How to assess a product? The M&A processes at TX Markets
TX group has acquired a bunch of products in various fields: marketplaces like Ricardo, classifieds like homegate or jobcloud and ventures like doodle.ch, but also financial services like neon. What makes a product worthy to invest in? When and how does the corporate management decide to invest?
Here’s how the M&A process works at TX Markets on the example of an actual assessment of a possible transaction
We talked to Georg Schumacher about the assessment of a company in a small European country, which the M&A team carried out together with many stakeholders of TX markets.
The previous owner of the company was a private equity firm that had reached its typical 4-year ownership time span and wanted to sell the company to make a profit. "That's why we had this company on the radar for a long time already," says Georg. He knows the bank that represented the seller well and so he knew that the company was being sold even before it was officially announced. Therefore, Georg and his team were able to consult internally at an early stage and had discussed the opportunity with Christoph Tonini and Christoph Brandt beforehand.
The company that went on sale is a market leader in its country. And although the market is very small, it is promising because it serves a large share of the market, and is highly profitable. Overall, this was an opportunity that fitted well in the strategy of TX Markets, and consequently, we decided to participate in the sales process.
At the end of November, the M&A team received a first information deck with the highlight information about the company. Based on this information and his own research, Georg then prepared a document for Tamedia's management board. After the pitch to the management, the decision from the board of directors was that the TX Markets should submit a non-binding offer.
What is a non-binding offer?
A non-binding offer is an expression of the buyer's interest in the company and includes a lot of details on a possible transaction - most importantly, the price that the bidder is willing to pay. The non-binding offer is given usually towards the beginning of a sales process and can be withdrawn, increased or decreased after further review during the so-called due diligence process. The company to be sold then decides which non-binding offer makes it to the next round. This is often a fierce competition and the non-binding offer must be good in order to hold out against the competition.
After TX’s non-binding offer was submitted in mid-January, the M&A team was informed that it had entered the next round and from then on the project was really taking off. As the next step in every M&A transaction, a due diligence is conducted.
What is a due diligence?
A careful examination of the company that TX Markets would like to invest in or buy. A due diligence is usually divided into the same topics:
- Technology (important: are there any technical debts that need to be settled over a number of years when a company is bought?)
- Product (this is handled by the PUX team)
The central departments of Christoph Brandt provide direct support at the due diligence in their areas of expertise. Further areas that are investigated in detail are:
- Finance &Tax
- Commercial (usually done directly by the M&A team under the direction of Andreas Schlenker)
So Georg started to set up the project. Since it was a large investment, Georg brought in external expertise: he contacted various consulting firms as a first step in the project management. He also had to coordinate experts who understand the law in the country where the company is based in order to clarify the legal issues. For financial and tax issues, TXoften works with an external auditor, who is coordinated by TX Group Finance. Georg set up a meeting for the TX Markets - internal experts at Werdstrasse.
For the internal meeting, Georg prepared a kick-off presentation in which he introduced the company and defined the objectives and set a strict timeline for future activities. The aim is to scan as thoroughly as possible in a short period of time the company that one wants to buy. And the people present at this kick-off presentation are to be understood as a task force, who are to carry out this task in the best possible way.
Each task force of the different streams scans its own areas and looks for so-called red flags, i.e in other words, absolute deal-breakers. A period of about three weeks was planned for this activity.
During this time, the seller side uploads as many documents as required into a shared folder and makes all available figures accessible so that they can be examined. During this dedicated time, the individual workstreams were able to ask the seller all questions about these documents.
The project is usually organised as follows, after the kick-off: There are weekly check-ins where the workstreams summarize what they have been looking at and if there are any important findings to share.
But in this special project from this company from the small European country we are not allowed to name, things turned out differently: After only one week, after attentively looking at the provided information, it became clear that there are already potential deal breakers in all areas.
What exactly were the problem areas the product team identified?
- Very long loading time on the mobile version of the product.
- The team size: For three completely various sub-companies there was only one product manager and one designer. A product team that is far too thinly positioned is immediately a big question mark.
- The future growth of the company seemed to be largely based on price increases that we did not fully believe were possible as planned.
- The seller was very slow to provide the requested data.
Similar problem areas were also identified in the technology, commercial and marketing areas after the first week. The overall feeling was just poor after gathering these findings.
At the same time, Georg had learned from the bank that TX Markets' offer was clearly at the lower end of the range of other offers the sellers had received.
So Georg decided to address this in the next steering committee. The decision was quickly made to stop the due diligence and not to invest any more time, as the alarms were too strong in three different workstreams.
How does the M&A process work at TX Markets in a nutshell?
1. The seller side contacts TX Markets and provides certain documents and figures
2. The M&A team reviews this information and presents these first figures to the management
3. The management decides whether to make a non-binding offer as an expression of interest.
4. The seller collects non-binding offers from various potential buyers or investors.
5. After reviewing the non-binding offers, the seller decides who will be admitted to the next round.
6. A due diligence is initiated in TX Markets. The different departments are coordinated by the M&A team and possible external consultants are called in.
What would have happened if the due diligence had given a satisfying result?
A binding offer in consultation with the company leadership of TX Markets would have followed. Here too, competition is fierce and the chances of actually becoming an investor or buyer are not always very high.
The company in this small European country was very promising and had all the external parameters that make a good company. Only on closer inspection, it became clear that there are many problem areas in the product/technology and commercial areas. A good technology and a standing team with enough manpower are essential to ensure the continued successful existence of a business. In this case, Georg concludes, too high investments would have been necessary, making the company a lot less attractive.
Thank you, Georg, for the exciting conversation!