Opinion: The five golden rules of pre-M&A
2013 could be the year when the industry finally starts to truly consolidate, but be warned, it's also too easy for M&A to be done for the wrong reasons. Consultant and former UK managing director of Betfair Peter Marcus presents the five golden rules that need to be answered before any prospective M&A deal.
Before you start any kind of M&A activity you need to answer a number of crucial questions.
According to investment bank Digi Capital M&A in egaming hit a record US$4bn in 2012. While this shows it is hotting up, transactional volume actually dropped by 27%. In effect there were fewer, but larger deals. This year we have already seen William Hill and GVC Holdings successfully acquire Sportingbet, William Hill’s probable buyout of its joint venture partner Playtech’s 29% stake as well as the question of what investment targets Playtech will identify next using its estimated £400m-plus winnings.
With changes in UK regulation and taxation looming and the potential impact this could have on small and medium-sized operators, not to mention regulated US poker coming on stream in at least three states later this year, this indicates to me that 2013 could be the year when the industry finally starts to truly consolidate.
But be warned. It’s also too easy for M&A to be done for the wrong reasons such as increasing share price multiples or buying revenue rather than longer term sustainable strategic reasons such as obtaining economies of scale, increasing bottom line revenue, entering new markets or buying expertise. Too often I hear the question, “Now we have bought the business what do we do with it, how do we operate and what should the integration plan be?”
Operators spend months negotiating the finer legal points around M&A yet spend very little time before the deal is done contemplating an integration plan.
Having directed two large and complex integration projects I’ve devised five golden rules that need to be answered before any lawyer even starts to look at a prospective M&A deal.
- Know what you are buying: You’ve seen the numbers, spread sheets and due diligence but what is the culture like? What brought the company its previous success, and can that continue? What’s the history and reputation of the company? Is there more than a database on offer? If you can’t answer, don’t buy.
- How much is the target company really worth? Why do people still look at Gross Gaming Revenue (GGR) as a metric? Never accept the answer “we spent a lot of money on branding 18 months ago, we now have a good loyal customers base with great retention so there’s no need to spend at that level going forward”. It’s not true the cycle will turn and your metrics will all go the wrong way. In essence does the company’s valuation have any resemblance to future reality
- What’s the M&A strategy? Do you want to grow in a specific market? Do you need a product you don’t have? Do you need marketing expertise and what’s your brand strategy going to be? More importantly, can you cut costs and make the company more efficient and increase bottom line revenue? If so how? Will buying a company fix your company’s problems or is it more of a quick Band Aid job?
- Can you integrate and if so how long will it take? It all starts with technology. Be realistic if, how and when you can merge IT then add another year. Staff and process integration is slightly easier but still fraught with problems and can only really start after the technology has been fully integrated. You must pre-plan a staff retention strategy on both sides. If not, then you will lose the good ones first.
- Don’t try and integrate by yourself bring an expert in: The COO, CTO, CEO or a project manager are not best placed to manage integration. Core revenue will be impacted and they don’t have the time, they don’t have the expertise and they are bias to one side of the deal. Use the services of a gaming integration director and team. They have done it before, know the issues and are able to independently assess the structure, facilities, employees and brands of the acquired business as well as the buyer, can recommend the best future structure and strategy and oversee the actual integration.
By following these five rules I believe that the longevity and profitability of our industry can be assured no matter what regulation and taxation is thrown at us.
Peter Marcus is director and principle consultant for The Marcon, a consulting company specialising in strategy, specialised project management and integration within the online gaming industry and is the former chief operations officer for William Hill Online and UK managing director for Betfair.