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A Magical Recipe For Serial Acquirers

EugEnio MoRPuRgois CEO and founding partner of Fineurop Soditic, a company of the Fineurop Group which focuses on M&A and debt advisory services. He is also a board member of Fineurop Fineurop Investment Opportunities and Emisys Capital and Chairman of Fineurop Partecipazioni. In 1984, Eugenio graduated cum laude from Bocconi University in Milan.Before joining Fineurop, he was Head of M&A and Privatizations at SOPAF, a private financial group listed on the Milan Stock Exchange. He started his career at the financial group Matuschka in Munich before moving to Deutsche Bank where he worked in the corporate finance and capital markets areas in London, Frankfurt and Milan. Eugenio Morpurgo is professor in Investment Banking at Bocconi University in Milan. He is member of the Advisory Board of Bocconi Alumni, member of the working group “Why not Italy?” and member of the AICEO association.

It is the virtuous combination in a company of family ownership together with the listing of the capital, minority and also majority. Key factors: an efficient governance and a best practice financial discipline put in place. Here are the case studies

by Pier Paolo Albricci

M&A

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Lombard: It is always said that the Italian industrial system lacks critical size and has a limited

member of consolidators, i.e. groups able to pursue an effective build-up strategy. Is this a real snapshot of the situation? Morpurgo: The Italian M&A market has been dominated by foreign investors for many years, but through a more careful review, however, we have registered an acceptable number of Italian players who were able to use M&A continuously as a growth strategy over the years.

Lombard: Which are the basic elements of your analisys?

A Magical Recipe For Serial AcquirersMorpurgo: We concentrated on non state owned companies in the industrial and service sectors, excluding banking, insurance and public utilities. The period of observation was 2010-2016. We took into account companies which performed more than 2 acquisitions in the considered time horizon. Some of these serial acquirers were able to make transformational acquisitions, others were more concentrated on a high number of small add-ons.

Lombard: Do you consider your analysis reliable enough to identify a trend in the Italian corporate mid-market?M. Our analysis is not exhaustive but it covers a

The breakdown of the Italian serial acquirors

Source: Fineurop Soditic

The industries which registered a good number of italian serial acquirers are specialty chemicals & pharma, specialized industrial manufacturing and machinery. it is interesting to note that consolidators are there also in industries which we thought, some years ago, would be the dominion of foreign acquirers, like construction and chemicals. As of the size of the deals only four exceeded €1 bn(gtech-igT, Autogrill-WDF, Salini-impregilo, Prysmian-Draka)

good portion of the Italian Champions, or the backbone of the economy that put Italy at the top of manufacturing, worldwide. We have identified over 30 firms that performed a serial and successful acquisition strategy. In the table (see next page, edn.) these groups are broken down according to industry, type of shareholding or stock listed vs private companies.

Lombard: Which are the features recurrent in this case study?Morpurgo: The industries which registered a good number of Italian serial acquirers are specialty chemicals & pharma, specialized industrial manufacturing and machinery. It is interesting to note that consolidators are there also in industries which we thought, some years ago, would be the dominion of foreign acquirers, like construction and chemicals. Half of our champions are listed, in a country in which companies listed on the exchange are definitely underrepresented.

Lombard: Another, very high percentage of the serial acquirers is family owned. This would appear to be in oppositions to Italian corporates’ reluctance to going public?Morpurgo: It is a wrong impression. In fact the

MachineryICTAutomotiveFinancial servicesFood and BeverageLuxuryOther servicesMedical devicesEngineering and ConstractionHome automation systemsConsumer productsServicesRetailGaming

Under 100€ mn

n.d. (most of them <100€ mn)

over € 1 bn

€500 mn - 1 bn

€100 mn - €500 mn

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combination of being a listed and, at the same time, a family-owned company seems to be a magical recipe. By the way, these champions have shown a successful approach to managing generational change. An efficient governance and a best practice financial discipline have been put in place: the stock listing is considered not as a result in itself but as a tool to finance growth and to make paper against paper transactions easier to achieve.

Lombard: To do what? Which are the main goals to achieve with the funds rised?Morpurgo: The majority of the deals performed by serial acquirers (70%) were done outside Italy, showing their role was more one of international rather than domestic consolidators. As we said, most of the strategic buyers into our market is coming from outside Italy. As a destination of the investments carried out by our consolidators, the UE accounted for approximately 40% of total volume. So, most of them show a global attitude and the strength to compete, even in markets very far from their headquarters.

Lombard: What does this mean in practical terms?Morpurgo: All of these companies show strong managerial capability and corporate identity. Along with the availability of internal funding and external acquisition financing this seems to be the critical factor for being a successful consolidator. In fact, no one-man-show firm is capable of integrating different cultures

The table prepared by the chief analyst

of Fineurop Soditic, Laura De gradi,

covers a good portion of the

italian Champions, or the backbone of

the economy that put italy at the top of manufacturing,

worldwide, or 30 firms that

performed a serial and successful

acquisition strategy. in the table these

groups are broken down according to industry, type of shareholding

or listed vs private companies.The

well known IMA (machines for

confectionary), Danieli (steel

engineering) and Interpump (pumps)with 11 acquisitions

in the period are the top performers as

serial acquirors, but the smaller CRIF, a global provider

of commercial information for

business purposes, owned and geared

by the founder Carlo gherardi, overcomes

the multinationals with 12 acquisitions.

Prysmian, the cable company, Amplifon,

hearing aids, and Pirelli, tires, follow

with 9 deals in the period

Listed n. deals (2010-16)

Automotive1 Adler Plastics 42 Pirelli Group x 93 Brembo x 5

Chemicals and Pharma4 Euticals 35 Industrie De Nora 66 Italmatch Chemicals 57 Recordati x 78 SOL 4

Consumer products9 F.I.L.A. 6

Engineering and Construction 10 Società Italiana per Condotte d'Acqua 311 Salini Impregilo x 5

Financial services 12 CRIF 12

Food and Beverage 13 Campari x 814 Cremonini 3

Gaming 15 Gtech x 2

Home automation systems 16 Nice x 6

ICT 17 Objectway 418 Reply x 819 TeamSystem 820 Datalogic x 3

Industrial manufacturing 21 Emak x 422 EPTA 423 Guala Closures 524 Interpump x 1125 Italcementi delisted 226 Ariston Thermo 727 Prysmian x 928 Saes Getters x 229 Valvitalia 3

Luxury 30 Luxottica x 11

Machinery 31 IMA x 1132 Danieli x 533 Coesia 6

Medical devices 34 Amplifon x 935 Diasorin x 4

Other services 36 Gi Group 537 Rina 6

Retail38 Autogrill x 5

Services39 Gruppo Argenta 4

Total 19 224

The ranking of serial acquirers

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and a owner style very much conflicts with an efficient build up strategy.

Lombard: That could be a result of some Private Equity heritage?Morpurgo: Some of the mentioned champions, approx. 18%, are owned by private equity investors, not in a proportion some would expect. In any case, some of the now stock exchange-listed acquirors have a kind of this heritage, i.e. a private equity investor accompanied the firm in a previous stage of its development, leaving a financial culture and a certain respect for the market rules, even in the small and midsized companies. In fact the number of mega deals was very limited, fully reflecting the characteristics of our M&A market. Most of the

serial acquirers performed transactions under €100 mn.

Lombard: How could the number of top Italian consolidators be expanded over the years, and gain further market share and competitiveness in the international M&A arena?Morpurgo: Average size and availability of funds, mainly in the form of equity, should grow, along with stronger international management skills. In this scenario we believe that the role of private equity-either in a majority or in a minority position, can be very important in promoting a consolidation strategy and pushing the champions of tomorrow.

Lombard: But private equity funds are mostly focused on the sizeable deals and

privilege majorities that often exclude the founder or the entrepreneur’s family from the management. That could be a risk for the operations?Morpurgo: Private equity can be done not only in the form of a traditionally structured fund but also through investment companies, clubs of investors and family offices. In particular we see a growing role for family offices in the private equity arena, providing an ideal combination of industry expertise and entrepreneurial spirit.

Lombard: And what do you think of opening up the capital by listing of the company?Morpurgo: IPOs can give an important impulse to external growth, not only in terms of additional funds but also for the educational angle of this status with its implied transparence and efficient governance. For this purposes we deem the SPAC vehicle to be a very convenient instrument for the Italian market and for helping the growth of our SMEs.

Lombard: What are the pros of this thecnique?Morpurgo: SPACs are an accelerator of the IPO process and they reduce market risk, i.e. they make going public not dependent on stock market volatility. A SPAC gives the entrepreneur certainty about the IPO price, avoiding withdrawals at a very advanced stage and a more stable set of investors. So far we’ve had only 12 SPACs in the Italian market that accounted for some € 2 bn in market capitalization, I hope the number will increase in the future.

M&A

Italian Spacs (Special purpose acquisition company)Name Date of listing Fund rised Target comp. Market cap *Italy Investments Jan 11 150 IVS Group 334Made in Italy Jun 11 50 Sesa 264Ipo Challenger not listed 52 Italian Wine Br. 36,8Space Dec 14 130 Fila 471Industrial Stars of Italy Jul 13 50 Lu-Ve 49GreenItaly Dec 14 35 Zephiro 70Space 2 Jul 15 308 Avio 318Capital for progress 1 Sept 15 51 GPI 54Glenalta Food Nov 15 80 GF Group 81Industrial Star of Italy 2 May 16 50.5 - 51,3Innova Italy 1 Oct 16 100 - 98Ipo Club fund rising 150 (target) -Source: MF * as of 20 December 2016

L

How much have the SPACs that debuted on the italian market yielded for their investors? The calculation needs to take into account the value of the warrants assigned upon subscription of the SPAC shares, the possible dividends paid out by the targets and the stock exchange movements once the target is listed. The most recent answer, which does not, however, take data for 2016 into account, is that the SPACs, at least a few months after the integration with the target, yielded good returns, on average an iRR of more than 20% thanks to the effectiveness of the business combination, with a peak of 33% and an average iRR of 13% at 5 months from the business combination. The calculation was performed by Simone Strocchi, president of the Association of italian SPACs at the end of 2015 on 4 listed companies that had been integrated with the same number of SPACs