Opinion: Technology, tooling and M&A

Through the centuries, technology’s main benefit to mankind has been to reduce the strain on overworked humans by transferring as much of the burden as possible to a mechanical underling, whether that be a crane, a car or a social network.  

Today, viral videos of an army of Chinese robots doing press ups as they await deployment give rise to the thought that perhaps we’ve taken this tech stuff a bit too far. But there’s no need to panic – today’s age of innovation is no different to the time of pharaohs.

In 3,000BC, the Egyptians used tech to relieve the burden on construction workers when they dreamt up pulleys, ramps and levers. At the turn of the 20th Century, Henry Ford did similar when he created a motorised way of moving people and goods over long distances. And a couple of decades ago, the arrival of social media removed an immense amount of the burden (you know, like talking to one another #IRL) from our social lives.

All technology through history, good and bad, has been built with the intention of making our lives a little easier. 

The business of technology 

This is true in business, especially in financial services, where new solutions are easing the burden on professionals, allowing them to achieve greater output with their limited time. From the capital markets and investment banking, to corporate finance and advisory, tech is changing long-standing business practises and demolishing long-held limitations. 

In competitive sectors, where an edge is everything, tech is also giving workers the tools they need to get ahead. A Goldman trader today is little different to a crane foreman working on the slopes of the Great Pyramid – he wants to do his work, earn a crust and get home to his family. If technology helps him do his job more quickly and profitably, he’s all for it. 

Crucially, tech is enabling forward-thinking companies to tear up how they do business. In the same way the cutting-edge construction methods of the age allowed the Pyramids to be built higher than any structure in history, financial services firms now have the tools to focus on markets, products and opportunities that were previously not worth their time or effort. 

Bigger is better 

This hasn’t always been the case, especially in corporate M&A, where firms have had to be highly selective over the opportunities they work on due to limited bandwidth and resources. 

When assessing corporate M&A targets, deal discovery and due diligence are crucial but time consuming and every worker in history only has 24 hours in a day. Hence, it’s fallen to CFOs, CCOs and BDs to decide what a corporate should and should not focus on. Even during the booming M&A market of the last few years, many have chosen deals on the basis that they didn’t have time to source from the lower mid-market, preferring to seek out larger deals that, they thought, would offer greater economies of scale over time. 

This is an anecdote we hear from our network, with many M&A-savvy corporates reluctant to devote their limited time to small or mid-cap deals. For example, a corporate M&A manager wanting to grow market coverage by finding a €500m revenue company may look to buy 10 x €50m or 2 x €250m companies. They are busy, resources are stretched, and, given the tools and solutions available, assessing a €50m deal takes a comparable amount of time to a €250m. As a result, they are forced to filter out the majority of the lower mid-market.  

The risk of risk 

But by choosing to focus on a small number of large opportunities, a company is betting a larger part of their stack on a smaller number of possible outcomes. They believe the work they do on a few propositions will unearth a deal that is, on a time-cost basis, a better solution than discovering and doing due diligence on a larger number of propositions. A limited, large-cap approach to M&A creates higher concentration and, in turn, higher risk,

Of course, certain firms choose to be large-cap focused – that’s their strategy. However, a firm with a looser mandate may miss profitable opportunities simply because they don’t have the bandwidth to commit to an ongoing approach to deal discovery or the resources to undertake the diligence on small- and mid-cap companies. In choosing to overlook the lower mid-market, they miss opportunities that could be a great fit. This drives up risk both in terms of what they are choosing to purchase and what they are choosing not to purchase. 

Companies are having to compromise because of time and resource constraints – and it’s a risky compromise. But it doesn’t have to be this way. 

Tech is at hand 

Help is at hand for corporate M&A participants who want to explore the lower mid-market but struggle to do so given the constraints. An increasing number of affordable solutions are available, offering access to on an ever-widening share of the M&A market and improved deal discovery and due diligence.

And that’s good news, especially when you consider how an M&A strategy that focuses on companies with revenues of between $5 million and $100 million is now widely regarded as a more effective and lower risk approach for companies seeking to grow via expansion. Our COO, Jelle Stujj, talked about this approach on our blog earlier this year, writing: 

"A long-term study by McKinsey has shown that a series of smaller deals built around a specific business case or theme delivers better returns at lower risk compared to large one-off deals, selective acquisitions or organic growth."

So, whilst it might not be their priority, any company seeking to make acquisitions would benefit from assessing the small- and mid-cap market. What’s more, the opportunities at the lower end continue to be significant, with Jelle going onto comment: 

"The lower mid-market is extremely fragmented. Across Europe, there are many thousands of companies in the $5-$100 million range, often serving small geographic areas or business segments. These types of companies are prime candidates for consolidation by buyers with a clear strategy — and the diversity of businesses means that there is no shortage of specialist strategies that can be accommodated."

Fragmentation means that there is less competition than further up the chain, with buyers price makers and a greater volume of dealflow, allowing buyers to find opportunities that better match their unique needs at a specific point in time. 

This is why we hear from corporates how they’d prefer to look at €5m acquisitions rather than €20m, and work their way through a wider number of opportunities to find one that suits their needs, keeps risk exposure to a minimum, and comes at the right price. 

Clear solutions 

5,000 years ago, the foreman grew tired of hauling granite uphill – so he was delighted when someone showed him the crane. Similarly, corporate M&A directors, strategists and advisors today should be excited to learn of the tools they can use to access the lower mid-market. 

Tooling is helping companies to save a huge amount of time when seeking out the right deals and conducting due diligence. Even the market’s largest corporates, with revenues in the hundreds of billions, are strategising around the idea that they can create a standardised “blueprint” approach for the low- and mid-caps. Via technology, they can identify potential targets and make rapid, profitable acquisitions. 

With a growing number of active corporates on the buy and sell side employing tooling to facilitate their hunt for their next deal, the network that’s being created is also expanding. This is creating even more value, as an ever-growing group grows increasingly comfortable sharing propositions online, via secure, technologically-enabled channels.

A bright future 

Private markets have been slow to react to the tech revolution that’s taken place in financial services. It’s understandable – caution is key, especially for acquisitive corporates having to assess the risk involved in deploying their hard earned cash in volatile markets. 

In some ways, the fact that M&A has been slow to adopt reflects the caution shown towards the lower mid-market. A company that is wary of shiny, new tools might also shy away from the unknowns that are more prevalent amongst small- and mid-cap companies. 

But this is changing, with the levels of adoption of tooling being matched by the number of opportunities in the lower mid-market. It’s why Programmatic M&A is such a hot topic. It’s why we think every company that is looking to be active in M&A should consider this end of the market. Thanks to technology, this is now a possibility for everyone.

It’s why we’d be delighted to chat with you about how we might be able to help you and your business grow by giving you access to the lower mid-market deals that take your business to the next level.