Our study shows that the ownership was changed in 52% of the IT service companies with less than 25M€ sales between 2015 – 2018. We followed ownership arrangements of 65 companies over 36 months. These companies were on a so-called “long list” of one of our buying-assignments.
The number of arrangements in this group was reasonably high. 25% of these companies were sold. Some of the owners we discussed before the deal did not actively seek a buyer. They told that if a suitable price and buyer appear, they are ready to talk. Some instead said that they were not selling, but the owners found conditions or reasons for selling.
3% of the sample companies decided to sell part of their business and focus more on their core competencies. It was often felt that it was not worth investing anymore to the business being sold, so better to give up if a suitable buyer was found. Some of the companies that were willing to discuss selling decided to seek growth by buying other companies. Some of the buyers searched for a purchase that would fulfill their requirements for competence, price and customer base.
11% found during those 36 months a suitable purchase target, and an agreement was reached on the terms. In addition to growth, many buyer companies are looking for a higher value for their own business.
8% of the companies organized their ownership otherwise. These were actions such as Management Buyout (MBO) and merging with another company through a partial exchange of shares. The challenge of these arrangements was often to find a suitable valuation for both parties.
Some companies (8%) closed down their businesses. As a rule, these were poorly profitable small companies whose business did not interest the buyers, or they could reject the bid as too low until the liquidity crisis terminated the business.
Same trend will continue in 2019
How does 2019 look like in this target group, and maybe even more generally, in terms of ownership arrangements? The pace continues with the same speed as the following factors increase the number of transactions:
- Consolidation continues – this is a relatively certain option to improve competitiveness, profitability and the value of the own business. Equity funds still hold non-invested capital, and many of them are interested in consolidating a market
- Need for experts grows – trendy capabilities such as AI, Blockchain, IoT or RPA are interesting buying targets for a wide range of domestic and foreign buyers. If the company, also, has its IP, the attractiveness and value of it will increase significantly.
- Accelerating the growth of strategic business segments – many times when companies create their strategies, they are not getting their new units growing organically fast enough and end-up to accelerate growth through acquisitions to keep up with the planned schedule.
- Globalization – At some point, most companies will enter the international market or become international by selling their operations to a foreign buyer. When we search buyers for Finnish companies, many times, our starting point is to reach out globally for buyer candidates.
- Seek for growth – If the organic growth or its pace is unsatisfactory, it will be boosted by buying competitors, new business with synergies, experts or customers.
- Growing IP portfolio – many buyers in the market are focusing on buying Intellectual Property and are systematically developing their patents or trademarks to their chosen sectors.
- The temptation to sell – when the number of M&As in the market is high and colleagues sell their businesses, and it adds its twist to the owners’ thinking should we sell
- Giving-up non-strategic business segments – usually well-considered strategic decisions – you can’t be good enough in everything and sometimes it makes more sense to sell when the price is still right.