Merchant, 11.05.2010

Everyone knows how the great Michelangelo Buonarroti described creating his masterpieces: “I take the marble and cut off everything unnecessary”.

 

M&A transactions in the XXI century occur almost the same way. An operator finds an attractive asset, cuts off everything “superfluous” from it and finds a strategic investor ready to finance this “masterpiece”. Of course, the comparison with the great master is highly exaggerated, but the essence remains the same - the majority of Ukrainian assets have a lot of “superfluous” components. To see an angel inside a marble block and release him, that is reorganize a company to make it not just a profitable business but an investment-grade asset is the task of an M&A operator.

 

Nowadays, financial indicators alone are not enough to sell a company. The crisis gave many investors a very bitter pill in the form of lost millions and billions in investments. Post-crisis investors have become more cautious and we can even say - pickier. The profitability of the business, of course, is one of the main factors affecting its value, but just “one of many”. Other factors, such as a clear management structure, skilled management team, the availability of audits conducted by international companies, the proper level of management and financial reporting to many owners seemed important but secondary. It was postponed “till better times”. As a result, huge holdings with dozens of subsidiaries and branches, with overstaffed central offices, with expensive design were created. And suddenly credit resources became scarce. And it turned out that expensive office design and many hundreds of staff, loss-making subsidiaries legally unrelated to the “parent company”, are worth nothing. Investors in their calculations instantly cut off all this “superfluous” and demanded a clear justification of the declared value of assets. Before the crisis business owners proved their assets’ worth by square feet under construction or even just by the objects on the drawing board, by hectares of land, virtual profits and various multipliers. The crisis shifted the emphasis. Now investors require detailed analysis of all operating parameters, the availability of long-term marketing strategies and accounting for all external and internal risks of any market. Alas not all business owners were ready to accept the new rules of the game. Many dream of the “return” of pre-crisis valuations of assets and, accordingly, the pre-crisis prices. I can say with certainty – such hopes are unjustified. The downturn in the M&A market in 2008-09 suggests that many Ukrainian businessmen have to change their approaches to both the creation and the management of their businesses radically. It is important to understand what attributes are superfluous and worthless, and what are important and worthy.
It is no secret that 90% of Ukrainian businesses operated with the help of credit resource. The spring of 2009 was characterized by massive restructuring of loans by banks and now this year comes to an end. Of course, there are companies that took the advantage of this respite, made the necessary changes in its structure, made some adjustments in strategy and are well able to not only service their credits, but also generate some profit. However, not all used this time to make the necessary changes. Many companies are still drowning and servicing their credit lines is simply beyond their strength. The question arises - what will happen in the near future? Will there be a massive selloff of assets or shall we see numerous bankruptcies? Banks do not need assets as they make their living by managing monetary resources, while business management, manufacturing, production etc. is of absolutely no interest to most of them. It is logical to assume that those companies that are not able to restructure their obligations will be forced to declare bankruptcy. And today there are already several examples to prove this assumption. What are options available to owners? Attracting a strategic partner, that is selling some of the assets or the business entirely. And most importantly – it must be a quick sale, because lenders are unlikely to wait for years until the owner finds an acceptable offer. We are not talking about super-profits any more. A forced sale involves an adequate price, accommodating seller, a clear understanding that today’s M&A market is a buyer’s market and the rules are set by investors.
Which companies today can quickly and profitably sell their assets today? Judging by the beginning of 2010 – medium-size companies with clear structure and clear market niche segments. There were practically no “Mega-deals” over the last two years because the “giants” had serious gaps in the organization and management of the business and auditors found hundreds of discrepancies which lead to vast differences in the valuations offered by buyers and sellers. Many business owners were not ready to sell their companies not only organizationally, but also emotionally. An average length of a standard M&A transaction is 4-5 months. During this time several types of audits must be done: legal, financial and, if required for this market, environmental; dozens of auditors may be involved and hundreds of questions have to be answered clearly and honestly. I have witnessed numerous deals when owners perceived such disclosure of their business not as a natural process of sale and confirmation of the declared value, but as a personal insult leading to the rejection of the process. For us Slavs emotions always dominate over the dry figures. No matter how bizarre and ridiculous it may seem at first glance, for most modern and sensible businessmen the word “transaction” is associated with the process of “shaking hands”. In their understanding this process has nothing in common with agreements hundreds of pages long and dozens of volumes of audit reports. A foreign investor comes to this process with an entirely different approach, in which emotions play the least important role.
Today’s investor is interested in the bottom line, in the quality of offered product, contracts with suppliers and customers, the professionalism of the team and all those things I mentioned at the beginning of the article. Advice I can give to business owners – do not wait for the sale to restructure the company. Those who already understand the need to merge with a larger company or want to sell the business entirely – get a head start. Make the structure of your company simple, clear and understandable. Invite an international audit team and do not skimp on the funds for this process – the stamp of approval from one of the “big four” is a mark of stability, legal and financial competence of your business and may greatly increases the status of your company for potential buyers, while all the errors found by auditors hired by the buyers during the sale will be used as arguments to reduce the price. I have no doubt that every leader tries to hire competent and professional managers, but it is always useful to take an unbiased look at your team. You may need additional training for staff, rearrangement or some changes of emphasis in the structure of the company’s management. In today’s environment investors value the availability of a company long-term strategy and marketing strategy. I always stress that having no plan is equal to planning to fail. This is why having only quarterly or semi-annual plans demonstrates inability to look ahead and the lack of desire to study the market in which one’s company operates, to see its risks and prospects. This will be another argument used by the buyer to reduce the offered price as you cannot clearly prove the business’s profitability in the long term. The conclusion is clear - if one wants to sell his business quickly, valuation and the asking price must be objective, well-reasoned and sensible. An operator of M&A will help you to find an investor, prepare convincing argumentation, conduct the negotiation process and audits; however, the necessary changes in the business can be done only by its owner and competent managers that carrying out his instructions.
A business, like a creation of Leonardo, may also become an invaluable masterpiece; it only has to observe a few criteria – coherence, competence and nothing superfluous.