The most interesting deals are found in conversations with partners and colleagues in the sector.
The M&A Trend Forum on 27 February – sponsored by Ansarada – was an evening not to be missed for anyone active in M&A.
But before that, another special roundtable between M&A Directors took place at the Telenet headquarters. After a warm welcome by M&A Community Manager Charlotte Declercq, the debate was started by moderator Melle Eijckelhoff (House of Executives). The main question discussed during the roundtable was: ‘how to find the right target for a successful M&A deal?’
The first question is of course: when can we call an M&A deal successful? After a moment's consideration, keywords such as ‘facilitating growth’ were bandied about. An acquisition should lead to growth, either of the target or of your own company. At the same time, an acquisition should be ‘in line with your company's strategic objectives’. If you do your job well, you will have started with those objectives and M&A will be a means to implement that strategy. If the fit with your company is right. If you have the discipline to always keep the initial objectives in mind and if you have the courage to walk away if the negotiations threaten to end in the wrong deal. If the ego then does not force managers to go through with a deal, against their better judgement. In other words, if you make the right choices and implement them correctly, this will translate in the end into ‘synergy’ and ‘added value’.
In the space of fifteen minutes, the M&A experts had already stated many truisms. In what followed, we searched for the answers to a few fundamental questions to realize a successful M&A deal.
Tips for decent sourcing
Of course desk research is important, one of the experts at the table noted. But even more important for finding good targets is to leave the office, get out there and talk to partners and colleagues in the sector. The most interesting deals are found in those conversations.
For example, someone told how he got talking to a company that wanted to start up in Belgium during the Private Equity Summit in December 2024. They are still talking about a possible collaboration today.
But it is not just about data analysis. Go out there, shake the trees. Visit sector fairs to spot targets. And listen not only to advisors, but also to business management. Because, as one of the experts pointed out, most deals at his company are presented by an advisor, but the best come from management.
Language can be a barrier when doing business abroad. You can search Italy for interesting targets, as one company did, but you will quickly come to the conclusion that the cliché is true and that knowledge of English is limited. If the language forms a barrier, you need third party advisors from the country itself. Local banks and analysts often have a good understanding of what moves a market. If your company is looking for targets, you should share your strategy with them so they know what you are looking for. And so they know who to approach.
If you search within your own sector, you know who the players are, how the market is structured and works, which gaps in the market you can still fill, but if you want to buy new expertise in new markets, it is more difficult.
What can help is to have anonymous conversations with customers of potential targets, either yourself or through an advisor. This way you get an idea of their value. It is also important to maintain close relationships with your business partners. They know what the next step is that you need to take, and at what pace. Moreover, they sometimes form a channel to potential acquisition candidates, if only because you have the same customers.
How do you ensure careful screening?
So far for some valuable tips for sourcing, but how do you proceed to a careful screening? Do the attendees use checklists and criteria? One of the participants explained how his company makes these considerations. Does it work better with a scoring model, which it then uses to check opportunities? Do you go for a mathematical model or rather a subjective assessment to find the fit? If you don't take a ‘scientific’ approach, screening will remain fairly subjective, someone remarked.
The question is also what criteria you use. The M&A Director of a company in human resources – that has made several acquisitions in Italy in recent years – said profitability is the most important criterion for a roll-out strategy. But also, for example, regional KPIs, so that the acquired players do not cover the same regions too much. In this way, criteria help you to better focus on which opportunities are interesting and to kill less favorable deals earlier in the process, so that you waste less or no energy on them. You then proactively approach other companies that do score well on, for example, turnover and customer portfolio, and you start building a relationship with them. Something that can take years to do.
Of course sometimes you will sign an NDA to take a closer look at a target... and fifteen minutes later come to the conclusion that it would be better to keep your nose out. Seriously, it does require a certain amount of instinct. How much competition is there? It varies from segment to segment.
It also depends on who you are taking over from. Distributors in the same business, who you already know reasonably well? Then there is not much to score and it mainly comes down to getting the necessary financial data to check whether the company is healthy. Or companies that sell technology with which you want to expand your offer. Then it is already a bit more difficult to screen a target without criteria.
Or what if you want to become the market leader in a new segment? In that case, a company would first apply a few basic criteria to determine whether the segment is even an interesting avenue. Is the equipment key for customers? Does it make up a large part of their capital expenditure? Are there heavy capital investments involved if you enter this segment? Only when the market segment scores well and the executive committee agrees, will the division involved be given permission to look for targets in the segment.
How do you make initial contact?
At a certain point you will have selected a target and the time has come for an initial introduction. As mentioned before, building a relationship can sometimes take years, especially if you’re a new player in the sector. You then have to feel your way around a bit, get to know the potential targets, after which a deal may or may not be made.
Sometimes you even have to try several times, for example with companies owned by private equity, if you cannot find the right price point. A year and a half later, you find yourself sitting around the table again, and then maybe even another time... In other cases you quickly get to the heart of the matter, even if you are trying to hide the fact that you are mainly looking for companies to take over with terms like ‘corporate development’ in your job title. If targets are in the same business, they understand all too well that you don't just drop by for a cup of coffee. That you are there with a mission.
What can help to facilitate the first meeting is to bring someone who is proficient in the local language (of course) or better yet: a local general manager. That is how a company approaches things at the negotiating table in China. Some GMs have been with the company for a long time, so they know the way the company works and its culture very well, and are therefore extremely well-suited to approach targets together and try to get the doors opened.
On to pre-due diligence
Okay, time to focus on due diligence. Or are we going too fast? Well, it turns out we are. Between screening and due diligence, there is a phase that M&A specialists refer to as pre-due diligence. You have found a target that is not in an acquisition process, but that process itself is different today. A company would send regular pre-IRLs to the table to obtain certain information for the due diligence. You deliberately ask a lot of questions, to which the target protests strongly, but in the end you still obtain a lot of information in advance. That approach works.
This intermediate phase is very important. To begin with, to get a feel for whether there is a good fit. Sometimes you realize that the target's figures are not what they seemed and you obviously do not continue with the due diligence. That is exactly what you can do with pre-due diligence: examine the financials and accounting at a high level in advance. If something is wrong, it is better to realize this in time than during the due diligence itself. If everything is in order, you will have the information you need to convincingly pitch the identified business opportunity to the board and, if successful, make a realistic initial non-binding offer. In any case, pre-due diligence is crucial if you are sending a buyer to pitch your takeover plans. This person should be very familiar with the sector in which the target operates.
How to do due diligence properly?
Suppose the board gives the green light for due diligence. How do you get through that phase successfully, while managing the risks as well as possible? Well, for example, by involving the business and HR management in the process, so that they are not faced with a ‘fait accompli’ after the deal has been closed. Due diligence then became one industrial company's starting point in the discussion of two issues: on the one hand, all aspects concerning the financials and compliance, checked using checklists, and on the other hand, the proposed synergy: is it feasible?
One issue with due diligence is that your in-house lawyers may insist that you work with so-called clean teams. According to competition law, you may not involve people in deals who could then use the information obtained to distort the market, unless you can justify their involvement. This could include, for example, insights into the target's prices, customers or strategy.
Some private equity investors also sometimes force this. That means that even just having one company at the table invariably turns into a battle to get people on your takeover team. Legal should not get in the way of one's own business, someone else remarked. That is true, but apparently that is not how it works in practice. At the same time, we heard that the use of clean teams prevents clear, transparent decision-making.
Don’t forget about cybersecurity
And then there is also the cybersecurity and technology that play an ever-increasing role in M&A. Whether or not the target is making sufficient efforts in that area is sometimes very important, especially with everything that is happening in the world today.
By the way, when you announce a takeover or acquisition of a company, you automatically see the hacking activities around it increase. Cybersecurity has become a fixed part of the narrative, also because there is not a single company that is no longer active online. Some negotiating parties then rely on third parties to check the cybersecurity, while others have their own specialists for this.
One expert at the roundtable even engages a company that anonymously monitors the target's network to see if the negotiations are going well. Even without the company to be bought knowing about it. Do deals ever fall through? Companies clearly think in a solution-oriented way in this area, and require, for example, that the target must reach a specific level of cybersecurity within a certain number of months.
Speaking of IT, do M&A specialists also use AI to facilitate due diligence? One company is experimenting internally with the services of Emma.legal, a tool that optimizes legal due diligence with AI. For the time being, the company is only using it to test smaller deals it has completed in the past. AI then performs the legal due diligence again, after which the company compares the results with its own work. The burning question? Yes, the conclusions broadly agree. And of course, artificial intelligence could also reduce the costs of due diligence. Not entirely unimportant, in the opinion of the present dealmakers.
Photography: Vincent Gorissen
