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Funding strategic acquisitions

BGF News 05.15.2013

For businesses determined to grow quickly a strategic acquisition can be the transformative moment in their evolution. But buying another company requires both deep pockets and the skill and experience to integrate two organisations in a way that realises their combined potential. Many growing companies have the ambition to expand this way, but lack the means to do it.

By the beginning of 2012, Anthony Foy, the chief executive of SkyDox, a business offering secure file sharing facilities that use cloud technology, was facing exactly this dilemma. “We were a small and innovative company that was a leader in its field, but we were growing in incremental steps, mostly thanks to business angel investors,” Foy explains. “We came to the conclusion that making an acquisition would enable us to realise our ambitions more quickly.” He identified Workshare, a US company with a very complementary document management business, as the perfect target. The question was how to finance the deal.

“It was a slightly unusual transaction because we were hoping to buy a company that was both older and bigger than us,” Foy says. Securing sufficient debt from risk-averse banks was out of the question and equity investors were wary too. “We did pitch to several private equity companies, but I wouldn’t say imagination is a particular hallmark of that industry,” Foy recalls. The solution proved to be an injection of growth capital from BGF.

In September 2012, it invested £7.25m in SkyDox, with Scottish Equity Partners also participating in the financing. The acquisition of Workshare was completed a few weeks later. “Raising money is never easy – it’s a painful and humbling process and you have to really believe in what you’re doing,” says Foy. “We chose BGF because they had the intellectual capacity to see beyond the immediate risk of the deal to the longer term potential of bringing these companies together – they had the capital we needed to grow, but they also offered a partnership where our interests were aligned.”

Nevertheless, Foy says he thought hard about whether he had the drive to make the deal work. “The pain is something you put up with in order to realise your ambition,” he says. “Not everyone desires that and part of this process is deciding whether you really want to go for that growth, or whether you prefer to run a lifestyle business.”

That’s a familiar refrain for Chris Hodges, an investor in BGF’s London office. “Our single-biggest competitor is the ‘do nothing’ approach,” he says. “The reality is that it’s tough out there and ambition is a crucial ingredient of business success.” This is one reason, why, says Hodges, the quality and attitude of the management team are priority considerations when he is mulling an investment in a business. “I need to get a sense they’re open to the bigger picture, to really strategic thinking,” Hodges adds. “We only take minority stakes, but equity dilution can be an emotional thing, so we need managers who recognise that growth capital can really turbo-charge their business.”

For those managements that meet these tests, an equity investment – especially from BGF – is the ideal way to finance an acquisition, he argues. “Equity capital is far less restrictive than bank debt, where the borrower is subsequently required to perform to very tightly defined criteria where failure may mean losing control of the business.”

Mervyn Williamson, the joint managing director of business travel management specialist Statesman Travel, points to another advantage of growth capital he says was crucial when his business was considering fund-raising options. “Bank debt wasn’t going to be practical – the problem we pose for the banks is that we’re not an asset-backed business so there’s no security for a lender – because our model depends entirely on earnings,” he says.

“But even if we had been able to borrow the money to do the deal we wanted to do, we wouldn’t have gone down that route because we were also looking for additional expertise at the boardroom table, ideally from someone outside the business travel sector who would bring a different mindset to our company.”

Like SkyDox, Statesman was also on the acquisition trail. “My partner and I had bought Statesman in 2007 and we grew it from £28m of annual revenues to £50m three years later,” he says. “But we needed to be bigger than we were in the eyes of some of the larger potential clients, who felt uncomfortable dealing with a company where they’d be a disproportionately large customer.”

That posed a chicken-and-egg problem, with larger clients unwilling to come on board until the business grew bigger while the business struggled to achieve that growth without the bigger clients. “We began looking for acquisition targets and having identified Commodore Travel, we had to think about how we would finance the deal,” Williamson adds.

Having decided growth capital was the best fit for his business, Williamson began talking to a number of interested private equity firms. But he didn’t want to give up control of the business and he was concerned about the “churn factor” in the industry. “Three years after they buy you, you can find yourselves sold to someone else who you may or may not like,” he complains.

Finally, Statesman was introduced to BGF by its banker, Lloyds Banking Group. In October 2011, the company became what was then only BGF’s second investment, accepting a £4.25m injection of funding, which was crucial in clinching the acquisition of Commodore. “We did think long and hard about bringing in a third party, but we’re happy to have ended up with a minority investor whose interests are aligned to our own,” Williamson says. “We also like being part of a portfolio family – we’ve been able to offer our services to some of the other companies in which BGF has subsequently invested and to source from those businesses at a competitive rate.”

A year-and-a-half later, Williamson says both the rationale for the acquisition and Statesman’s choice of funding solution are proving themselves. “The combination of our two companies has given us a great deal of additional credibility in the market place, boosted our procurement power and given us real strength in depth – we’ve totally raised our game,” he says. “We’re also continuing to invest, which costs money, but there’s going to be a return on that investment and we’ve had the support of BGF as we’ve made those commitments.”

All of which is music to the ears of BGF’s Chris Hodges. “More people need to recognise the attractions of growth capital,” he argues. “It became deeply unfashionable for a period, amid the first boom and the years of easy credit that followed, when leverage and debt were all the rage, but this really is an excellent way to develop a business.”