Thursday 18 October 2018

Firms warned they need clear M&A strategy

John Dolan of Cardinal Capital Group
John Dolan of Cardinal Capital Group
Gavin McLoughlin

Gavin McLoughlin

Most of Ireland's top dealmakers expect M&A activity to increase here this year, according to a recent KPMG survey.

Good economic conditions, the increasing presence of private equity, and investor confidence were among the factors behind the positive outlook.

Making an acquisition can be an attractive way to grow a business, but it's not without risk. John Dolan, managing director of private equity with Cardinal Capital Group, says businesses need to have a clear strategic rationale for buying a company.

"You need to have an acquisition plan - why do you want it? Will the combined entity be more valuable post the acquisition? Are you buying it for new products, new geographies, new customers ... there's a combination of reasons why you might do an acquisition but you need to have a pretty clear strategy and rationale for why this acquisition fits."

Cardinal Capital is the joint manager - with the Carlyle Group - of an entity called Carlyle Cardinal Ireland (CCI). CCI has been one of the most active acquirer of Irish businesses in recent years and counts the AA, Carroll Cuisine and Sam McCauley chemists among its portfolio of companies.

It recently exited an investment in chocolate maker Lily O'Brien's after substantial growth at the business, which was sold to Polish company Colian. Dolan said that valuations are at a high point in the cycle - even accounting for the downward movement in equities in recent days.

"You need to be cautious around acquisitions at the moment and make sure that there's the right reward and rationale for doing a deal at that level [of valuations]. Warren Buffett said it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price, and that summarises our view.

"Even though valuations are high, you still do the deal if it's the right deal. You're better off doing a deal that makes strategic sense rather than getting something cheap and trying to make it work after that."

Dolan said the first 100 days after an acquisition are crucial in terms of integrating the new business with the old. "You've got goodwill and momentum and most people would generally see an acquisition as a positive move, a company growing. But then you've got to make sure you act on that momentum and make sure that employees know exactly what it means for them and remove any uncertainty." He also said companies taking on debt to make an acquisition should make sure they have "sufficient room to be able to survive surprises post-deal".

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