Expanding through acquisition can be a good way of increasing market share, cutting costs or getting hold of useful new technologies. In July alone, there were 45 takeovers in the UK engineering sector, according to accountant Robson Rhodes.
Getting information about potential takeover targets can be a daunting task. In the case of quoted companies such as BTR, which was taken over by Siebe earlier this year to form Invensys, there are glossy annual reports and stockbrokers’ notes.
In most cases, however, the target company will be private, and information much harder to come by.
But there are a few simple steps that can make the process easier. The initial target list should be drawn from as wide a range of companies as possible. The best sources are databases such as Kompass which allow lists to be drawn up according to industry, turnover, profitability, location and any other relevant factors.
The disadvantage of these databases is that they tend to be too expensive for smaller companies to buy on their own. But they can usually be accessed through professional advisers or business support organisations such as the Business Link network.
Some company names may come from talking to contacts. Martin Pilley, director of corporate finance at Robson Rhodes, says: `A good idea is to talk to your customers and suppliers. There are confidentiality issues, but they will often tell you about your competitors – especially if they are charging less than you.’
Other sources include trade associations, which can often help with lists of companies in similar industries, trade journals, and market research reports which identify the major players in a given field.
Once a list of suitable partners has been drawn up, each one will have to be researched in greater detail. A search at Companies House is a relatively inexpensive way of getting hold of publicly available information. As long as the target company complies with the law, it should provide financial data and the names of the company’s owners and directors. But beware – the information here could be up to 10 months out of date.
It is also a good idea to find out what the target company actually produces. Some companies might put product literature on the internet, others are more traditional. `A good way is to make an anonymous call to the company and ask for their brochures,’ says Pilley. `If you’re a bit braver, you can arrange to meet them. Companies in the same sector often talk about the problems they face.’
If the search is successful, an approach will have to be made to the target company and a price decided on. This is where advisers, such as banks and accountants, can provide the most help. If the target company is willing to sell up, then it should be easy to arrange a meeting. If not, try again later. According to Pilley, takeovers often go through despite the target company’s initial scepticism. `Persistence is often beneficial,’ he says.
It may seem easier just to launch a bid for a public company than negotiate with a private one, but the need to get agreement can have benefits. A spokesman for Smiths Industries, which has made acquisitions worth £100m in the last year, says the process is lengthy, but worthwhile. `If it’s an agreed bid, it can take up to about two years, but you go through the company’s books thoroughly.
`The problem with taking over public companies is that the buyer can sometimes get a nasty surprise once they are in control,’ the spokesman adds. The company may have looked good on paper, but it is important to make sure there is a good fit in real life. As well as new products and plants or an expanded distribution network, an acquisition will bring in new people. If the business is technology-driven, the people could be more important to its future than the product it makes.
The final stage is deciding how much to pay. Pilley says: `You look at what the company is worth on its own, what its cash flow is and so on. Then you look at what the combined group will be worth. That will tell you the premium you can pay.
`If the people selling are doing their job, they will do the same calculations. Then it’s just a matter of negotiation.’