M & A Rainmaker

http://redeye.firstround.com/2009/12/finding-the-dreamers.html

They can’t sing but I like it !!

according to

http://www.techcrunch.com/2010/01/03/top-ten-digital-deals-2010/

The Wall Street Journal

http://online.wsj.com/article/SB10001424052748704007804574575481948503664.html

and Harry from Laidlaw & Co.

http://laidlawholdingsplc.wordpress.com/

are saying that Berkshire Hathaway are going to do a stock split later this month.

Could be a safe investment bet ??

This is an interesting review from Icon Corporate Finance of Q2 M&A activity and mentions 365iT as being on the acquisition trail which it is for selected companies that fit the portfolio, such as the acquisition of 5i earlier this year and the very recent acquisition of 7 global.

http://www.iconcorpfin.co.uk/NewsEvents/M&ATechnologyReviewQ22009.pdf

We have talked about the use of the “ P “ words as an aide memoire to ensuring that a proposed investment has the right ingrediants.

The main P words that we are using are People, Proposition, Profit, Potential and Plan. After some considerable deliberation I have decided to prioritise them in this order. Let’s look at why and also add some meat to the bones of each of these points.

Certainly you could debate my ordering considerably. You could say, for example, that without the right Proposition, the right idea, nothing else matters. You could also say, especially in the light of Google, Facebook and Twitter, that Potential is more important than Profit. However I think that lots of people would agree with me that Profit is, generally speaking, more important than Potential.

I have put People at the top because I believe, and indeed I have seen, that People can make an average Proposition really work and that People can also really kill a good Proposition. In that sense People are more important than the Proposition. I think that it is also the case that a lot of business’s are similar to one another but the thing that differentiates one similar business model to another is the People that are running it. In addition, almost all Propositions will be challenged really hard during their business lifetime and it is the People that will recognise the challenge and fine tune it, rise above it, side step it, go around it or simply change the  original business model in order to succeed. This seems to me to be almost inevitable – that the original business Proposition will have to be changed in the light of experience to succeed.

If People are the most important aspect of the company that you are proposing to invest in then what are we looking for in those People ?? ( We don’t know how many People we are talking about here, or what roles they hold ). If you are talking about a number of People then it is great to see them working as a team, each with their own skills, but working together. It is also important that there is a leader. Ideally we would like to see experience. Experience of starting and growing a start-up or early stage company.

In no particular order we are looking for a number of characteristics in these People. These will include – passion, persistence, determination, professionalism, presentability, believability, likeability, honesty, loyalty and innovativeness.

The Proposition will be our second most important “ P “. Some people would say that the Proposition is the most important “ P “ but I have explained why it is not for me. The Proposition must be logical, understandable, researched, focussed and it must generally scream “ I have to buy one of those “ or “ I can see exactly why someone would have to buy one of those “. In my experience the original Proposition rarely stands the test of time fully intact. It is almost always “ not quite true in the light of experience “.

If the People and the Proposition look good then we come to the debate about Profit and Potential. We must also consider whether we are talking about Gross Profit  ( Transaction Profit ) or Net Profit ( Trading Profit ). Profit before all overheads are considered or profit after all overheads are considered.

What we know from, for example, the dotcom experience, is that companies that have relatively small transactional revenues and profits become hugely valuable when huge transaction numbers come into play. In other words if they are scalable and replicatable globally then small amounts of revenue and profit turn into massive overall revenues and then profits because of the huge numbers involved. ( Microsoft, Amazon, and eBay might be examples of this. )

Profitability ( It costs me this, I sell it for that and make a profit of whatever ) is clearly important but it might not lead to the company being as valuable as when it had huge Potential.

It is also one thing to be asking yourself whether you will achieve a highly valuable company by going for a low profit, high revenue model versus a high profit, low revenue model but entirely another to be asking whether you should go a virtually no profit ( or negative profit ), global transaction model !!! ( Google, Facebook and Twitter being examples of these ) The founders of Google could easily see how they could get millions of transactions ( well users anyway ) but not so easily how those millions of transactions would turn into revenues and profits.

Our assessment of Potential will include considering whether it is applicable globally and whether it is scalable and replicatable.

The final thing that we will look for is a Plan. A financial plan ( sales, costs, profits/losses,cashflow ) and a business plan ( How is it all going to happen ). This will be clear, simple, achievable ( at least on paper ) and concise. I put the Plan at the bottom because, inevitably, it will change !!       

What is the quote from that film - Cool Runnings  ?? “ I see Pride, I see Power, I see a bad arsed mother who don’t take no crap from nobody “ !!

Well  in addition to Pride and Power we should really add Passion, Persistence and Professionalism to the other P’s like Proposition, People, Plan, Profit and Potential that are important to see when investing in a business.

I was watching Dragon’s Den on the Road the other night when Duncan Bannatyne was following up his investment in UK Commercial Cleaning, which was run by two very professional looking guys who had started the company with a few hundred pounds.

Duncan admitted that it was a plus that they “ reminded him of himself “ but most of all he pointed to the obvious passion and determination of one of the founders of the company.

Speaking personally I have always been passionate and enthusiastic about every business I have either worked for, started or invested in. There is another word that is important in this context  too – not a “ P “ word but an “F” word – Focus !!

The first business that I was ever involved in, as a 15 year old, was a chain of Spar Supermarkets in South Wales owned by Philip Jones (   http://www.filco.co.uk/about.html   ). Whilst I did not take too much notice of it at the time, looking back I think of the passion, professionalism, pride, enthusiasm and commitment of Mr Jones. I did not know anything about his ( business ) plan, or how profitable his business was or what potential it had however I could have guessed, had I thought about it, that there was a plan and that the business was profitable and had considerable potential.

However his Philosophy was clear from what he did, said and asked for. He demanded hard working professional, passionate and enthusiastic  people. Everything in his shops was well presented – shelves were cleaned ( you had to carry a rag in your pocket for this job ), tins were continuously lined up and faced out, meat and cheese counters were tidy and looked fresh and wholesome. Customers were “ served “  whether from behind a counter, in the aisle or at the check-out.

Only in later years did it become clear how formative the principles that Philip Jones ingrained in me were. He didn’t make it into the “big league” of supermarkets – Tesco, Sainsbury, Asda/Walmart and Morrisons all overtook  him while we seemed to be locked in a battle with the Co-op stores.

So, maybe there was something in the bigger picture that was not quite right – e.g. the overall profitability, the willingness to borrow or the buying strategy ( Spar was a franchise which Mr Jones left to set up Nisa – the National Independant Supermarket Association or Not in Spar Anymore !!! ). However Nisa remains a thriving,  independant, 8 store supermarket chain in South Wales.

Later, at Memorex-Telex and Fibernet I experienced again Passion, Professionalism, Persistence and Focus. Certainly Pride was also there and we had Power in the market because we “ knew “ that we were good people, with good products and we represented great companies.

Focus was something that I learnt at Memorex Telex and continued in Fibernet. Focus is a powerful thing. In many ways the market and Memorex’s proposition allowed it and us to focus. We had a very clear target market, vertically, horizontally and geographically. We only sold to the IBM user base. These tended to be a certain size of company depending on the size of the computer system
( mainframe or mini-computer ). We only sold to a certain territory ( selected counties or postcodes ). We only sold certain products into our target market. We only needed to speak to certain people
( The IT Manager or Director ). The focus made things relatively simple. The simplicity allowed you to concentrate on Presentation and  Professionalism and you added Passion, Pride and Persistence to the overall mix. A virtuous circle is established whereby when you focus and concentrate on selling selected products to selected people you become more proficient and more efficient.

Fibernet’s business model and market was slightly more complicated than Memorex’s ( Fibernet operated in a multi-computer vendor, multi-protocol environment versus Memorex’s almost single computer, single protocol environment ). Nevertheless selected products were sold to selected companies in selected territories and therefore targeting was possible and achievable and once again you could add Presentation, Passion, Pride and Persistence to the mix to become Powerful within your sector.

When you looked at UK Cleanings product offerings (  http://www.ukcommercialcleaning.co.uk/ ) and heard them talk about their products and customers you could tell that there was a considerable degree of focus and selectivity being added to the Passion and Presentation ability of the two founders.

One company that I invested in kept asking for more money from me and its other shareholders. The investment opportunity originally came from one of my ( share ) brokers. ( Not proved to be a very reliable source of investment opportunities ! ). The management team were supposedly “ very experienced “. It was being run by a Venture Capital outfit. It was, of course, a “ surefire bet “.

After a couple of rounds of investing there was a big change in the senior management of the company and a new Chairman took over from the old Chairman and M.D. Clearly something had gone on !

In a letter announcing the change of management there was yet another request for more money. I decided to make an appointment with the new Chairman and flew up to meet him.

I said that I had obviously read what he said in his letter but I was looking for more detail on what had happened and why it might be worth investing yet more money bearing in mind that nothing much had happened with the money that they had already been given and that the old management team was now mostly gone.

Is this “ off the record Chris ? “ he asked. I said that I was happy for it to be if that was what it took to get the full picture.

“Well”, he said, “ the truth is that the M.D. and the Marketing Director ( a lady ) were having an affair and they spent more time in bed together than they did running the business “. In addition they had managed to establish a couple of businesses “ on the side “. These businesses included one that acted as a reseller to the business that I invested in which was basically a manufacturer. Profits from this business were going to the old M.D. ( They obviously had time for some things then I thought ! ).

I thanked the Chairman for his honesty and then asked him where, exactly, were the former Chairman and the Board of the venture capital company when all this was going on ??

There was, of course, no good excuse for this. These “ highly experienced  people “ simply did not have their eye on the ball. They were not watching the business closely enough and the M.D. and the Marketing Director were able to run a business, unimpeded, in an awful state, establish side-line businesses and indulge in hours of sex together whilst being paid for it !!!

Morals of the story:

- Just because you have experienced people overseeing the company does not mean that they are actually doing their job
- Warning bells should sound when repeated requests are made for money
- If you are not getting regular financial updates there is probably something wrong
- Sex and relationships often get in the way of good business!