Growing your business relies on either building it up or adding to it by acquiring others. Dominic Dudley discovers that, for a quick result, merging seems to be the preferred option.

THERE'S ONE QUESTION THAT ALL companies with any ambition must answer at some stage: buy or build? If you want to grow your business, do you buy another company or build up your own operations organically?

It's not really an either/or question -all firms will do both, depending on the circumstances. For French IT consultancy Unilog, for example, moving into a new market means having to buy its way in -something it did in May last year with the acquisition of MarchFirst's technology arm in the UK.

"In the UK we can't start absolutely from scratch," says Jean Charles Bouillet, who, as director of corporate development for Unilog, is in charge of all its M&A deals. Buying its way in was the only way to go. "It's much easier because it saves time," he explains.

Marketing and communications group Incepta doesn't have such hard and fast rules, though. CEO Richard Nichols says it's "an inquisitive group" and is in talks with several companies at anyone time. But for every dozen or so initial soundings, only one or two ever proceed to a serious stage.

Around 10 deals were actually concluded last year, including a rescue of online marketing outfit Tangozebra by Incepta late in the year. The difference between a deal that goes through and one that fails revolves around the people and culture of the target company. Nichols says Incepta is only interested in businesses with a strong market position that share its entrepreneurial culture.

So while it bought a business in the Netherlands last year, First Financial Communications, in Italy it decided to build up a new operation. "We couldn't find a like-minded business with a market-leading position," says Nichols

Finding a suitable target depends on the market segment you're in as much as anything else. "There aren't too many people in our sector who we don't already know," says Nichols. So for Incepta, it's just a matter of working out who is best suited to its needs.

Unilog pursues a different strategy, one that has three avenues. For small companies with under 100 staff, it relies on making independent approaches. Medium-sized deals see it use match-making consultancies, such as Catalyst in the UK. And for large acquisitions, ones involving more than 500 people, "we simply inform all the major M&A banks," says Bouillet.

He claims that he's in touch with 10 banks in the UK and that it was such contacts which led to the MarchFirst deal. Credit Suisse First Boston put the deal in front of Unilog in February and it was sewn up by the end of May.

Such deals are vital for banks and corporate finance houses, given the downturn in the market for new share listings. But they're having to work hard to find them, with the number of M&A deals "substantially down over the past six months", according to Nick Martin, head of corporate finance at Durlacher.

Banks or no banks, all deals have their own unique characteristics and Unilog's saw a fairly major hurdle. MarchFirst's US parent was in trouble and went into bankruptcy proceedings during the takeover process. This meant that Bouillet had to be quick on his feet. The time from CSFB suggesting the deal to the first written proposal from Unilog was just a week.

Bouillet was helped by MarchFirst's US parent being willing to help. On day two Bouillet sat down for dinner with the firm's CFO. "I got a lot of information on the group. He made it very clear to me that we needed to make a decision within two weeks, which was true."

Teleconference calls between Unilog's various European teams followed while the firm worked out how to proceed. Once the offer was on the table, Bouillet spent a month in the UK, meeting the team - one of the most important issues in the takeover of a service company. " All the value of a company is in the people, so if you lose the people you lose the value," he maintains.

Nichols agrees. "You have to be people focused," he says. "We want talent." He too sees the need to move quickly at times. Although he estimates the Tangozebra deal took around a year from initial soundings to completion, others have been far faster. "We bought one PR company in three days," he says.

It wasn't just speed that kept Bouillet occupied through the MarchFirst deal. Any cross-border acquisition throws up problems of different legislation, local rules and difficulties of financial transfers - and of course, in this particular case, all the issues of dealing with a bankrupt company, especially as the European subsidiaries were financed by loans which the US administrators began to call back. "Typically the most difficult thing was to get people in front of you who can make decisions," says Bouillet.

Once the nitty-gritty of an acquisition has been completed, there are still the myriad problems of integration. The only real issue for Bouillet was people, specifically the senior management. "Of course, the guys there had their own ideas on how to run the business," he says, and this meant the CEO had to go. Problems of wider staff attrition were met with incentive packages for the staff, but nonetheless around 20% of staff subsequently left the company.

Nichols admits that staff retention is an issue for lncepta too. For the sellers "there's an emotional issue, especially when you're buying small private businesses as we tend to do," he explains. But, through lock-in periods which mean the sellers only get full value if they stay in Incepta after the acquisition, he says the firm is fairly successful in retaining staff that do move over.

Other deals are now on the cards for both Incepta and Unilog. Bouillet says he wants to do a major acquisition in the UK this year, with the aim of taking his staff count from around 200 to over 1,000.

Nichols, meanwhile, wants to eventually take Incepta to well over 10,000 staff. The overriding incentive for doing such deals is clients, he says. "It's all about globalisation. Clients are driven by a global market."

Not all M&A deals come off, and even for those that do there's no clear way to see if any real value has been created. One only has to look at the ongoing arguments emerging from the planned tie-up of Compaq and Hewlett-Packard to see how easily discord can be sown.

But there are several reasons why more and more are at least attempted. Nichols points to globalisation and IT costs as two key drivers - both make it harder to compete as a small company and so encourage firms to merge.

But for all those weighing up their options, Bouillet has one simple piece of advice: "I would never recommend anyone to make a cross-border acquisition of a bankrupt company."

New Media Age on 24th January 2002