If you want to maximise value, don’t stop negotiating until the deal is signed, says Brian Parker, head of M&A at ICON Corporate Finance.
What was the deal?
The sale of TechQuarters to Graphite Capital-backed Babble in March 2023. TechQuarters is an IT-managed services business, focused totally on Microsoft cloud solutions. It has more than 450 UK clients, mainly SMEs, and 85% of its revenue is recurring. Founded by CEO Chris Dunning, with operations director Mark O’Dell responsible for day-to-day business, systems had been put in place to enable the company to scale easily.
What was the strategy?
Graphite Capital acquired Babble from LDC in a £90m secondary buy-out in November 2020 – LDC still has a minority stake. Babble is a communication service business, which has acquired 29 businesses over the past four years. The TechQuarters deal was one of its bigger deals and fitted with its buy-and-build strategy – it gave Babble an IT-managed service to sell to its SME customers, and access to TechQuarters’ customer base. Babble is much bigger, but it wasn’t just a case of a bigger competitor buying up a smaller one – it was a convergence of communications and IT services.
How were you introduced to the deal?
We got involved in March 2022. We had carried out a couple of Microsoft-focused exits in the previous couple of years, advising Dunfermline-based Exactive on its sale to AIM-listed Gamma Communications in March 2020, and Cloud Direct on the sale of a minority stake to the multinational IT group Crayon in September 2021. There was a beauty parade of advisers and we won the mandate.
What were the timescales?
TechQuarter’s year end is May. We advised it to wait until August before marketing the business. It was growing very rapidly: revenue was increasing at 40% into double-digit millions. We prepared for the due diligence and created a data room, which was painful but made the job easier when we got going. We put together the information memorandum. Our advice to the owners was to let the business tick over into the next financial year and focus on delivering on all the KPIs to maximise sale price. An MBO wasn’t an option. And given that the CEO of the business wanted to exit, it wasn’t appropriate for a dual-track sale. We ran it as a trade sale and had seven offers. A lot of interest came from private equity-backed businesses, but also listed companies and overseas businesses.
Who were the advisers?
We were lead corporate finance adviser and Wallace provided legal advice to TechQuarters. Babble used RSM for financial due diligence and Gateley for legal advice, Analysys Mason for commercial due diligence and Quirk for HR due diligence. Babble knew what it was doing and what it was looking for. As expected, it was a refined, thorough and professional process.
What were the challenges?
TechQuarters is a highly sought-after business in a very competitive space. We had almost 30 interested parties. Just managing that and keeping everyone focused on sifting the wheat from the chaff was a challenge. We got seven offers for the company and whittled that down to three. We got the final offers and then worked out the best – which is not always the one paying the most. Babble was given exclusivity in November 2022. It had done loads of deals and we thought it should be a seamless process, which it pretty much was. We felt it wouldn’t price chip and would meet the timelines. Deliverability was key.
Negotiation never stops in a deal. When there is such competition, it’s a matter of advising sellers how far they can push buyers to maximise value. It’s a classic trade-off between greed and fear.