A small geographical market and linguistic and institutional complexities actually encourage openness and agility on the international business front. Interview of Gabriel Englebert, BNP Paribas Fortis.
The Merger and Acquisition (“M&A”) market in Belgium has been growing steadily since 2016, as the Vlerick Business School’s most recent M&A Monitor can attest. Our companies are once again showing their desire in 2018 to expand in Europe and even beyond. Gabriel Englebert, Head of Corporate Finance: « It’s not all about the BEL 20 companies, I assure you. I’m proud to confirm that the companies looking for acquisitions are among the top 300 Belgian firms ».
Looking beyond Belgium at a very early stage
In a narrow national market, made up of different regions and languages, our companies sometimes have to start exporting at a very early stage of their development. As a result, Belgian companies are natural exporters with a decentralised culture that is extremely favourable to M&A. Belgian companies have solid shareholders and management teams that are often multilingual, highly educated and able to recruit international profiles. Our country is also an ideal territory for niche sectors such as life sciences and healthcare, agri-food, aerospace, industry, building materials, services, consumer goods and technology.
"It’s not so much the absolute deal size that strikes me, but the valuation levels. Valuation levels are high, with rising EV/EBITDA multiples."
A combination of factors can explain such high valuations: the scarcity of opportunities, the amount of cash available and the low interest rate environment. "Current EV/EBITDA multiples can hit very high levels well above 10x. Those are big numbers for only the very best companies in the market!"
Exploring new countries, new activities and technologies
Building on their success, Belgian companies are ready to invest in foreign target companies to gain new market access or knowledge of a country, or to test an adjacent product or service. In a third of all M&A deals, the target is a foreign one. On average, these transactions take six to twelve months to complete – the time needed to negotiate the price and terms, conduct due diligences and clear regulatory approvals, taking account all the while of cultural differences, that can be substantial in some cases.
Gabriel Englebert: « Lastly, I would pinpoint two trends for 2018 among the big Belgian groups: the pursuit of innovation – in many cases a specific technology or know-how – and continued investments in the field of sustainability. ».
The M&A market is changing, we need to be innovative
The traditional auction process involving a very large number of potential buyers, used to dominate the market in the past. This type of very standardised process was sometimes contrary to the desire for discretion of our Belgian clients, who favour highly discrete transactions.
Belgian business leaders do not expect the same from their investment banker in 2018 as they did in the past. Gabriel Englebert: « We are in a world of bespoke processes and tailor-made solutions, and I am absolutely delighted about that! Our ‘made-to-measure’ approach is perfectly suited to our bank, which nurtures long-term relationships with our clients. Our teams use their know-how to articulate in-depth solutions. It means, for instance, that we do not disclose all our recent transactions, even though they are very large in number and in quality. Our business is all about discretion and pure trust. »
What’s the investment banking business model in 2018?
We help and coach business leaders making the right decision in complex, life-changing merger and acquisition transactions, of which some are industry-transformational. Is artificial intelligence set to revolutionise our core business? Gabriel Englebert: « Not in my view. Why would a business leader still need us in 2018? The answer is that we completely trust our ability to offer effective but nuanced judgement regarding many complex M&A situations ».
Backed up by their internal experts, business leaders have massive amounts of information and analysis tools available, together with unlimited data available on the web and consultants’ reports on specific fields. But there is actually too much information out there these days and that can result in confusion. In this context of information obesity, we make a real difference in terms of tactical advice and decision-making timing. A profession like ours, which is founded on intangible factors like trust and confidentiality, demands dedication at every moment. Gabriel Englebert: « As for me, I have already made my choice: I am happy to jump on a plane if a client across the Atlantic needs my advice on a complex transaction ».
Timing in M&A: the key to success
Gabriel Englebert: « Our clients’ interests are our absolute priority. We’ll finalize the transaction in less than three months, if that’s what the parties want ». Other elements are sometimes at stake too, such as business succession or the transfer of shareholdings. Consulting your investment banker about family governance can also bring some helpful neutrality to the thinking process.
What about the future?
Gabriel Englebert: « I would pick out two structural factors: (1) The M&A market, which I believe is to stabilise. Central Banks intend to raise interest rates progressively, which can decisively reshape stock market valuations. (2) The profession: the investment banking model will evolve again: in five or ten years’ time, a new generation will pick up the profession that is fantastic on both human and professional terms. M&A ‘advisory boutiques’ are flourishing but a natural selection will be unavoidable and some will disappear. But we’ve been around for 200 years now and I expect us to be here for a lot more years to come ».
Crowdsourcing: the basics
Are you undecided about the various ways of increasing your offering? Has R&D encountered a technical problem? Perhaps your clients know more.
The concept of crowdsourcing is simple: you call for the contribution of your customers and/or the general public. An approach which is gaining popularity worldwide even though it is not actually new. As far back as 1714 crowdsourcing by the British government led to the invention of the chronometer and therefore a reliable method of calculating longitudinal position at sea.
Three hundred years later the basic principles remain the same: in crowdsourcing you work with a network of individuals and communities within and largely outside the company. They make a contribution in the form of ideas, time, expertise or financial support. This enables new solutions to be accessed and makes realisation of joint projects and optimisation of tasks possible while keeping down costs.
This system is based on exchange, transparency and communication. It also works for all sectors and at all management levels. You should be able to engage a community of designers for your product development for example and choose the best proposal together with the public. Then you will bring it onto the market, possibly even financed via crowdfunding.
The crowd is ready for this
This is certainly no science fiction, as proven by the growing success of the system. It is also the ideal time to get involved with crowdsourcing:
- communicating with the crowd is easier than ever before thanks to technological development, the social media boom and the development of online communities;
- the crowd is straining at the leash: a joint survey by several European universities showed that 54% of Europeans would like to support projects by companies and private individuals creatively and/or financially;
- co-creation, or developing a project together, is hot. The crowd can join in with a project for a whole host of reasons: the necessity for a creative outlet, commercial motives, dedication to society or just for a sense of honour or fun;
- the economy urgently needs sources of financing and innovative projects in order to achieve new growth and to increase competitiveness.
It will definitely take some getting used to as such a system radically changes the way in which a company gathers information, carries out research, produces and even finances projects. At the same time relationships with clients or users change as they evolve into potential colleagues, financiers and ambassadors.
But this does not have to be a threat. On the contrary, crowdsourcing provides you with a unique opportunity to relinquish your traditional methods. You can now look externally for ideas, get feedback from the crowd on ideas developed internally or even combine both approaches. The possibilities are endless.
The dos & don’ts of crowdsourcing
A good crowdsourcing project creates a win-win situation where the initiator and the crowd feel that they are achieving something together. How do you approach that?
In crowdsourcing the 'crowd' component is at least as important as the 'sourcing' component. In order to be successful you must build up this community and win it over. This is where the challenge lies: the crowd is not an anonymous, homogeneous mass but a collection of individuals and sub-groups. You need to seek out and mobilise each one separately. 5 tips for a powerful crowd dynamic:
Take care of the presentation of your project
Your project must appeal. Present it with photos, short films or a clear presentation – vague sketches or a half-baked concept are inadequate. Keep your explanation as simple as possible. After all not every potential funder is a specialist or an engineer.
Also, don't forget to keep your target amount as realistic as possible. Above all do not create the impression that the campaign is an excuse for personal enrichment or that you will channel the money off into other, existing projects. If you work with rewards, ensure that they are original and attractive, divided up into transparent and attainable blocks of financing.
Build your crowd
Look for the suitable crowd and get these people right behind your project. Approach them via all possible channels and assign them various roles: creative or technical input, critical analysis, ambassadorial, ... When doing so keep the threshold as low as possible, within your company as well. It is recommended that you bring as many of your people as possible into contact with the crowd in order to ensure healthy cross-pollination.
Live your project
A project without animation has little chance of success. So be motivated and keep motivating others. Respond to queries, take comments into consideration and intervene where necessary. Remember that participants cannot be squeezed to produce viable ideas. They too must go through a creative process in which they can gradually shape their input. So ensure that they continue to be involved. For this purpose it is necessary to approach each sub-group differently: encourage, win over (again), congratulate, permanently challenge, ...
Keep your campaign exciting
Keep communicating, even if some of the messages may be negative. The greater the involvement you demonstrate, the greater the loyalty of the funders and the greater their willingness to accept delays or problems.
A good dosage is important here. Ensure that news is provided at regular intervals to keep the crowd involved so the attention on your campaign does not fade away.
Your project, your rules
The principle: you decide where you want to go with your campaign while being open to suggestions from the crowd. So you lead the crowd to the desired end product rather than the other way round. Otherwise the outcome may be rather different to what you had hoped. A few examples of how not to do it are the recent – and hastily cancelled – campaigns which resulted in the product name iSnack 2.0’, a chocolate bar filled with mince, or a washing-up liquid with a scent of roast chicken...
Crowdfunding: financing with extras
Are you looking to finance a new project which has some risk attached to it? Present your plans to the crowd and discover how quickly small acorns can become mighty oaks.
Crowdfunding or participative financing involves looking for a (large) number of potential moneylenders. These may be professional investors or co-entrepreneurs or equally your clients or the general public. They will finance your project or company on a quid pro quo basis.
This specific form of crowdsourcing is centuries old. Just think about the construction of the Sagrada Família (Gaudi cathedral) in Barcelona or the plinth for the Statue of Liberty in New York. The way in which it happens is rather different today: via online payment or online platforms, often with lots of publicity on social media. The emergence of social media is undoubtedly one of the reasons for the increasing popularity of crowdfunding, together with the search for alternative sources of financing as a result of the crisis.
Much more than just a source of financing
While crowdfunding focused on cultural or humanitarian initiatives for a long time, its emphasis has recently shifted to commercial projects and even the financing of start-ups and small and medium sized companies. The advantages are clear:
- companies can meet the cost of – mainly innovative – projects which are less suitable for (complete) financing via a bank loan, business angels or a private equity partner. This may be because they have considerable risk attached or demonstrate too little concrete potential for growth, the required amount is too low or the company does not want to have an external party join in with the company capital.
- Financing is just one part of the story; creating sufficient 'buzz' and a community around your project will make you much more visible. Simultaneously, you carry out market research. Is there a call for your product or service? Is the design suitable? And are you bringing it onto the market in the right way? Thanks to this interaction you can also make adjustments to the product during the design phase, thereby reducing the risk of an unsuccessful launch.
- By taking the input of the crowd into consideration you will create a much closer bond with your target market, with clients developing into co-designers, fans and ambassadors.
Challenges and risks associated with crowdfunding
Although crowdfunding provides almost inexhaustible possibilities, it also involves a number of challenges and risks. An overview.
1. For the company
You open the company up to the public. This is of huge benefit in terms of marketing and strategy but it also means that everyone has access to the complete financial situation. You must therefore be prepared to be completely open and sometimes share sensitive information.
This new business model turns all traditional models on their heads. The greatest challenge is learning to deal with this and finding a good balance in the area of
- control: how do you divide authority between the company and the crowd? There is no golden rule but research conducted by the University of Toronto suggests that the ideal system has 80% of the project firmly in place with the crowd having a say in the remaining 20% (e.g. choice of colours, technologies, points of sale etc.);
- transparency: to what extent do you wish to share your knowledge, technology and research and development results with others – including potential competitors? How will you protect your copyright and intellectual property in such a case?
A significant risk is of course the fact that you may not achieve the desired funding and the campaign fizzles out. However, this is an advantage in a sense. The campaign helps you assess whether there is a demand for your intended product or service on the market. If this does not appear to be the case, you will at least find out in time and be able to avoid the much higher loss of a failed product launch, both financially and in terms of reputation. You can use the feedback received to instigate changes and make a new attempt later on.
If you add up all the fees and the marketing, time and energy involved in a crowdfunding campaign, the cost of this form of financing can be extremely high. With reward-based funding there are definitely a few flies in the ointment. You must declare the funds collected as taxable income. In addition, a pledge is regarded as a sales transaction which is therefore subject to VAT for companies. Take these factors into account when setting your prices. Otherwise the tax office may bring you an unpleasant surprise...
2. For the investor
For a moneylender the challenge primarily involves finding good projects. There is no shortage of attractive initiatives. Quite the opposite in fact. With reward-based campaigns it can sometimes even be difficult to resist the temptation. But what will your investment yield?
Putting money into a project always remains a bit of a gamble, even if you have analysed it thoroughly and you believe in it. Success is never certain and unforeseen problems may occur at any time. With lending or equity-based formulas your complete investment could then be lost.
The chance of this happening is smaller for the reward-based model, as is the amount invested. There is always the possibility, however, that the initiator will not meet his commitments, will only partially meet them or severely delay meeting them. In very rare cases fraud may be involved with the collectors (and your contribution) disappearing into thin air.
A clear picture
Do you want an objective opinion before joining a Belgian crowdfunding project?
If the project has a prospectus obligation, you can look at it with the FSMA approved prospectus. Among other things this contains further information about the initiator and the legal form of your investment (share, loan etc.). An approval or licence from the FSMA or the National Bank of Belgium does not however mean that these bodies automatically deem the project suitable for investment – it is up to you to weigh up the risks.
You can also use the FSMA website to check whether the internet platform and/or the initiator are under special supervision by the FSMA or the National Bank of Belgium.