Valerija Liege: Buying a company as a way of mitigating risks

Times of uncertainty and change are often said to be times of great opportunity. The range of possibilities in such conditions is significantly expanded by the ability to rationally assess the situation and predict some of the most likely development scenarios without getting lost in the huge pile of information and assumptions. In the context of strengthening the competitiveness of companies, this time is suitable to prepare for the next cycle of economic development.

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This means diversification of risks and expansion of operations. One of the ways to do this practically is to buy companies. And Latvian businessmen have begun to understand this – since I have been managing the M&A consulting business, for the first time I have come across such a strong desire of local companies to buy businesses abroad.

Acquiring a company helps to distribute, or diversify, the company’s income, creating a larger customer base and reducing dependence on a few large customers, as well as increasing the range of services and products. When buying a company, there is an opportunity to improve efficiency – fixed costs can be reduced by combining a series of so-called business support functions that create a better profit margin. In addition, the scale of the company’s operations is a serious argument in negotiations with suppliers, customers, banks, because it stabilizes the company’s financial situation. Competitiveness is also improved by the fact that the acquisition of a foreign company reduces dependence on the risks of one specific country (not only war and conflict situations, but also risks of the legal environment, economic development, competition in the specific market, etc.). Namely, acquisitions and mergers are a way for a company to become more stable and competitive. In addition, acquisitions of direct competitors reduce competition in their markets and help maintain a more stable market share.

Latvian companies in the M&A market: this time in the role of buyers

Speaking of Latvian companies – buyers of other companies, it must be said that already since last year there has been a strong interest in investments in similar profile or competing businesses in foreign countries. This year, until the conclusion of the contract, we have already successfully completed two such acquisition transactions, where the buyer is a Latvian company: one related to the payment processing business, the other – to the online gaming business. Target companies are located in Portugal and Cyprus, but also in a number of Western European countries in our “Oaklins” Colleagues of the global team select several companies for potential buyers from Latvia.

Why now?

Why is this a good time to buy a company? First of all, due to geopolitical risks, it is good that part of the business is located further from conflict and war zones. Although we ourselves are aware that as a NATO member we are not directly threatened, in the eyes of cooperation partners and customers, companies that have secured themselves against geopolitical risks and develop business also in one of the Western European countries or elsewhere look better. Namely, investments in other companies show healthy foresight.

Secondly, comparing Latvia with countries outside the European Economic Area (EEA), we still live in a world of relatively lower interest rates. This temporarily increases our competitiveness in transactions and improves returns. Thirdly, various types of financiers (both lenders and capital funds) are looking for good investment opportunities for their capital, and M&A transactions are a good opportunity for investment with a clear return. Which markets are invested in depends on the specifics of the specific company’s activities, goals, as well as past activities and other factors (experience and contacts of the owners and management team abroad, location of existing customers, suppliers and other partners in the world, ability to export their goods/services , opportunities to find or retain good managers for business abroad, etc.). On the part of Baltic companies, we feel interest in investing in Western Europe – such a choice is motivated by lower geopolitical risk, wider markets with wealthy buyers, a single currency, transparent and stable regulation, as well as good protection of the rights of entrepreneurs. And this interest is specific not only to the technology sector, but also much more broadly, including manufacturing and retail.

From idea to contract: 3 main stages of M&A

When characterizing the company acquisition process in a focused way, we should talk about the three most important stages. First, the owners and management must first have a clear vision of their business strategy and goals in the coming years. The M&A strategy and the purpose of the transaction should be synchronized with the development of the core business – in the future, the buyer will have to manage and direct the purchased business, not the other way around. An M&A consultant can, of course, help prepare this very first step as well, together with the owners and management identifying the suitability of the acquisition of another company in the development of the existing business. When the vision is clear, it is necessary to find out the desired geography of activity of the acquired companies and identify the desired range of products and services that the buyer wants to add. In the first stage, the possibilities of financing such a transaction should also be realistically assessed – in addition to the existing financial resources, it is necessary to understand the possibilities of attracting financing from a bank or an external investor, taking into account also the future cash flow generated by the company. The opinion of a professional financial advisor would certainly be useful here, preferably one who has experience in organizing M&A transactions and will be able to see financing opportunities for the transaction where others would not notice them.

The second stage is the creation of a list of companies that meet the mentioned criteria, as well as the creation of a transaction strategy. Publicly available information on target companies should be ascertained and negotiations should be initiated. This is the only way to get sufficiently high-quality and detailed information and make an informed decision. It is better to entrust the realization of this stage to a professional M&A consultant, who will know how to properly start negotiations so as not to destroy the possibility of a deal at the very beginning.

The third stage – negotiation and transaction. After the second stage, the buyer usually makes an indicative price and transaction terms offer to the target company and, if satisfactory, agrees on the further course of the process. Then the in-depth research of the company begins, within the framework of which the buyer requests, searches and checks all the necessary information to make a final decision on making an investment. After that, the buyer reconfirms his offer according to the results of the in-depth research. If the parties agree on the terms of the transaction, a share purchase agreement is agreed upon, which includes additional transaction negotiations. Finally, various final procedures must be completed in order for the buyer to become the owner of the target company – acceptance by the competition council, payment of the transaction price, registration of the new owner of the shares in the commercial register, etc.

In terms of time, all three stages can take a year or more together, in special cases we have conducted the entire process in six months or faster, but it requires existing M&A experience for both the buyer and the seller. However, the most important thing is not how long the negotiations and preparation for the deal will take, but the time when the decision to start this process is made. It should not be delayed – if there is a feeling that the company is ripe for the next step of development, the first and most important step must be taken – the decision to act must be made.

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