Welcome to MJ Hudson’s monthly On Target, where you’ll find useful tips and insights to ease you through your M&A transactions. This month we managed to catch up with Dónal O’Sullivan, M&A Director for EMEA at Eli Global, as he was boarding a flight to Hong Kong, and discussed Eli Global’s investment strategy and his insights on the M&A market. Eli Global is a US-based investor (and MJ Hudson client) that invests primarily in healthcare, financial services, insurance, media, marketing and sales businesses in the US, Europe and Australasia.
MJH: You have an interesting story as to how you joined Eli Global. Do you mind sharing it?
DO’S: I used to work for a corporate finance adviser, which focused primarily on Irish technology and services businesses. I met Eli Global’s CEO and Chairman when we were selling an insurance company. Immediately, I knew these were guys I could do business with, they were refreshingly straight up. When prompted, I advised them to get some actuarial advice, which they did and subsequently stepped away from the transaction. A few weeks later, the business went into liquidation and Eli’s CEO said that he appreciated the goodwill and asked if I wanted to set up Eli Global’s EMEA M&A team, based in Ireland. I’ve been with Eli Global for over three and a half years now and it’s been such an exciting journey.
MJH: Part of Eli Global’s investment ethos is that you acquire and grow businesses but never sell them. That’s a strong statement – are there any circumstances under which you would sell a business?
DO’S: No, absolutely not because it dilutes our offering and unique proposition to entrepreneurs and managers. Our view is a long-term one; we genuinely look to grow a business or group of businesses for 30-40 years because we back the business and the people we invest in. We’ve had some very attractive offers to sell some of our businesses over the years, and while it may have been in our interest to sell them we’ve stuck to our word (no sale). We’re all about the entrepreneur and back good people all the way.
MJH: Eli Global has a very diverse portfolio of investments. How do you and your team source M&A transactions and what are your key investment criteria?
DO’S: Our transactions come through a myriad of different channels, including from our external contacts and growing platform of businesses across different jurisdictions. Our insurance, debt finance and M&A team comprises about 60 people globally and we’ve found that the world of M&A is small enough that you will eventually make a connection with someone. We place a lot of importance on developing strong working relationships with owner-managers, brokers, private equity and other service providers. We also spend a significant amount of time researching different industries and jurisdictions to really understand the market. Our key criteria are solid, back-able management teams, solid macro trends for their industry and solid fundamentals within the business. We only invest and partner with well established, market leaders in niche areas.
MJH: You have taken a buy-and-build approach to some of your investments (buying a business and carrying out further bolt on acquisitions). In your experience, what is the key to a successful buy-and-build strategy?
DO’S: From the outset, I think you need to have a clear vision for the entire group of businesses you’re building. We typically look at a business and work out what its short, medium and long-term challenges and opportunities are. We then work backwards with its managers to identify the key growth drivers. This can sometimes mean working with a management team to take a new approach – for example, some companies pursue growth by acquiring the capability to provide new products and services without investing in the sales and marketing needed to realise their full potential. We have significant experience in developing strong enterprise sales teams globally and may be able to offer our expertise here as an added value proposition from the outset.
Having the right people in the right places is also critical for an M&A buy and build strategy, so you really have to know the team and where the expertise lies. We work closely with CEOs and finance managers in particular to help them prepare for and execute deals as some may be less experienced than others. Our model is typically one of light-touch integration, significant autonomy for the management team and trust-based growth. Therefore, ensuring we have the right team in place is crucial to our success.
MJH: Do you have any unique challenges as a long term/permanent investor that you may not have seen prior to working at Eli Global?
DO’S: We and our businesses are fortunate that – with our long-term investment horizon – we are not required to drive rapid growth, combine or integrate companies, or sell, if we think the business needs a different approach. However, the challenge for us as a long-term partner is finding enough top-quality assets with strong growth potential as well as enough quality people to manage our portfolio given our business is constantly growing and changing.
MJH: Highly competitive auctions have re-emerged in the last year. Have you noticed any changes in sellers’ behaviour in negotiations or particular deal terms?
DO’S: It comes down to the specific auction and the sellers involved. There’s a lot of capital out there at the moment and, with interest rates remaining low, you need to differentiate yourself from ABC private equity firm who can match what you’re willing to pay. There are also a lot of different types of buyers who participate in auctions which can drive a seller’s behaviour. As it’s a seller’s market, you need to show how your capital is different and where the value add is if managers and their business were to join your group. We’ve found sellers very receptive to our approach, even in a very competitive auction context. We take our time early on to really get to know the people involved, both the brokers and the sellers, which really resonates with them and builds trust, which is crucial.
MJH: You have recently completed a couple of UK acquisitions. What impact, if any, has Brexit had on your approach to UK M&A?
DO’S: Brexit has definitely had an impact on our approach to UK M&A. While some potential buyers are running away from the UK or reducing their level of activity, we have taken the opposite approach and are ramping up our investment in the UK. We already own nine UK businesses and we are here for the long haul. Even if the UK does take a hit from Brexit, we can see it bouncing back in short order. We aren’t afraid of Brexit and have had more bang for our buck recently due to the advantageous FX rates (as much of our funding is USD denominated). We remain committed to creating a global business and the UK is a key part of that objective. We are currently hiring portfolio managers in France, Germany and the UK in equal measure and are committing ourselves to a long-term marriage between the UK and Europe.
MJH: What other challenges do you see for your business and M&A generally in the next 18 months?
DO’S: When interest rates eventually rise and when the effects of quantitative easing flow through the global finance system, I don’t think there will be as much capital which I think should result in stock markets returning to their normal levels. When this happens I think you’ll see a difference in terms of prices (given the high valuations we are currently seeing). At that point, I don’t expect to see as much M&A activity. This will present real opportunities for buyers who, like us, are not under short-term pressure to invest or divest. Others may not find that environment as easy to navigate. This year has been our busiest to date, having acquired 25 businesses globally and looking to hit 30 by the end of the year, and I don’t see this slowing any time soon.
MJH: In which markets or sectors do you see particular opportunities for your business in the short to mid-term?
DO’S: In terms of geography, we’re looking to invest quite heavily in Asia, particularly Hong Kong and Singapore, as Asia will drive a lot of world growth in the long run. We have also just completed a couple of deals in Australia and New Zealand. Sector-wise, we are a market leader in the US within the healthcare, technology and education industries and see a number of opportunities to leverage our expertise in European countries and also Australia which have similarly advanced healthcare and education systems. We’re also looking increasingly at insurance underwriting, mortgage origination, niche technology and service sectors, as well as testing, inspection and certification businesses which is a solid industry. That said, we are very much an agnostic investor and are not restricted to any industry so we will be where the opportunities lie.
MJH: If you could change something about M&A deal-making what would it be?
DO’S: We have a very upfront way of doing business. When we say we will do something, we do it. If I could change something about M&A deal-making, I think having people standing by their word when they say they are going to do something would be it. That may sound straight-forward, but I’ve found that it’s not a universal approach. If more people did what they promised, there would be more M&A deals, better marriages between buyers and the companies they acquire and better outcomes for all parties generally.
Is this brief too brief? Expert legal advice is on hand from MJ Hudson’s M&A team. Just contact any of the On Target team (details below) or your usual MJ Hudson M&A contact, and we’ll gladly help.
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