What is attracting M&A? Etienne Greeff talks investment trends at CRN XChange

Greeff told the audience what pitfalls they need to avoid during day one of CRN’s two-day services provider conference

CRN is currently at its inaugural XChange UK leadership residential conference bringing together top solution providers and IT decision makers.

Flow Communications UK CEO Etienne Greeff opened day one of the event in a fireside chat focusing on M&A - what are the trends and the pitfalls?

He revealed what he himself is looking for on his M&A journey, which is focusing on Microsoft managed services partners.

"Whether you love or hate Microsoft, I think they will play a major role in our space.

"This mini enterprise, Microsoft managed services space is really interesting."

How to prime yourself for M&A

Greeff outlined his five key things that are attractive in the market to catch the eye of a potential buyer.

"First of all, recurring revenue, and I'm using my words carefully. It used to be recurring revenue, which is managed services, which is fine. And of course, it will continue to be extremely attractive, managed services which is occurring every year," he told the audience.

"But in a new cloud world of hyperscalers, you also get recurring revenue, which means effectively reselling someone else's stuff, but you add consultancy services on top of that.

"So I think recurring revenue is a really important metric."

Greeff's second point revolved around size, conceding that, if something isn't interesting from a size point of view then, a company should look to bolt-on additional smaller businesses.

"The third thing is the market that you're in," he continued. "Nobody wants to buy a computer project because then what value does that add?

"Take property investors for example. They don't want to buy a completed house, they want a fixer upper because they can add value to it.

"So really, in the market game you need to understand this runway in the market, so they can add value on top of that, so that maybe in three or four or five years' time, they can then either sell it on or realise the potential of that unrealised value."

His fourth point touched on a topic which continued to crop up throughout the day - talent retention and growth.

"Within a resource-constrained market with wage inflation running riot, the whole school of buying people, in other words, buying lots of salary, paying high salaries to attract the people - that's not working anymore," he stated.

"It's about growing your own talent then illustrating to a potential acquirer that you can take someone junior and grow them through the ranks.

"That brings me to my last point, and this is perhaps the most important thing, if you can't demonstrate, if you can't measure and demonstrate to a potential acquirer, it doesn't matter.

"You can talk about growing talent, recurring revenue, land and expand and selling to customers.

"If you don't have KPIs and metrics that you measure and put in front of a potential buyer, that doesn't matter.

"So it's not just about having a strategy, saying this is what we're going to be able to do and demonstrate it and measure it. So if your plan eventually is to be in an M&A process then start measuring your metrics early."

M&A pitfalls to avoid

During his more than 20-year tenure Greeff admitted to witnessing the perception that "private equity is the devil."

"That's not true. I don't think that's right. It just depends on what you want to do as a business leader," he said.

"If your goal is to scale your business out I think PE is a good platform for that.

"You need to decide what it is you want to do. That's the most important thing.

"I think the biggest pitfall that I see is that people don't really clearly think about why they embark on the journey and what good looks like.

"Because once you've answered that question, then you can ask all the different questions like do I buy small businesses? Do I buy a platform? Do I invest all my time and in creating something interesting that's potentially interesting for a PE house?

"So I think, for me, that's the biggest thing that I find not a lot of people really seriously think about."

What's changing in the market?

The Flow CEO believes the market is going to start to see an increase in "distressed M&A".

"Companies that aren't doing as well so valuations will start coming down and people maybe getting to the end of their career in the business will say, ‘you know what, let me just sell'.

"What I am seeing is that some of the bigger private equity houses, some of the big investment funds are coming into our space," Greeff said.

"So I think we're going to see a lot more mega mergers that will come up."

He added that in the shorter term there will be a shift in balance towards private equity investments in supply as opposed to strategics owing to people looking to "batten down the hatches".