Acquisitions, Overseas Expansion & Product Development

The past two years belong in the record books. UK GDP has been in decline for six consecutive quarters (the longest recession since records began back in 1955) and consumer confidence has hit lows not seen since the early 1980’s. This however is in the past, and while debate still surrounds the timing and shape of the economy’s recovery, professional consensus indicates that the worst is probably behind us.

Top business leaders seem to find the good in any situation. Over the past two years many of these prudent leaders have used the downturn as an opportunity to look inwardly, refining operations, solidifying balance sheets and redefining their business models to align with the new environment. Those who have succeeded in this will find that the downturn now presents a very real opportunity to gain long-term competitive advantage. Richard Punt, head of strategy practice at Deloitte UK, the accounting and consulting firm, believes “This could be the age of the large company,” he says. “Those that have assets and capabilities and access to capital have lots of advantages. The question is whether they can be innovative and apply that to new ideas.”

This article looks at some of the areas where these opportunities may present themselves.

Acquisitions
Mergers and acquisitions have been scarce recently, in part due to a reluctance of businesses to look at such transactions and the need for a realignment of price expectation from vendors. But, Mark Thomas, head of strategy and marketing at PA Consulting Group, a management firm, says: “There will be lots of weakened companies and ... next year, there will be another rash of consolidation.”
First, though, he says companies need to do three things: retain liquidity, by sensible and prudent management of their balance sheets, invest in the strong parts of their business and avoid the temptation to prop up the weaker; and adapt their goods and services to changing patterns of consumer behaviour.

Ian Stuart, Managing Director of Barclays Commercial Bank, offers his opinion, saying “There are not many bargains at the moment, but during the course of the next two quarters, large corporations will sell businesses that no longer fit their model”, creating an opportunity for those who have done their homework to expand their business. Ian builds on this point by highlighting that while there are opportunities, he is advising clients to first of all make sure their due diligence is good, that the acquisition fits well, and that cash flow is sufficient to service acquisition cost.

Beyond M&A the current market offers other acquisition opportunities. Many businesses find that the weak property market presents growth opportunities that were previously out with their budget. Similar to previous downturns, this period has seen a sharp decline in plant and machinery investment, a symptom of cost cutting. In some circumstances large expensive fixed assets are now cheaper than they were previously. Rather than allowing maintenance costs to ramp up and run the risk of disturbing your production cycle, this may be a good time to look at asset purchase.

Overseas Expansion
Manufacturers are at their most optimistic for 14 years about selling goods abroad, according to the CBI employers’ group. Until recently, the weaker pound, down by more than a quarter against other currencies over the course of the financial crisis, had merely caused exports to fall at a slower rate than imports. But in the third quarter, the value of exports started rising for the first time in a year, a sign that British exports can benefit from a pick up in economic activity around the world.

Don Sull, professor of management practice at London Business School, fears (British) companies are unprepared for the possibility of perhaps five to seven years of slow growth. Not that this means they should be timid. “Often the golden opportunities come in the worst of times, in terms of asset prices, picking off weak competitors, serving shifting consumer needs. It is disastrous to get into a defensive crouch and just wait for the pain to end.”

Some business leaders have anticipated this period of tighter revenue in the UK market and have consequently looked abroad for superior margins and growth opportunities. One example of this is David Martin, chief executive of Arriva, the bus and train operator. Arriva already derives half its revenues from continental Europe, where it operates in 12 countries, and Martin says there is “a massive opportunity for us as long as we get our basics right and our capital structure right and have our funding lines in place”.

Germany, Italy, parts of Scandinavia and Eastern Europe look promising. “Three years ago I said revenues from overseas would double within five years, and they have doubled within three. There is no reason why that can’t continue,” Martin thinks the danger for businesses is becoming too cautious. “It is okay that there is a drive for a reduction of costs and taking out the fat that has built up, but if you do not keep looking forward, there will be a danger of becoming risk averse. You’ve still got to have the courage to take the opportunities, against robust criteria,” he says.

UK Trade & Investment (UKTI), the government’s support service, is encouraging companies to export more, arguing that “economic research consistently shows companies that export to any country, in any financial climate, perform better than those that don’t”. Exporters have proved more resilient during the downturn, it says.

Lee Hopley, head of economic policy at EEF, the manufacturers’ federation, says “It can be difficult for smaller companies to get the access to contacts they need, she says, but UKTI is a good place to start for market information or more tailored advice and guidance”.

Product development
One item that usually finds its way onto the ‘budget cut’ list during a downturn is product research and development. Whilst understandable, this needs to be carefully considered. Research and development is not only a key part of differentiating yourself from the competition but also of staying close to customers and ensuring that the products delivered fulfill their current and future needs.

Sir David McMurtry, chairman and chief executive of Hi-Tech manufacturer Renishaw highlights that “All our growth is going to come from new products and we are launching quite a few in the coming year,” Sir David says. These range from control systems for making wind farm gearboxes to encoders used to make solar cells. Climate change, he thinks, will have a big impact on the post-recession world. As things pick up, the biggest danger a company faces is an inability to supply.

The key to recovery for individual firms will be about having the right products available to market at the right time. Those businesses that seize opportunities with new and innovative answers will be best placed to make the most of the recovery and subsequently well positioned to exploit other opportunities.

Barclays
At Barclays we take our responsibility to lend extremely seriously. We have continued to work with both existing and new customers over the last year - by way of illustration, between January and September 2009 we advanced £11.8bn in new facilities to businesses in the UK.

We remain keen to work with customers, both old and new throughout all sectors. Our industry aligned Relationship Directors have a wide range of products and specialists that they can draw upon in order to deliver solutions to our clients, whether the need is for straightforward transactional services, through funding for asset purchase or acquisition.

Please visit our page on the ‘Business Support Network’ link (See below) to find out more about these services.

Remember “Golden opportunities often come in the worst of times”

Further Information

• https://www.bpf.co.uk/BSN/Commercial/Barclays_Commercial.aspx

• http://groupspaces.intranet.barclays.co.uk/sites/LargerBusinessMarketing/FT%20Page/surv_RTR100_pages.pdf

• http://www.barclays.co.uk/business/manufacturing/index.html

Or please feel free to contact Philip Bidwell – Relationship Manager
Mobile: 07775551209 E-mail:[email protected]

Disclaimer
This commentary is generic and may not suit all circumstances. Before taking any action, we recommend either contacting your treasury manager or obtaining independent financial advice. The information in this document was obtained from sources believed to be reliable but its accuracy and completeness cannot be guaranteed. Neither Barclays group, nor any officer or employee thereof accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. Barclays Bank PLC. Registered in England and Wales (registered no. 1026167)Registered Office: 1 Churchill Place, London, E14 5HP, United Kingdom. Barclays Bank PLC is authorised and regulated by the Financial Services Authority.