more faith in the creation of value capabilities of your company.
In a financing agreement with the seller, in which he accepts deferred payments, it is going to be easier than agreeing with the bank that the company’s own shares are a guarantee in the event of default. That is, that the owner recovers the ownership of the company in case you, as a buyer, do not comply with your payment obligations. He knows the true value of his company and knows how to manage it properly. Thus, if such instance should to occur, he should not have much trouble if the property is reverted. He knows the company perfectly well and believes in it, so he should not attribute the risks that he would assign, due to ignorance, to a stranger.
If, however, you want to give the shares of the company to a bank as collateral for a loan you will find that option inconvenient. Banks are not seduced by the idea of having to manage a company and, not knowing it, they apply a much higher risk rate than that assigned by their previous owner.
With Vendor Finance There Is No Fight for Interests
Another very interesting feature of the vendor finance is that the seller usually does not fight interest on deferred payments, unlike any other lender. Their concern is focused on selling the company and its price, not interest. This can be very significant in the true final price of the operation. For example, if instead of paying 5 million cash you pay 1 million a year for 5 years without interest – considering an interest rate of 8% – you would actually be paying 3,992,000 euros.
In addition, the value of the company is still in it and not yet in the seller’s pocket, so it should not be difficult to assume that part of the value remains within the company for a while
To learn more about other types of financing and what they depend on click here.
What If the Businessman Resists a Structure of Deferred Payments (Vendor Finance)?
Initially, it is likely that the business owner will resist a structure of deferred payments (vendor finance) since it is not what he had in mind when he decided to sell his company. Your challenge, as a buyer, is to persevere with the approach until he agrees.
If he resists completely, you should ask yourself questions like “Is the owner hiding something that you do not know? Will the company not be able to pay? or did he not tell you it was a cash generator?”
Maybe the seller has valued his company at 10 million euros and you explained that, since he has 7 million between bank loans and lines of credit, the value of his shares is 3 million. So, you find that the seller wants the 3 million, but you do not have the money. Since he wants to sell and can not find another buyer, you offer the possibility of buying it in several deferred payments.
You have already studied the company and know that it generates 2 million euros of EBITDA (profit before interest, taxes, amortizations and depreciations). The financing that the company already has pays an average interest of 7.15%, so you will have to allocate from the EBITDA 500,000 euros to pay the banks. You only have 1,500,000 euros available per year to generate dividends and pay them back.
Given the situation you are in you can propose the following structure: I am willing to pay you 500,000 euros cash, another 500,000 at the end of the first year and one million euros a year for the next two years. Remember that you must reserve money to finance the growth. Think that now, the company is yours.
Within a more globalized world, the buying and selling of companies is a great way to approach a new market or reinforce a competitive position. The main difficulty involved in this type of operations is knowing how to approach them so as not to be deceived and maximize our value. If you are considering buying a company and are looking for advice, do not hesitate to contact us!
