The Merger Factory

United Business Media has been a major player in the international media scene for years. The FTSE 250 business previously owned majority stakes in channel five and Express Newspapers. Since 2002, however, it has rationalised its operations by shedding its prestigious 'old media' investments and concentrating on the events and digital B2B information sectors. The strategy has worked; the company has integrated over 70 new businesses with a turnover of £800m and pre-tax profits of £176m.

Nigel Wilson has been CFO at UBM for five years. For him, identifying, structuring and integrating acquisitions have become the drivers of the company's growth in recent years.

"We've managed to create a lot of value through buying and selling, which is rare in corporates," he says.

The system has been developed as a team effort with much input from Andy Crow and Neil Mepham. It has been effective from day one, reaping dividends as UBM's acquisitions function is able to identify and execute deal after deal. But how does Wilson measure whether the deal has worked?

"We set a very simple, transparent financial target, by which we calculate the cost of capital at 8% and set the target of achieving an 8% post-tax return in the first full year after acquisition," he explains.

The UBM approach involves setting benchmarks so that whenever an acquisition is mooted, as part of the process, the deal origination teams – led by Richard Kerr and Scott Mozarsky – must provide Wilson and David Levin with a detailed post-deal document in order to set KPIs by which to measure the deal's progress.

"I think that's where lots of acquisitions go wrong," Wilson says. "We then review that after two months with what we call a light touch internal audit report, and the audit team will go in and say: ‘This is what you said you'd do, what have you actually done?'"

Following this routine enables the UBM dealmakers to pinpoint any mistakes and ensure best practice on M&A is passed throughout the organisations.

While a lot of this expertise is constantly growing and evolving, a lot of the more strategic direction comes from Wilson himself, a man who does have a long history of dealmaking. As part of Dixons, one of the 80s success stories, he's seen the best and worst of M&A strategy.

"We had the right strategy at Dixons – a great business in the UK, so we thought 'let's expand in the US'," he remembers. "The best one to buy at the time was Circuit City, the second was BestBuy. Eventually they bought Silo and it took them ten years to fix the mistake. Ultimately they ended up having to sell it. Looking back, the right thing to do was to buy one of the first two and focus all your resources on making a success of it."

This is a method UBM now uses. To stay ahead of the game in the modern, fractured, technology-heavy media world is too much of a task for large corporates to carry out in-house. While UBM values innovation and drives best practice from within, it also recognises that it simply can't keep up through internal research and development alone. So strategic acquisitions are a must, but they must be handled correctly and not pursued for the sake of it.

"It's not good buying things that don't fit just because you have surplus capital available," Wilson says. "That just doesn't make sense. If we have capital left over then we give it back to shareholders. We don't see having excess capital as a sign of weakness. And we've been transparent about that; let's not let the money sit in the bank earning 3-4%, but give it back."

It's a people business

From the extensive experience that Wilson and his UBM team have gathered over the years, certain procedures are now commonplace when structuring the deal. Chief among them is making sure the right people are retained when a business is acquired. The sorts of companies UBM acquires tend to be owner-managed businesses with considerable intellectual property embedded within the key people.

"We've got lots of systems that help us post-acquisition," the CFO explains. "We're very focused on ensuring the right people stay. We'll often put earn-outs in to lock in the best people and give us time to transition the business. And most of the deals we do are largely bolt-on acquisitions with a high return on capital built into them and there's a lot of headroom; so we're not betting on new technology, paying out on multiples and taking a gamble."

But what about when things go wrong? That 80% failure rate is an ever-present elephant in the room, and UBM, despite the expertise and experience generated over the past few years, is as vulnerable to the same pressures as everyone else. Wilson takes a philosophical view: "We've only really had one go wrong and that was our fault," he remembers. So what went wrong?

"We try and see as much of the management as we can to make sure there are no issues and that the chemistry is right. We'll sit in on the management presentation so that we can quickly see if there is any friction or tension and test the management capability. We made a mistake once where instead of equalling two, one plus one equalled minus five. And that was simply because it was a new / old media thing and it imploded."

Intriguingly, Wilson sees parallels between his in-house deal team and private equity (PE) houses. Given that UBM has a war chest and is driven by the need to spot and drive acquisitions in order to grow shareholder value, the similarities (and some attendant differences) are clear to see.

"PE still has to be aware of the stakeholders. The issue for us is that our shareholders rotate. If they don't think we're doing a very good job then they will sell us. There's liquidity in the shares. For PE, they have to wait for a liquidity event. And if you look at the PE business model there's a huge difference between the mean and the median. The median return is very low because there are few with massive returns."

For UBM, however, the variations in ROI are much smaller. With shareholders to keep happy and the City in constant touch with the executive team on how deals are implemented and integrated, demonstrating any given acquisition is paying for itself is crucial. "Our deal-return figures are much closer together and the distribution is very different because we're not betting on red and we're not putting in huge amounts of leverage, but simply trying to get our 8% plus tax," says Wilson. And so far, it's working well.

"Last year we produced 13.1% pre-tax return on capital. The distribution around that will be narrow unlike private equity, which will probably be all over the place." Clearly the private equity model will see a very low median number while the mean is much higher. But with the credit crunch taking hold, private equity may well find that the good times are harder to maintain with lenders squeezing rates and trade sales becoming more difficult to get away with. Something UBM will be keeping a weather eye on, no doubt.