I recent weeks, I’ve shared two great ways you can get into businesses with no money down, namely through a merger or by creating an agglomeration. Both of these methods help businesses solve issues involving risk, scale, and liquidity, as well as provide for easier succession planning.
I’m sure much of this sounds great, but it’s always great to see it in action. Here is a case study from another one of our Harbour Club members, Goran, who did just that.
Goran’s Story
Goran did the Harbour Club course in March 2015 in Mallorca. He was intrigued by mergers and acquisitions and was inspired by the idea of doing global deals, but he had no experience. He decided to learn to do deals by actually doing them, after learning as much as he could from the course.
The agglomeration model and the idea of fragmented markets got him thinking, so he had a look through his telephone contacts to see which companies he knew. He chose the telecom and cable TV industry, which has over 6,000 businesses in Europe. He knew one entrepreneur in that field. From his research, he identified that more than eighty businesses were too small to scale, and their business value was dropping because they were losing users, therefore decreasing the exit value of the business. The telco and cable TV industry is a dynamic M&A industry with the bigger telco and cable TV companies frequently acquiring smaller companies.
Goran realized that he would need to get to know the industry in-depth to close deals. He determined the size of the fragmented market and analyzed all possible competitors.
He did his research. He had more than 200 live meetings and video calls with telco and cable owners to find out where their problems were. He wanted to identify the pain points in the industry and check with the business owners in the segment to identify what they would need to succeed. It was also imperative to understand the owners’ mindset, how they were thinking, what their personal motivations were, and what they wanted for themselves.
Among the bottom-line pain points were that the owners wanted to remain independent as entrepreneurs; they needed cost savings, and they found the price of content rights high. They also had challenges investing in technology and infrastructure. Adding new services was essential and, perhaps most of all, the owners didn’t want to sell their business. If they could solve these problems, they would have an advantage and could compete with the big players in the market. It is important to remember that the companies required in an agglomeration are profitable, so the deal must solve their three main problems—risk, scale, and liquidity—which are also problems for the whole industry.
The Agglomeration—Goran’s Perfect Solution
The agglomeration model is perfect for solving all these problems, reducing risk, and creating shareholder value. The agglomeration will bring the smaller companies together to collaborate and enjoy the benefits of scale, liquidity, and reduced risks. As a group, they are stronger and can avoid being the target of a takeover.
Goran set up two types of deal structures:
- Swapping shares with the listed company
- Becoming a client for the content of the listed company, thereby giving the group more buying power
Pitching to businesses works better if you have people from the industry on your team because they give credibility. You need to adjust the pitch for business owners to understand it, and many business owners need multiple talks and negotiations to get on board with the idea. It’s not just about explaining the plan but also about building a vision for the business owner. Rapport is vital. Goran realized that the biggest challenge for business owners was changing their mindset. They needed to stop thinking like managers and change to shareholder thinking, in other words, from operational tasks to strategic thinking.
For Goran, he needed to close deals as fast as possible by immediately collecting accounts, preparing offers, doing due diligence, signing agreements, doing the legal documentation, etc. This was also a great way to identify which companies were serious about the idea and which were curious timewasters. There was no time to waste. Being prepared was crucial, along with having a pipeline of other interested companies, so momentum continued when one dropped out.
Goran notes, “In the beginning, you will lose a lot of your time, so get used to it. Everybody is lying and saying they are the best. It takes persistence, so don’t lose your faith and vision of what you want to do.”
From the other side of the deal, Goran got as many investors lined up with as much money as possible to invest in the pre-IPO stage and support doing the deals as the agglomeration started.
The final agglomeration involved deals with companies in eight different countries. Therefore, he needed to find local legal companies that understood deals and acquisitions from the local perspective. He also needed his own legal agreements and team.
Goran said, “I came into this with zero experience doing M&A deals, and from the start, everything went wrong—positioning myself, the pitch, making offers, getting clear on the process. We didn’t have a good number of investors at the start. If we did, we could have moved faster.”
Goran is currently in the end phase of the deal before listing the agglomerated company on a stock market. He is dealing with a pipeline of sixty companies in the telco and cable segment in eight different countries in Eastern Europe. So far, it has been a steep learning experience, but he’s looking forward to capitalizing on the deals that are lined up.
Next time, I will be discussing what to do after you’ve done the deal. Be sure to come back for it.
In the meantime, I want to share some exciting news: my latest book, Go Do Deals, is set to release on December 9, 2020. If you’ve been getting value from my blogs, then the book is definitely for you. And, when you pre-order the book, you will receive two free gifts. First, you’ll receive my eBook, Merger and Acquisition Strategies for SMEs, an exceptional starting point for those serious about entering the world of mergers and acquisitions. You’ll also receive my new 21-Day M&A Strategy Email Course. This eight-module course expands on concepts introduced in the M&A eBook, as well as introduces entirely new concepts and terms.
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