Broadly speaking, I think that most acquisitions by listed companies come within the same parameters. An entrepreneur sells a business and in so doing will often make life changing amounts of money. The purchaser is likely to be a manager, possibly with some skin in the game. I would suggest that the former holds most of the cards in terms of fully understanding the business, especially any type of people business where due diligence may not reflect the human factor. Moreover, for the vendor the financials are really personal but for the buyer it's largely other people's money.
So what relevance does the above have? The reason I point this out is because a recent acquisition by the Vianet Group (VNET) of Vendman Systems Ltd caught my attention. Not due to its extraordinary nature but because it was so banal. It seems to fit the company in many ways. Not glamorous, not even mildly exciting but simply good management. I will elaborate:
1.The acquired company is well established and respected in its area of operation. It also has a high level of recurring income (90%).
2.The companies have been collaborating for a reasonable period of time. The buyer has clearly carried out a type of due diligence that an investigator could not. It knows the company from the inside.
3. The monies paid up-front are generous (£2m), presumably shared by the two directors, but the bulk (£2.25m) is linked to an earn-out. The team in place are motivated to make the deal work.
4. It's earnings enhancing at an early stage and not a blue sky project.
5. There are clear synergies with cross-selling opportunities.
6. Should the deal collapse both parties will get hurt but the acquirer does not suffer irreparable damage.
7. It's buying something that it obviously does not have. That is, expertise and intellectual property that would be very expensive and risky to develop itself. It's not simply buying market share. But what it's buying is potentially very exciting and leverages the business to another level.
8. It's a small manageable situation. The target company's turnover is a little more than 10% of Vianet's. No cross-border issues. No cultural misunderstandings.
All-in-all, I think that the purchase makes sense. Incidentally, I hold the stock.
Hi Long Value
It certainly looks an interesting acquisition. I owned Vianet sometime ago when it was known as Brulines, however I came to the conclusion that while it was a good income stock I just couldn't see where the growth was going to come from, hence I sold it. Based on the current forecasts the stock is not cheap, however neither is it expensive and there is a nice supportive dividend. Time to consider buying back in perhaps, but need to do a bit more homework.
Thanks for the thumbs up.
Jonno
