In fragmented marketplaces where competing businesses are in a race to increase their share, an acquisition strategy can be preferable to organic growth. It offers a way to scale up a business quickly, securing transformational benefits such as new skills, geographic reach or product innovation in one fell swoop rather than gradually over time.
Many services sector businesses pursue this strategy, focusing on merger and acquisition (M&A) activity as a way of developing scale in their respective niches. For many such businesses, the skills and knowledge of their workforces are their biggest source of competitive advantage but increasing the talent available through organic growth can be a slow process that can be expedited through strategic acquisitions.
Nevertheless, executing an acquisition strategy successfully as a services business requires an approach that reflects the challenges of running such companies – particularly around their culture and people. In Livingbridge’s experience, there are three distinct stages to the acquisition process that bring unique challenges.
1. Strategic fundamentals
The opportunity presented by acquisition strategies should be compared with achieving the same objectives organically – what is the anticipated difference in timelines, costs and quality of results? Ascertaining the acquire versus organic case is an important qualifying exercise required for all businesses.
The crucial task at this stage of the strategy is to understand what the business is looking for in an acquisition and why. For example, at Livingbridge investee Carousel, a specialist logistics provider, the priority was to acquire new capability. Its transformational deal with AYS Logistics added a range of new services to Carousel’s value proposition, from time-critical and express deliveries to warehousing. By contrast recently exited investee, Key Travel, was looking for geographical expansion; hence deals in the US to acquire World Travel management and OT&T Travel Management.
Once you have considered and justified why you want to acquire, then you can also look at the operational synergies that can be driven through acquisition, such as sharing back office functions whilst leveraging a broader range of skills. It is often possible to secure a valuation benefit too: the value of the standalone business acquired is greater when it is part of a larger business.
2. Identifying and securing the right deals
Once the business understands the opportunity it is looking to exploit through M&A, its next job is to identify suitable targets. Some businesses choose to employ dedicated in-house M&A leads to map the market and pinpoint potentially suitable acquisitions; others work with specialist consultancies. A third possibility is for the business to work with its funding partner to identify suitable targets, leveraging the investor’s knowledge and experience of the market, and its expertise in executing deals. Livingbridge has a dedicated in-house acquisition team who can help define criteria, identify and approach target acquisitions for businesses in its portfolio.
This is especially helpful for the quarter of our investees who are pursuing an acquisition strategy as identifying the right target is only half the battle - persuading the company to sell is a different challenge altogether. To operate a successful acquisition, businesses need leaders who can build a convincing proposition that engenders trust and conviction in delivery. Working with an investor that has a strong track record of successful growth can help the target investee build that conviction.
This certainly helped Livingbridge investee, Ten10. Livingbridge invested in software testing services provider Centre4Testing in 2015 and then identified Test People as a partner that could help it accelerate growth with complementary services. The two businesses subsequently merged under the brand Ten10 and now operate a 250-strong team across the UK.
3. Integration to drive synergy and transformation
With the deal completed, success depends on how well businesses can integrate, identify synergies and exploit their complementary capabilities to drive new value. In services companies, integration can be particularly challenging as much of the value in such businesses typically lies in their people and the cultures of the two businesses coming together may be very different. Managing the integration to deliver the intended benefits without jeopardising relationships with customers and key talent can therefore be a tricky balancing act.
There is no one-size-fits-all answer to this question. The acquisition process is based on leveraging the value of the combined businesses but moving too aggressively to bring people together into a single team may damage value. It may make sense to be more cautious – for example, looking for back office synergies first while maintaining separate operations in sales and other customer-facing activities to be integrated later. But if so, it’s vital to find ways to exploit the businesses’ combined upside value – by cross-selling to the expanded customer base, for example, to drive revenue growth. And over time, the biggest gains for service businesses will come from leveraging the combined groups' capabilities to service the customer needs better.
Former Livingbridge portfolio company Nexus Vehicle Rental offers a good example of what is possible. Livingbridge worked with the car rental broker through several acquisitions between 2008 and 2015, integrating the new businesses and leveraging Nexus’s own technology to shift the focus away from credit hire towards corporate customers and larger accounts. The transformational nature of its deal-making, followed by careful integration focused on the emerging value proposition, helped the company deliver a return of 4.5x over seven years and become the UK’s largest corporate vehicle rental management firm.
To find out how Livingbridge can help your company make acquisitions, please get in touch.