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Communications M&A Market
M&A and investment activity is constantly underway in the cloud communications and cloud networking industries as service providers and vendors both look to scale and make capability acquisitions.
Cavell’s unique positioning in the market as a trusted advisor to many service providers means it’s ideally placed to assist companies in M&A.
Cavell is an experienced commercial and technical due diligence provider and is often asked about the process, valuations, and the best strategy for companies to prepare for M&A. Cavell also regularly advises companies on their strategic options and undertakes these services for potential investors and acquirers.
We are sharing some of the insights we have gained from our experience on multiple technical and commercial diligence projects. Hopefully, these experiences might help companies considering investment options.
Information Memorandum and Pitching: First Impressions Count
Ensure that when you present the first time you can deliver a clear pitch with Information Memorandum (IM) that demonstrates clearly and succinctly where you create value.
To maximise the value of the business you need to clearly position areas of most value.
Both the IM and pitch should be succinct and include sections on:
- Company history with past achievements and investment highlights
- Organisation structure and ownership
- Market dynamics and company ‘right to play’
- Product portfolio
- Customer base
- Growth plan, particularly relevant to our communications industry markets where growth is expected.
- Business KPIs
- Key Financial information including revenue, sales forecast, EBITDA
- Key Risks – technological, customer, and operational risks
Cloud Business? Be honest about what you are
We see many companies positioning themselves as cloud businesses when this is not true.
Most investors have realised that there are very few pure cloud businesses and would prefer businesses to be honest about their offering.
If like most, you are carrying some legacy, in the form of product or customers, ensure that you have a clear migration plan.
Shape of the Business
This is one of the first areas Cavell wants to understand, and it’s surprising the number of times this information is not readily available.
This means being able to explain:
- Product volumes
- Customer volumes
- Channel volumes
- What is sold and why?
Data and Information Availability: Hire a CFO
When you enter any business process, be prepared for the level of information you will need to provide, particularly financial.
In the first quarter of 2021, Cavell was involved in 2 processes that stalled because the businesses hadn’t prepared the appropriate financial information. Lack of the correct staffing allocated to this process could result in a 6-month delay. Investors can lose patience and drop out as a result of these delays.
A Chief Financial Officer will help you pull the relevant business metrics including data history and projections. You need to back up claims and justify them with data, adding detail wherever possible. You’ll need to explain events throughout the narrative of the business, how goals were achieved and how issues were resolved.
Additional financial figures may be required for some private equity investors including the cost of the acquisition and performance ratios. These additional steps are particularly hard to deliver in the absence of a CFO.
If you are looking to be acquired or gain investment, the other party will look to do a significant diligence process.
When a company like Cavell comes in to undertake Technical Due diligence, they expect easy access to Network maps and key processes. Failure to produce these is going to be a red flag for the investor.
This can negatively affect:
- Impression of the business on the investor
- OSS systems
- BSS systems
Cavell has had first-hand experience in engagements where documentation is missing and has caused pauses in investment.
Businesses should also build documentation of when they have had major technical incidents. What were the causes and resolutions? It is essential to provide confidence in the investor that appropriate action has been taken.
Additional processes, significant to document:
- Sales process
- Provision process
- Support process
Chief Operational Officers and/or Chief Technology Officer are usually the individuals responsible for providing these details and will need to demonstrate a good working knowledge of the areas above.
Be prepared to show a full demo of your product including user experience.
Proof: Your Forecast will be tested
A Due Diligence team are going to examine your forecast in detail.
Be prepared to explain all your assumptions and be ready to demonstrate where the growth is going to materialise.
Be cautious of making customer assumptions as the diligence process will likely include customer interviews. You need to understand your customer’s plans and factor these into your assumptions and projections – especially if one customer represents over 10% of your customer base in users or revenue.
An in-depth discussion will be expected. You’ll need to answer:
- What is the market opportunity?
- What are your pipeline opportunities?
- How have historic trends driven your thinking process?
Inspiring confidence in this area is of paramount importance at this stage.
Commercial and Technical Due Diligence and Health Check Services
Cavell has worked on several M&A deals over the past few years and seen a large increase in M&A deals, 10 in the first 6 months of 2021.
We have represented both sides of the process; service providers and vendors – readying them for investment, and alongside investors – finding them their best match.
We have undertaken both formal commercial and technical due diligence projects for service providers and private equity companies, identifying potential target acquisitions and assisting them in the process of negotiation and completion of acquisitions.
A growing area of interest is assisting companies at the pre-investment stage with a ‘health check’ to ensure they are ready for an M&A process.
In a usual due diligence exercise, a company will look for financial, legal and regulatory assistance, at this stage, Cavell would refer your business to one of our partners.
If you are a company looking to prepare yourself for investment or you’re an investor, book a call with Matthew Townend, Executive Director at Cavell Group, to find out how we can turn your ideas into action.