If you’re fed up with people asking you when you are going to launch your high-tech start-up, just tell them the smart money is moving into acquisitions. Buy-ups, you can inform them, are the new start-ups.
Buying someone else’s company and making it better has always been easier than starting your own operation from scratch. And these days, with so many companies struggling to survive, and larger players slimming down, there are some great deals on the market.
Companies are outsourcing or demerging functions they no longer see as core to their operation — a recent example being Marconi’s sale of its manufacturing interests. There is a prevailing ethos that companies need to be more focused. Any part of the business that doesn’t contribute to its central purpose must go. Industrial conglomerates are now rare, except for the most acquisitive investment vehicles, such as the US giant Tyco.
The result is plenty of opportunities for enterprising engineers looking for good deals on under-exploited manufacturing firms — which can be built up to realise tidy profits. The bargains are there for the taking.
‘If a company has decided it is going to demerge part of the business, it is probably worth more to the buyer than to the seller,’ says Jeremy Stanyard, a partner at PA Consulting and head of the management consultant’s mergers and acquisitions team.
‘The reason? Usually the seller just wants it off the balance sheet, and is probably not as concerned at getting the last pound out of the price as the buyer.’
Spun-off operations can also look attractive because they sometimes come with a sales guarantee, as sellers often promise to buy components from the company for an agreed period of time following the deal.
But the risks in such sales can also be high, as the former parent company will probably have been supporting the division by providing central overheads such as IT systems, accounts, facilities management and so on.
Many newly-independent companies struggle with the sudden lack of centralised functions, so buyers need to be ready to spend money putting these systems in place quickly. While they may be offered a ‘divorce’ package, where the fledgling business can use its former parent’s systems for a specified period, others will be on their own. And getting started takes time.
While corporate downsizing provides a rich source of companies for sale, so does the disposal of family-run firms. If sons and daughters choose not to take over the family business when their parents retire, there are further opportunities for acquisitions.
Many such companies may have been run by the same manager for years and, although profitable, may not have been exploited to the full. Chris Burnett, an electronics engineer, bought Silverstone Electronics, a small microwave transmitters and receivers manufacturer, when the previous owner retired in 1994. He went on to expand the business into the Silverstone Group, almost doubling its original size, and started two new companies.
In this type of sale he believes engineers are at an advantage, because many owners want to sell to someone who understands the nature of their beloved business, and are fearful that accountants will strip the company for a quick profit.
Burnett is now chief executive of Westica, a communications start-up that manufactures digital radios and transmission systems. He says buying an existing company is a lot safer than launching a start-up. ‘In my experience it’s much better to buy into, or buy outright, a company that has been trading for some time, because it has historical accounts and credit set up. It’s much easier to get someone to believe it is a viable concern,’ he says.
However, acquiring an established business still involves risk. There are significant opportunities to acquire small engineering firms, but the buyer must have something new to offer. ‘You need to have a skill set that you are bringing to that particular industry or business that isn’t there already — be it in production or sales,’ says Keith Hinds, a partner at RSM Robson Rhodes, and a specialist in the corporate recovery of manufacturing firms.
Despite manufacturing’s general unpopularity with the stock market, Hinds believes there are still solid companies, with good products and excellent skills to be found. These can be a real ‘steal’, but only for those willing to invest the time to build them up. ‘There are always bargains, but businesses and opportunities are worth different things to different people. It is easy with hindsight, because somebody has made a success of something, to say it was a bargain,’ he says.
Hinds offers some simple common sense advice to consider before buying a company: look closely at its market and establish whether there is scope for expansion. If not, the company may need to be realigned to find a new market for its products. This can mean decisive and tough action to turn the company around. It may have a loss-making subsidiary, an under-performing division, or a poor product or contract. ‘The longer you leave a problem, the worse it gets, and the more draconian the measures you have to take to remedy it. If you leave it too long, the problem becomes unmanageable, and affects the whole company,’ he says.
The so-called honeymoon period, the first 100 days of a new owner’s management of a company, is when employees and investors expect changes to be made. But if significant changes are not made within this period, the new owner may have missed the boat.
Getting results from such changes can take much longer. John Moore, a member of the Sainsbury Management Fellows Society, which pays for MBAs for a select number of engineers each year, says that unless a buyer plans to asset-strip a company, they should see it as a long-term commitment, rather than a chance to make a quick buck. And it will take at least three years before they get a meaningful idea of the return on their investment, he says.
Some believe it can take even longer. Mike Gansser-Potts, who led a management buyout of vinyl flooring company Amtico from its former parent Courtaulds in 1995, says it can take closer to five years of hard work to create sufficient new value, before a company can be sold at a profit.
Although large companies sometimes sell off a subsidiary cheaply, which can then be re-sold some months later for profit, these deals are less common now than they were five years ago. ‘People tend to get the valuation more or less accurately now,’ Gansser-Potts says.
So if making a fast buck is not an option, is it worth the time and effort needed to build the company into a successful concern? Burnett has no doubts: being involved in all aspects of a small business means every day is different, he says. And then of course there is the long-term profit.
‘Buying a small company is risky,’ he says. ‘But if what you want is a pot of money at the end of it all, you are unlikely to find it by working for a large company.’