In the last in our series of blogs, we explore mergers and acquisitions (M&A) as a growth strategy and the key legal considerations. This follows the launch earlier this year of our in-depth report, Ambition 2025, which looks at the key drivers for growth of North West businesses – their strategic objectives for the year, the challenges that lie ahead in their respective sectors and the opportunities that exist in their quest for success. The report dives into a number of core areas that feature prominently in the growth ambitions of regional businesses. These include finance, people, innovation and sustainability.

In our fourth blog, we focus on the key topic of M&A, speaking to Corporate partner, Tom Hall, about its importance and what businesses need to consider from a legal perspective when scaling up. Sustainable growth requires scaling up in a way that protects the values, identity and continuity, which are fundamental to long term success.

The importance of M&A

According to research carried out by Pannone, as part of our Ambition 2025 report, demand for external funding is set to rise as North West businesses strive to meet their growth ambitions and long-term objectives.

An overwhelming 80% of regional businesses surveyed as part of the report are actively seeking funding to facilitate growth, with angel investment and growth capital the most favoured types of investment for North West decision-makers (21% each).

M&A activity is also set to increase, with mergers and acquisitions featuring prominently in businesses’ strategic plans. Over three-quarters of businesses in the North West plan to explore M&A opportunities within the next year. This trend is particularly prevalent in education (93%) and leisure (88%), with tech following closely behind (84%).

The survey clearly shows an appetite for M&A and reinforces the long-held belief that mergers and acquisitions are a highly effective mechanism to drive growth ambitions. Whether the objective is to acquire intellectual property, extend geographical coverage or access new products or service lines, the overarching purpose of an acquisition is to facilitate growth. It’s little wonder that many leading global companies have used acquisitions as part of their growth strategy, underscoring the importance of M&A in driving long-term expansion.

“Depending on the speed at which people want to grow their business, M&A is a very important tool,” explains Tom. “Growth can obviously be achieved in different ways; you can grow organically by hiring people, or by securing new revenue streams via client wins, but if you want to rapidly accelerate your growth plans then acquisitions are the best way to achieve that. With one deal, you can acquire talent, clients, infrastructure, distribution networks and IP, or you can immediately access new markets, geographies or products.”

Like many strategic moves in business, successful acquisitions depend heavily on getting the timing right.

“We don’t see many acquisitions by early-stage businesses,” says Tom. “This is largely down to financial capacity and experience, with few businesses of that size and maturity having the funds or know-how in place to buy another company. It’s more common for a business that, for example, has been through at least one debt or equity funding round, which puts them in a position to start exploring a buy and build project. At this stage, they ordinarily have greater transactional experience, a better sense of the market they are in and usually the backing of experienced investors / stakeholders who have been on similar journeys before.”

Key considerations

The path to a successful transaction is fraught with a number of pitfalls that can derail even the most strategically sound deals. Tom considers some of the key issues to tackle:

• Get your advisory team right – “This is probably the most important aspect of any deal,” says Tom. “A huge amount of value can be won (and lost) by engaging advisors that know what they are doing”. “Sadly, we do see occasions where parties have been let down by advisors that simply do not know their way around a transaction. Any costs that may have been saved by going with a cheaper option are almost always dwarfed by the value that is lost by their advisors being out of their depth and who miss crucial points. “Be sure that your chosen advisors have directly applicable experience and a strong track record of closing similar transactions in your sector. Do not be afraid to ask proposed advisors for a list of credentials and for references from previous clients of theirs,” explains Tom.
• Due diligence – “This is very much based on two principles – ‘buyer beware’ and ‘prevention is better than cure’,”says Tom. “It is infinitely easier (and cheaper) to arrange for the seller to fix a problem prior to completion than it is to try and enforce the legal documents and force them to do it after the deal is done.” An upfront legal audit allows you to assess and analyse any otherwise hidden risks associated with the target company and guides you as to whether there is anything that ought to be addressed pre or post-completion. The same exercise must be carried out for the financial and tax affairs of the target company. Specialised due diligence may be required depending on the sector.
• Resource management and integration – The process of acquiring and integrating another business is time consuming and will absorb a significant amount of resource from your organisation. “Would-be purchasers must remember that they still have to run a business while the acquisition process is going on, so at the outset it’s important to give proper thought to the roles and responsibilities of your team. It is not uncommon to have a division of labour, so that a certain team is assigned to the acquisition project while the remaining members of the team ensure your underlying business continues unaffected,” explains Tom. Careful thought and attention must also be paid at an early stage to post-completion integration, including technology, operating systems and, above all, culture. “You can have all of the perfect financial models in the world but if the people in the organisations just can’t work together effectively then any anticipated synergies of the acquisition will remain theoretical,” says Tom.  
• Project management – there are often many moving parts to a transaction, and trying to bring them all together in harmonious synchronisation on the closing day requires skill, experience and, above all, remorseless planning. “Time kills transactions, meaning that the deal team must meet / speak regularly during the project and continually work through the outstanding steps to completion,” explains Tom. The ability to “see around corners” and spot issues before they emerge is vital to ensure the smooth running of a deal; those businesses that can do this and plan a few steps ahead will usually emerge with a positive result within the proposed timetable.

Support and guidance

M&A offers compelling advantages for growth, including rapid market expansion, access to valuable resources, operational efficiencies, revenue synergies, and enhanced competitive positioning. However, the complexity and risks inherent in these transactions demand careful navigation by experienced professionals. “Advisors that understand both the opportunities and the risks on a deal can mean the difference between a transformative growth opportunity and a costly misstep,” Tom concludes.

If you would like to speak to Tom in more detail about the role M&A plays in your growth strategy, contact him on tom.hall@pannonecorporate.com or call 07920 237695