A M&A team to call yours

This Is Money - 06/01/2016

By Flavia Galembeck

Retraction of investment banks and cost cutting make companies with buyer appetite invest in their own mergers and acquisitions teams.

The scenario is improving for those who work with M&A projects. The fall in companies prices due to the slowdown in the economy and the favorable exchange rate for international buyers allowed the completion of 210 deals in the first quarter of the year, up 10% from the same period last year. By 2015, mergers and acquisitions teams could celebrate a slight recovery in business after a period of lean cows.

But the 2016 movement has something different. The layoffs made by investment banks last year, and smaller companies willing to participate in the consolidation processes of their industries, have made midsize companies give themselves a luxury once restricted to the largest corporations: set up their own M&A team.

A good example is that of health care operator NotreDame Intermédica, who set up his team in 2015. Recruiting company buyers was one of the first steps taken by mining company Irlau Machado Filho to take over the company following its acquisition by the fund investment in Bain Capital in 2014.

Since the creation of the department, NotreDame has acquired two competitors. The Santamália Saúde Group, in ABCD in São Paulo, and the Family Hospital in Taboão da Serra, also in the metropolitan region of São Paulo. They were the first purchases in the group's 48-year history. "We evaluated that it would be easier to have a team of internal analysts, even for the speed that having a team dedicated to it provides us," says Machado. "Our growth goals are bold and it's essential to have a focused team."

In mid-May, the contract was signed for a third acquisition, of a hospital in the metropolitan region of São Paulo. As a good Mineiro, Machado hides the details. All four professionals in the NotreDame Intermédica's M&A team responds to the New Business Director.

This was also Dasa's diagnostic services strategy, which this year hired an analyst from an investment bank. Questioned, Dasa did not comment on the matter.

Agility and focus are important advantages to justify hiring these executives. Another factor is the economy. Buying a competitor with the advice of a financial boutique or an investment bank can cost from $ 3 million to $ 5 million. Thus, a company that closes three businesses of $ 100 million each in a year can spend up to $ 15 million. In businesses with larger companies, the compensation can be calculated as a percentage of the transaction value, generally 3%. "If the company defines that it will grow by acquisitions and can maintain an internal team, I recommend it because it is cheaper and offers more quality,says André Pimentel of Performa Partners consulting. "A third party, as an outside consultant, adds value by planning the financial side of the operation."

This calculation also applies to small acquisitions, as is the case with most targets of the Senior Solution, a technology and services company for the financial sector. Senior invested R $ 2.2 million in a recent acquisition, carried out entirely with internal personnel. If it had turned to external advice, the invoice would not leave for less than R $ 300 thousand, almost 15% of the total. "We hire advisors for specific cases, but in general internal work tends to be faster, cheaper and more assertive," says Thiago Rocha, Director of Investor Relations, an area to which the M&A department with three professionals is subordinate. The team was established in 2013 but has recently won a manager, which shows that the shopping season is far from over.

Other competitors in the industry go the same way. The creation of an internal department for mergers and acquisitions is being evaluated by software company Consinco, in Ribeirão Preto (SP). Of medium size, the company plans to earn R $ 55 million this year and claims to be one of the leaders in technology for food retailing, with a 35% participation among networks that generate more than R $ 1 billion per year. To expand its operations to small and medium-sized food companies, CEO Flávio Barros wants to go shopping next year. "My favorite model is to set up an in-house team because it brings more sticky business, but we have not made the decision yet" , says Barros.

The manufacturer of led lamps and luminaires, Taschibra, made its first acquisition this year without outside help. Taschibra so enjoyed the experience that he decided to create his own M&A team.

Traditionally, mergers and acquisitions are concentrated in the second half of the year. Companies take advantage of the first six months to strategize and search the market for opportunities.

Veteran buyer, education company Kroton set up its team in 2009, when acquisitions have become one of its main growth drivers. With the exception of the merger with Anhanguera in 2014, which involved nine consultancies, the seven acquisitions closed since 2010 were carried out end-to-end by the internal team. "Normally we only call a bank when we want capital, or when the acquisition involves new operations on the capital market," explains Frederico Brito e Abreu, Kroton Group Vice President of Finance.

The team keeps busy. To close the seven deals, dozens of targets were analyzed and there are about 50 universities on the radar, "says Abreu. "We discard much more business than it does because we are focused on what is best for the company," says Fabio Panhoni, Director of Kroton M&A. "There is no variable remuneration for the internal team." This is an important point in favor of setting up own teams: as investment bankers only earn if they meet targets, they will be more inclined to prefer closing the deal. With a team of its own, interests are aligned.

The six people in the department are expected to have a lot of work in the coming years. According to Panhoni, private colleges that do not belong to any group concentrate 64.1% of the higher education market in the country. "We have been in great demand, especially by groups from the North, the Northeast and the Midwest, who are having financial difficulties for account of changes in the Student Financing Fund, "says Abreu. The work must be intensified with acquisitions of elementary schools, something that is being evaluated by the group.

According to Pimentel, from Performa Partners, another advantage is the flexibility of this manpower. Companies have set up temporary M&A teams and reuse professionals after the end of the M&A cycle. According to the executive, merger and acquisition operations are expected to intensify in the second half of 2016, due to the poor financial situation of a large part of the industry, medium-sized retail and tourism sectors, as well as opportunities in Health Care Services.

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