We were delighted to recently host a conference, together with leading research house CIL, on creating and increasing value in the IT Services sector.
With speakers including Dominic Monkhouse of Peer 1 Hosting, Charles Cameron of CloudXL and Tom Kelly of Logicalis UK, and over 80 people in the room, there was a lively discussion from a range of different perspectives about what it takes to build and realise value.
In the first of a short series considering the themes explored at the conference, we explore the role of M&A within strategy in the IT services sector.
Over the next few weeks, we’ll post on some of the other themes explored, including:
- advice on winning new business;
- growing pains when reaching £10m revenue;
- the importance of KPIs; and
- where next for private equity in the IT services sector.
But now: M&A.
To buy or to build, that is the question
The growth strategy of certain corporates and PE-backed businesses often involves making acquisitions – indeed, ‘buy and build’ has been at the heart of many recent investments in the sector. But is it really the best way to grow?
Before even contemplating an acquisition, one needs to go back to basics and ask the question: what is our strategy? Making acquisitions can be a means to implement a strategy, but the answer “to make acquisitions” is not in itself a strategy (or at least, not a good one).
Yes, acquisitions can make sense if they deliver enhanced growth beyond what the core business can achieve on its own, or capture a strategically important asset or capability that is too costly or too difficult to build internally.
Don’t forget your day job
But acquisitions are hugely time consuming. The search, acquisition process and post-deal integration are seriously distracting from the day job of actually running the business.
In addition, one can’t help but notice that a significant number of acquisitions fail to deliver on expectations – one only needs to look at the recent failure of 2e2 to see an example of a company that used acquisitions to grow but failed to integrate successfully.
Winning hearts and minds
A difference in culture is one of the most common reasons for this underperformance. It is much easier to hire new teams into organisations than integrate existing teams through acquisitions. You must put at least as much work into the integration process as the actual acquisition itself – you need to win the hearts and minds of the new teams if the acquisition stands any chance of being successful.
One simple way to check whether cultures will fit is to compare the formality of business processes – do the target’s employees simply phone their friends in other departments to get things done, or is there a formal process documenting the steps required? Successfully merging two businesses with different outlooks on processes is no mean feat.
So the next time you review your strategy…
The first choice should always be to build internally. If that’s not possible, or the rationale for making an acquisition is sufficiently strong, then buy – but buy judiciously.
Our IT Services conference was held at the Soho Hotel, London. Panellists were:
- Charles Cameron, Chairman – CloudXL
- Carmen Carey, CEO – ControlCircle
- Glenn Carroll, Business Development Director – Selection Services
- Mark Fowle, CEO – Attenda
- Etienne Greeff, MD – SecureData
- Mark Howling, CEO – Pulsant
- Tom Kelly, Former MD – Logicalis UK
- Dominic Monkhouse, MD EMEA – PEER 1 Hosting
- Jonathan Steinberg, VP Global Strategic Alliances – Level 3 Communications