5 tips from PSG CEO Piet Mouton on how to buy businesses
A small group of CFO Day attendees were treated to something of an M&A master class.
Piet Mouton, CEO of Investment holding company PSG, shared some of the insights around about the ground-breaking company’s investment strategy with attendees at CFO Day. In a special breakaway session, he explained how the company picked its investments and managed them. PSG has been touted as one as the greatest growth story of the millennium, according to this Citizen article, which states that, if one had invested R1,000 in the company when it listed in 1996, that investment would have been worth R3.5 million 20 years later.
In the session moderated by CFO South Africa co-founder Melle Eijckelhoff, attendees received tips on how best to approach an investment. They heard how, because PSG focusses primarily on early-stage investments, they are at an immediate advantage over competitors who tend to want companies that are already established as that, for is the best method for realising returns relatively quickly. Meanwhile, PSG is strictly in it for the long-term and they have no fixed exit in mind when they make an investment.
Piet, in reference to the group’s three largest companies, said:
“Capitec was started by us going out and buying 300 micro-lending businesses. PSG Konsult started with five brokers and today there are more than 800 advisors and it’s probably the biggest independent advisory business in the country. We bought Curro when there were three schools and today there are 140 schools.”
Here are Piet's top five company investment tips from the breakaway session.
1. You have to go into the big markets.
You want to avoid going into companies that serve niche markets because that limits the extent to which you can grow rather than looking for companies where the size of the pie is very big. Those are the banking, energy, financial services and education sectors, to name a few examples.
2. Look at the market characteristics.
Is the market full of fierce competition or are there lazy oligopolies, like those which characterised the banking sector before Capitec joined the fray? Fifteen years ago, Piet said banks would open at 10 o'clock and close at 3 o'clock and the customer service was poor. When Capitec opened, they went from zero to 10 million clients in a relatively short period of time because there was a gap in the market for a better banking service.
He also said that markets with government-run or state-owned entities as the primary competitor represented an opportunity because they also tended to be inefficient, leaving a gap for businesses that offered better value to customers.
3. Do a significant portion of the due diligence in house.
Most companies will outsource much of the due diligence aspect of a deal to accountants, lawyers and advisors but Piet said it is crucial that most of that team be made up of people from your own organisation.
"Because post-transaction, it is only you as the CFO that is going to have to answer to shareholders and board members. Not some external party. You have to take ownership of the deal," he said. "Furthermore, the CFO and his team must take charge of the financial assumptions within that business. The advisor can build the model but you have to take ownership of it. You cannot let someone else tell you what is happening or must happen with your investment."
4. Never allow the CEO or CFO to be part of the negotiations.
You need to keep your position of strength in a negotiation and, by having a representative at the table instead of yourself, you give that person an option when they are in a tough corner to say 'I have to take this back to my CFO or CEO'.
"If you are there as the CFO and say, 'I have to check with my board members whether I can go ahead with this, then you are immediately in a position of weakness," he said.
5. Make sure you have the best possible management team.
This, according to Piet is the most important element because, to destabilise the status quo, a company has to be different from existing competitors. It cannot not differentiate itself by offering a better price, a better service, or a combination of the two. Also, he said the management was as important as an effective sounding board for the CEO, who is responsible for creating the strategy of the organisation.
"I think what went wrong at Steinhoff was precisely the result of a weak management structure... The CFO can't be a yes man. They are the person that is sitting closest to the CEO and must be strong enough to challenge every decision that they make."