Whether you’re a small business owner or CEO of a major corporate, continuing consolidation in the IT industry is bound to affect you one way or another. Those who have been through the transition all agree on a simple principle – when it comes to acquisition the whole must be greater than the sum of the parts.

Amassing bulk to go offshore.

Phil Norman, managing director of Nortek Management Services, is something of an expert in advising businesses on mergers and acquisitions.

Norman describes the local ICT sector landscape as fragmented. Although there’s no shortage of innovation there are problems with commercialisation and lack of capital, he says.

“Young tech businesses are forced to look overseas much earlier in their life and that’s difficult because most don’t have the resources or expertise to step offshore.”

As Norman points out, New Zealand is dominated by SMEs and says some young companies need to get realistic about the need to bulk up to gain an economic return.

“They shouldn’t be too precious about continuing to own 100% of the company because if they don’t get market access offshore then they’re pretty restricted by the local economy.”

By aggregating, says Norman, a company can attract capital, develop a presence and go offshore with more ease than a small founder-based entity.

M&A activity locally.

While there has been some activity in New Zealand Norman says it’s nothing on the scale seen overseas.

He believes the local market is different because the big players looking to gobble up smaller businesses just aren’t here.

“We did see Telecom drive a lot of interest when it was in acquisition mode and it has subsequently had a big influence on the market through that activity.”

However recent consolidation has seen Connect NZ merge with Able Business Machines, Complete Solutions merge with Datagroup Solutions, Argent Networks buy Australian company Integration Management and Cogent snap up GDC’s voice division.

Buying

Thinking of going on the acquisition trail? Keep in mind the path is littered with failed attempts because people have overlooked some very basic points.

- why are you looking to acquire? Is it customers, technology, to take out a competitor or access a new market?

- an acquisition needs to complement existing organic growth plans

- carefully research potential acquisition targets. Understand who is out there and understand the value equation

- think about industry changes. If you think about the telecommunications market right now it creates some interesting opportunities but it also creates price and value expectations on the part of some players that might have been thinking about selling.

- consider the timing and approach. The end of the year is a good time to approach a business owner because it gives them time to have a break at Christmas and reflect on what they want to do.

- think carefully about how any acquired business would be integrated into your current business. It requires a substantial, dedicated effort and you need to commit senior resources to it.

- how will the integration occur? Will it be tight or is it going to be more hands off approach where you leave the entities as stand alone?

- product integration issues - do you leave competing products in place?

Retain customer satisfaction.

According to Norman there’s not a single answer to customer satisfaction. Each case is different but it is essential to be open with customers and have a solid migration plan.

“A lot of it is common sense. If you have strong management on both sides and good communications with customers then it’s just a matter of managing the transition,” he says.

Selling.

If, on the other hand, you’re looking to take advantage of the consolidation trend and exit the business world here are some key points to bear in mind.

- plan well in advance. As an owner think about what will maximize the sale value. It’s usually strong revenues, strong client base and solid ebit (earnings before income and tax).

- make sure you can get through due diligence. A lot of small businesses don’t keep their records well but it has to be up to date and reliable. If there are things that need to be tidied up you need to allow time to do that.

- always be on guard and ensure you have more than one option. If you can get another player or two in the mix then so much the better.

- if you are intent on selling it’s not a bad idea to develop outbound communication strategies – you might start doing more PR just to get noticed.

- - it always helps to use a trusted advisor to develop the sale strategy and manage the process. They should be help you structure the deal – is it an all cash deal or a mix of shares?

- make sure you consider your personal position as founder/owner quite carefully. Do you want to stay involved or exit completely? Do you want to open another business? When you sell your business your position of influence will decline markedly and you have to think about that. Often it can be a frustrating experience if you’ve lost that influence and you still have a substantial shareholding.