Timing an acquisition – City Comment
There should be growth in the market in which the acquired business is operating, as well as specific growth opportunities within the business itself. To properly assess this question though, it is important to know the reasoning behind the acquisition. Here are two scenarios where the acquirers have different motivations:
- A public company making a strategic, earnings-enhancing acquisition, perhaps by adding a new territory, client or service to its existing business.
- A privately-owned business making an acquisition to accelerate growth with the intention of an exit in two to three years’ time.
In the case of the former, there is no specific end game, so completing the acquisition now while the market is rising and anticipated to continue improving in the medium term is a sound strategy. However, if no acquisition is made in the next 12 months it is perfectly reasonable to presume that a suitable acquisition will still be a valid strategic move in 12 months time, adding value for shareholders.
This, however, may not be the case for the private business planning to exit in two to three years’ time. Realising the value of an acquisition is dependent upon the acquired business having been fully integrated and demonstrating that it is adding value to the acquirer’s business. Before that, the acquired business may in fact have a detrimental impact on any efforts to exit as there will be inherent risk in the business. A plan to exit in two to three years’ time will be predicated on the assumption that there will still be growth left in the market at this time, but there may not be much leeway before buyers perceive that the market is at or near the top, at which time they will be reluctant to acquire.
So for businesses seeking acquisitions as part of a ‘growth and exit’ strategy, there may be a limited window of opportunity in which to find and complete one or more acquisitions. Given the time which the process can take, I would recommend notifying advisers of any acquisition requirements immediately.
Private equity is actively seeking and completing deals in the recruitment market, which is a strong indicator that the market sees medium-term value in the sector. Private equity acquires with the intention of exiting in a typical three to five-year timescale. Business owners looking to exit during this cycle (if indeed we are in an economic cycle) ought to recognise that exiting at a time where value and growth opportunity remains in their business is important if full value is to be realised. Therefore, now and the remainder of 2014 looks like an excellent time to make an acquisition.
Nobody has missed the boat yet and it is difficult to know when that moment arrives, as it only truly manifests itself when the market starts to turn and owners ought to have acquired some three years beforehand. For now, the indicators are that this is an excellent time to be an acquirer.
