Let’s deepen why it is advantageous to acquire existing companies, compared to growing internally.
An individual seeking to go into business for himself can either start a company or buy an existing one. Acquiring an existing business means you have immediate cash flow; the company already has customers, assets and a brand name or reputation in the marketplace. Thus, it avoids the risks inherent in a startup such as the challenge of making customers aware of the company’s products or services.
The Italian market is characterized by the predominant role played by of small and medium-sized family owned companies, which are specialized in a specific industry with worldwide exports to overseas markets. Italian businesses are grouped in industrial districts and backed by network of associations and are valuable on some niche area such as: ICT, automotive, manufacturing, biotech and renewables. Recently, the specialisation strategy of these companies has however been questioned as they have come under increasing pressure from international competitors and the small size, which has been a competitive advantage for adaptability to changing market is no longer a specific guarantee to keep the acquired position or to foster these companies’ growth. The pillar for M&A activity in Italy is cross-border transactions thanks to the renewed confidence of international investors in the domestic market and the willingness of Italian players to expand beyond national borders, continue to compete and acquire new market positions.
Acquiring existing company could be reasonable:
- to obtain the necessary skills and resources to implement a specific growth strategy;
- to speed the process of achieving the desired growth target;
- to offer the possibility of identifying undervalued companies on the market that can be the right choice for an investment, often much lower, than it would be necessary to invest for “build” its own growth.
According to KPMG Report, in the first half of 2017, the Italian M&A market posted 390 deals worth €16.6 billion, which represents a 30% increase in terms of number of transactions compared to the first half of 2016 where there had been 298). Looking at acquisitions already closed the interest of foreign investors towards Italian businesses is vivid. There were 132 incoming transactions, recorder for a value of about 9.7 billion euro, up by 3 billion euros compared to the same period last year.
…and the most common mistakes
Nevertheless, acquisitions can turn into a risky process: history is full of examples in this sense. The Italian M&A market features several peculiar aspects which should be carefully evaluated in advance. Foreign investors should not underestimate the complexity of the Italian articulated labour law legal framework. A very common mistake occurs, for example, when acquisitions are driven by the desire to grow in dimensional terms without paying due attention to real synergies or focusing only on risk diversification.
Another common mistake is targeting to the most profitable companies: this is not always convenient, even when it comes to the best companies on the market, because they usually have a very high acquisition price. Furthermore, it will be more difficult for the buyer to add value (i.e. increasing profitability and cash flow).
How to limit the risks?
It is essential have in mind:
- the importance of holding meetings to gain a better understanding of the activities carried out within the reference sector in Italy;
- to take care of the interactions between legal and financial or tax advisors;
- to be ready to quickly assess the real feasibility of the transaction;
- to value solutions not only from a legal standpoint, but also from an economic and financial point of view, in order to better protect the buyer;
- to evaluate all the movable and immovable assets of the target company (i.e. due diligence) in order to proceed with an acquisition, minimizing risks;
- a careful identification and detailed planning of all the steps necessary to protect the business owner and his/her existing company in case of damages or hidden defects, and in dealing with authorization issues both for movable and immovable assets that may arise during the appraisal of the company to be acquired.
- to manage guarantees, timing and methods related to the transfer.
If a foreign investor knows how to move in the Italian SME’s market, and therefore have taken some necessary safeguards, company shares or assets acquisitions could be an opportunity. When planning an M&A deal on the Italian market, investors should certainly consider the points listed above and seek the assistance of trustworthy advisors in order to thoroughly assess all the pitfalls and criticalities related to or arising of the envisaged transaction.
Contributo a cura dell’Avv. Giuseppe Bellini – Studio Legale Bellini