RECENT mergers and acquisitions activity among some of the state’s smaller companies may provide a template to enable others chasing growth to go after their targets more effectively.
Pairings such as IT firms Empired and Conducive, and consultants PDC and Emerson Stewart, aim to achieve growth in difficult economic times. They also show that the challenges faced by one company could be an opportunity for another.
In the case of Empired’s acquisition of smaller IT consultancy Conducive, the circa $8 million cash and share agreement finalised in August has enabled both to achieve growth that would have been more challenging if each was to chase it independently.
Less than 12 months ago, Branden Dekenah outlined his growth plan for Perth-based private company Conducive, of which he was managing director, in an interview with WA Business News.
The company had been doing well since forming six years earlier, thanks to its emphasis on the resources market (a fortuitous change in direction from its initial focus on developing transport technology).
It had increased staff by 40 per cent in the year prior and was on the path to further growth, alongside expansion into Queensland.
Mr Dekenah said it was at this point that he began considering partnering with another company, to avoid investing in structures and procedures needed to support a larger operation.
“We had a number of larger companies tapping us on the shoulder, and with the growth ahead of us we started thinking that it might not be a bad idea to go out and look for someone to merge with or acquire us,” Mr Dekenah told WA Business News this week.
At the same time, listed company Empired was evaluating potential acquisitions that could supplement its existing consulting division - an opportunity Empired managing director Russell Baskerville said was apparent in Conducive.
“We’d been following the company for a while and it had a good reputation ... as well as the skills that we needed,” he said.
The two companies initiated direct negotiations before bringing in specialists to finalise the transaction terms.
“We knew a rough ballpark for what the Conducive business was worth and we were quite lucky that that was similar to what Branden thought it was worth,” Mr Baskerville said.
“We had numbers that were within 15 to 20 per cent of each other and we didn’t change the numbers too much, just the proportion of cash and shares.
Under the final deal, Empired agreed to a total purchase price of $7.95 million for Conducive - a figure based on a multiple of four-times forecast earnings before interest and taxes - and committed to two milestone payments (the first in July 2013 with the second a year later) provided Conducive achieved earnings targets.
“If Branden had thought it was worth a lot more then it probably would have stopped the deal then ... because what we don’t want to do is do a deal and then for Branden to feel like he’s lost out,” Mr Baskerville said.
The biggest risk for Mr Dekenah was losing control of a business he’d built over six years, and seeing it swallowed up by the listed company.
“They recognised that we had run a successful business for six years so Empired wouldn’t want to go in and change that recipe too much. Many of the decisions have been left to us,” Mr Dekenah said.
Conducive has been integrated into the Empired business so it still sits within its own business unit, but that will gradually change over the next 18 months.
While Empired is undertaking slow and steady integration, it’s the opposite for PDC Consultants, which recently acquired Emerson Stewart Consulting.
Emerson Stewart has had a difficult recent past, including the 2010-11 financial year when it cost the listed Emerson Stewart Group as a whole $1.4 million.
PDC managing director Martyn Weir said he had a number of concerns during negotiations with OTOC, which merged with the Emerson Stewart Group in 2011 via a backdoor listing worth $28 million.
“Due diligence did raise some concerns, but it was less with the consulting division and more the corporate bad history,” Mr Weir said.
“It was probably legacy concerns of prior management that had caused the majority of concerns.”
To limit the impact of that negative reputation, PDC has fast-tracked the integration of Emerson into the PDC brand - a process Mr Weir said would be completed in the coming weeks.
“That’s why we fast-tracked the integration; we wanted to recognise that if there were any perceived legacy or reputation issues we can get that behind us,” he said.
OTOC sold off the consulting division when it recognised the struggling business wasn’t complementary to its contracting services.
Conversely, Mr Weir said the resources offered in the Emerson business were the exact fit for the consulting services PDC offered.
The transaction was worth $1.18 million; a price Mr Weir said was offered with the company’s financial struggles in mind.
Another group to offload an acquisition subsequently found to be non-complementary has been VDM Group, which sold its Cape Crushing and Earthmoving business to privately owned CFC Group in April.
CFC Group - a resources-focused conglomerate - paid $46.5 million for the crushing business in a transaction executive chairman Philip Cardaci said would complement CFC’s services.
VDM took a $2.9 million hit over the sale of Cape Crushing.
