UK: The Silver Lining - Why More And More Foreign Investors Elect To Buy A UK Company, Rather Than Start Their Own Operation From Scratch

Originally Published February 2009

1. Setting up from scratch: the high risk-low reward strategy

The market is littered with foreign companies that tried to start a UK business from scratch. In no particular order, here are some of the reasons why they failed to make it a success.

In the full employment climate we've know until recently, trying to find and retain talented key executives and good salespeople was hard for indigenous UK businesses at the best of times. For a foreign company newly arrived on the scene, with no proven track record in this country, it was inevitably going to be even harder. Most of the good people were already employed, so many foreign companies ended up hiring the left overs. This mattered less when there was plenty of business around and the inept/inefficient/lazy could hide for a while, but as Warren Buffet famously said, "Only when the tide goes out do you discover who's been swimming naked". The tide has now receded a very long way and there are a lot of naked people out there. Our employment group is working overtime to advise French clients on how to sack underperforming and overpaid senior executives that they hired over the last few years.

Is it going to be easier to hire good people, now that unemployment is rising and the shortage of talents should ease? Not as fast as we'd hope, since most smart companies will try to keep the better guys. Initially, a lot of those joining the dole queues won't be the best... so the pool of resources to select from might be bigger, it won't necessarily be much better.

Even if the right executive turns up amongst potential recruits, the French company trying to staff its burgeoning UK operation might miss him/her, so different are the typical educational paths to success in France and Britain. What would a French employer make of a 25 year old who was educated at 450 year old Tonbridge School, where he was a scholar and played for the rugby 1st XV; had a gap year spent partly working on an eco-project in Africa, partly lying on a beach in Thailand; graduated from Christ's College Cambridge with a Classics degree? They might well discount him, so used are they to hire from the familiar "Grandes Ecoles" and "Ecoles d'Ingénieurs".

Another curious phenomenon is the 'behavioural gap'. Every nation and culture has its rites and habits. The French and British have very different behavioural patterns at work, so when recruiting British staff, French companies can lose their points of reference. Many are very conscious of those differences and they try to adjust their value judgment to take account of the locals' idiosyncrasies. The results can be unexpected; they sometimes end up mis-attributing someone's 'oddness' to the fact they are British. In fact, the individual is just plain dysfunctional and incompetent and would not fit in at all, in a French, British or any organisation!

Even if/when foreign companies do find the right individual to run their UK operation, they often have to pay a 6 figure package in order to attract the right calibre of executive, to run what is initially a small start up operation – albeit part of a large multinational group. This quickly leads to tensions as the executive is put under immediate pressure to deliver within a ridiculous time scale, if only to justify the high salary. It often ends in tears.

French clients are also often shocked to discover how much higher salaries are compared to their home environment. I have had to explain to countless bemused clients that they should increase their budget for the new UK subsidiary by 40% or 50% to take those costs into account. I also regularly advise them to spend a week in London to really feel for themselves the very high cost of living that is an everyday experience for their British colleagues.

Forming a UK company is quick, easy and cheap and it sometimes lures foreign corporates into a false sense of security, since running a UK business is intensely competitive and it is not cheap.

My point is this: apart from some exceptions – retail is probably one – setting up in the UK from scratch is often an unnecessary and costly step on the way to establishing a business over here. The current climate is unlikely to make the process easier and will not reverse the trend that has seen acquisitions become the dominant way for foreign companies to penetrate the UK market.

2. Acquisition: the time is right!

The trend to buying a business as a way to enter the UK market, as opposed to starting from scratch, is one that has grown steadily over several years. The current climate makes this a challenging time for any buyer but should also be a source of opportunities.

UK companies have never been more affordable – For years, French clients have complained that British vendors were adept at pricing their business aggressively. In these very tough conditions, prospective buyers will find that prices are dropping. As overwhelming evidence gathers that this recession will be more prolonged and more severe than what we have experienced for decades, vendors will realise that they should accept the price on offer now. It might take a long time – several years perhaps – for the value of their business to reach their pre-recession value again, so they want to sell it before its value drops even further.

The lowest exchange rate ever – Seven years ago, Eur1 bought £0.62. At the end of December 2008, the same amount bought you nearly £0.98, a difference of some 60%! The downward move of the £ has been dramatic, particularly in the last quarter of 2008, with a 25% drop £ versus € between October and December 2008. Most serious currency expert expects the rate to stabilise over the medium term at a rate of Eur1 = £0.65/£0.70. Spending euros to buy a UK business priced in sterling is an opportunity to use the strength of the common currency.

Large groups are starting to shed non-core businesses. In an environment where contracts, clients and money flowed in, businesses that were not core, or under-performing, were tolerated or ignored. Boards and shareholders will now take a long hard look at those peripheral divisions that do not come up to scratch – be it that they are no longer flavour of the month, or are not profitable enough, or both – and will look to dispose of them. There are even groups that are so starved of cash that they will sell non-core businesses to feed the rest of the group with fresh money.

Buying an existing business boosts your growth – The fundamentals of an acquisition remain. By buying an existing business, you buy a fully formed enterprise, with a market share, a client base, a team and a reputation, whilst a newly set up business has no history, no clients and no team.

Steal a march on the opposition when it matters more than ever – What better way to grow faster than your opposition, particularly if that opposition is suffering from the recession. The best riders in the Tour de France attack where it is hardest, in the time trials or the mountain stages, since they know this is a sure way to get rid of weaker opponents. We are now in the foothills of the Alpe d'Huez Tour de France climb, so it is time for the fittest to attack the UK market.

Whilst forming a company in the UK is deceptively simple – it literally takes a few hours – the real challenges lay elsewhere: hire and retain good staff; pay salaries that can be 20% or 30% higher than in France; endure extortionate property costs; survive in an intensely competitive environment whilst getting used to business practices and customs that can be disconcerting; etc. Those hurdles will not stop a determined, well-organised investor, but they represent barriers to market-entry that can sometime be tackled more easily by resorting to a different approach: buy an existing business.

The proportion of acquisitions as a part of all French investments in the UK has been growing for some time. Yet there is a new element at play – a silver lining to this recession – which offers a great opportunity to the hardened investor: it presents him with a rare chance of seizing and growing a market share in a difficult environment, with a chance to put clear blue water between him and its weaker competitors.

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