Takeovers take talk

In the first of a six-part series on mergers and acquisitions, Mark Beyer looks at who can help with buying and selling of businesses, large and small.

WHO is the best adviser to help with a takeover or business sale? An accountant? A merchant banker? A lawyer? A broker?

The answer is none of the above, according to Dr Ken Mildwaters, a partner at law firm Jackson McDonald.

What you really need is a negotiator, he says.

“You need to think about the negotiation process before you think about the legal process or the accounting process,” Dr Mild-waters said. “And you need to do the preparatory work for those negotiations. To me, that is 80 per cent of the success of a transaction.”

Dr Mildwaters has recently returned to Perth after 17 years in Europe, bringing unique expertise in mergers and acquisitions (M&A).

His experience in M&A ranged from medium-sized private companies to some of Europe’s largest public companies.

He believes the most appropriate person to take the lead role will depends on the circumstances of each transaction.

In his own case, Dr Mildwaters was responsible for the planning and execution of Europe’s biggest recorded merger – the 1997 union of Guinness and Grand Metropolitan to form Diageo.

He said his central role in the transaction flowed from his close involvement in the four years of planning and strategic industry assessment by Guinness that preceded the merger.

In many M&A transactions, the corporate finance team within accounting firms will take a lead role.

A prominent local example was this month’s purchase of the Marlows auto parts business by Brisbane-based Super Cheap Autos.

Super Cheap engaged Ernst & Young Corporate Finance as its lead advisers on the acquisition.

It also used its Brisbane-based auditors, Grant Thornton, to con-duct financial due diligence on Marlows prior to completing the purchase.

On the other side of the deal, Bell Potter Corporate Finance – the advisory arm of stockbroking firm Bell Potter – acted for Marlows in the sale process.

For smaller business sales, particularly retail outlets, there is a wide array of commission-based business brokers.

The market leader in this sector is Goodwin Mitchell O’Hehir.

A handful of business brokers, including GMO, handle some larger transactions but most of their transactions are in the sub-$1 million price region.

West Perth-based firm Mergers & Acquisitions, which describes itself as a corporate broker, has targeted the ‘middle market’ segment.

Director Ross Goldstein said most of the transactions managed by his firm were in the $2 million to $10 million range.

He believes Mergers & Acquisitions filled a gap in the market when it was first established, since merchant banks and big accounting firms tend to focus on large transactions while business brokers generally focus on smaller transactions.

Over the past two years, Mergers & Acquisitions has sold around $100 million of private non-retail businesses.

These included the sale of JR Engineering Services to Downer EDI, the sale of national manufacturer Croissant Gourmet to New Zealand’s Yarrows Fine Foods, and the sale of KDB Engineering to Hills Industries.

Mr Goldstein likens his role to a orchestral conductor whose job is to coordinate and facilitate the en-tire process. This includes working with legal and tax advisers for the purchaser and vendor.

“We always refer clients back to their accountant for tax advice, especially on capital gains issues,” he said.

“And we always recommend that they conduct due diligence.”

Mr Goldstein said the best way of presenting a business for sale could depend on the likely buyer.

Some purchasers plan to be long-term owner-managers, others aim to value-add in the short-term and then sell the business again, while others plan to integrate the acquisition with an existing business.

“Value is in the eye of the beholder,” Mr Goldstein said.

The remuneration of professional advisers involved in M&A transactions can be contentious.

While law firms and accountants typically charge on a fee-for-service basis, corporate advisers are more likely to earn a mix of hourly fees and success fees.

Mr Goldstein said his clients included many self-made entrepreneurs who had built substantial businesses, often from scratch, over many years.

Such people were often reluctant to pay the fees charged by lawyers and accountants. Hence they were attracted to firms that charged a success fee for the sale of their business.

Dr Mildwaters said Jackson McDonald had a flexible approach towards remuneration.

He said the practice of advisers and clients having some form of profit sharing agreement was happening more and more in Europe, and he expected the same trend could happen in Australia.

The remuneration of business brokers is also changing, according to Goodwin Mitchell O’Hehir’s latest newsletter.

“Good business agents are also spending more time and endeavour on asset identification, listing selection and rejection, presentation effort and risk management,” the publication says.

“Accordingly, most business agents are moving to a fee-for-service business model in addition to intermittent success fees.”