IT M&A – it is a heady place to be right now. If you’re contemplating selling, or perhaps becoming a buyer, it’s easy to get confused by all the numbers flying around – especially the ones related to valuations, adjusted revenue, combined free cash flow, and myriad deal structures with all sorts of payout options and closing cash concepts. It can be so overwhelming that many IT business owners simply decide to wait, instead of doing the one thing that really matters: focus on the opportunity first! Deal points and structure come last.
Let me explain. Generally, for a transaction to make sense for both sides, the post-acquisition entity should be worth more than the sum of its parts. Right? But even though most businesspeople know that to be true, they immediately focus on “valuation” and “multiples” and “the numbers” while many lose sight of the “opportunity,” which then derails everyone before they can begin to comprehend all of the synergistic DNA on the table.
At Cogent, we champion the “Opportunity First, Money Last” approach to IT M&A. We believe developing a clear view of the opportunity actually drives the transaction and is critical for both the buyer and seller to understand before thinking about financial terms and deal structure. Why do the deal at all if it doesn’t make clear sense to both sides? No amount of money is going to fix an improperly thought through business combination. That approach is doomed to failure. Putting the right pieces together at the beginning of the transaction process benefits both sides. Exploring the opportunity to gain more market share, sell a deeper product portfolio, or offer a wider range of services, to name just a few, helps the parties better understand how and why the new business combination should be able to deliver projected pro forma revenue with predictable costs and margins.
The highly fragmented IT Services industry creates opportunities for well-run companies to join forces. However, the key to long-term success is to create value by executing a transaction that has the best chance for success. That’s why we advise all of our clients and those considering a sale to consider exploring the opportunity first, and then focus on the money last.
Model the Opportunity to Understand it
Using our proprietary Transaction Analysis Modeling (TAM) tool, we work with the candidate company to create a detailed breakdown of their business that we believe goes deeper than the usual Quality of Earnings Report can accomplish. Because we already know our buyer-client, we are able to create a forward view, as well as the trailing view, and we don’t focus on market comps, industry statistics, charts and graph hyperbole, and such. We model current and future personnel, all sorts of customer analysis – which is really important for both sides – and spur discussion on operational needs, corporate culture and overall fit, integration considerations, consolidation opportunities, and even sales forecasting and objectives.
The TAM helps us pinpoint duplicate expenses, potential HR overlap, and potential economies of scale as well. We also use the TAM to explore how to support net-new revenue with the projected combined delivery and service capacity. The TAM demonstrates in black and white how the acquisition under consideration can be accretive as a result of the combined top line revenue and projected gross margins, so that overall bottom-line free cash flow can help the parties make a deal happen that works for everyone.
What are we looking for during all this analysis and modeling? The optimal opportunity for both the buyer and the seller – a transaction that yields a stream of combined revenue that creates predictable and sustainable margins that are better than either the acquired or acquiring company can achieve on their own. And it works. We are proud to say that a majority of our buyer-clients come back to us when they are ready to make their next transaction happen. Some do deals even more often, and a few are doing deals regularly. Once our clients get the hang of it, and learn how to integrate the people, products, and services they’ve acquired into their operation, they realize how effective growth-by-acquisition actually complements their organic growth strategies.
Warren Buffett’s holding company, Berkshire Hathaway (BH), has invested more than $211 billion in 60 companies, making the BH Portfolio one of the largest and most profitable investments in the world. Last year, Buffett made his first acquisition since 2016 when BH acquired Dominion Energy’s natural gas transmission and storage business for $10 billion. For four long years, BH’s $137 billion had been sitting on the sidelines just waiting for the right opportunity.
We strongly encourage IT Service companies, whether buyer or seller, to follow Buffett’s proven acquisition advice: “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” We believe putting “opportunity first” helps us accomplish that objective.
About Cogent Growth Partners
Cogent Growth Partners, LLC, a buy-side intermediary for mergers and acquisitions exclusively in the IT Services space, taps into the growth opportunities found by combining America’s IT businesses. Cogent accelerates the M&A process with a set of proprietary tools and processes that enable buyers and sellers to stay focused on running their respective businesses. Anyone who wants to know why Cogent is different, need look no further than our business card: “Providing Transaction Therapy™ for IT Business Owners Since 2010.” For more information, email [email protected], visit www.cogentmergers.com or call (678) 820-5290.