M&A activity for TMT firms: How can asset based lending help?

John Nelson, Managing Director of IGF Asset Based Lending discusses how asset based lending can help TMT companies looking to complete a merger or acquisition post-Brexit.

An astounding £72bn of deals have already completed so far in Q2 2016, defying expectations of a drop in M&A activity following the EU Referendum, according to the latest figures from Thomson Reuters. One of the most notable transactions came from the UK tech sector, with microchip giant ARM Holdings being taken over by the Japanese technology firm Softbank for a price of £24bn in July.

With the TMT sector taking up the opportunity to fuel its growth via mergers and acquisitions, firms in this industry need to consider what the best financing options are when the deal is in its initial stages. As each transaction is different, businesses must consider a deal on its own individual qualities when evaluating different options for funding support. Many firms in the TMT sector fall into the ‘asset rich’, rather than ‘cash rich’ category, meaning that accessing the value in these assets could be the key to financing future M&A activity.

Making ABL a viable option

Asset based lending (ABL) is an alternative funding solution which is suitable for a number of phases within a business’ corporate lifecycle, including a merger or acquisition. So why is ABL not a clear contender for financial support when it comes to these deals?

As its name would suggest, ABL is a form of financial support based on the value of any debt-free or debt light assets listed on a balance sheet, ranging from invoice finance and inventory to IT equipment and commercial property. When all of these assets are combined, they can be used as collateral to help an organisation’s cash position in the acquisition process, and also to fund the transaction as credit is extended against the items’ value. This form of lending also provides working capital for the new, larger organisation once the deal is completed, meaning that it can help in both the short and long-term.

What about smaller enterprises?

Smaller TMT firms in the UK are currently a prime target for M&A activity, whether from large corporations looking to acquire innovative technologies to stay ahead of the competition, or from smaller non-TMT businesses that are looking to combine their expertise and become disruptors in their respective fields.

The cost of the deal is not the only important factor to consider when financing a merger or acquisition, nor is the long-term potential for increased growth and profits. The short-term cashflow which keeps activity at a ‘business as usual’ level throughout the M&A process is also crucial. Asset based lending can assist in stabilising a firm’s cashflow in the short-term, in order to finance a transaction in the longer term by releasing the value of the assets within a business.

Newer SME or smaller spin-offs from a larger firm may find that there is not enough cash history present in the business’ books to support a non-securitised loan, when in fact the assets held within the business could be enough to back this up.

Some businesses also worry that ABL won’t be able to offer a large enough sum to fund M&A transactions, but more often than not, this is not the case. If necessary, an additional cash loan can be offered on top of the value of a business’ assets to further increase its cash position and help to fund the deal.

Traditional or alternative?

In many cases, getting a loan from a mainstream bank can be a drawn-out process for smaller TMT companies looking to finance an acquisition. Traditional lenders may also be unwilling to support this activity full stop, particularly in the case of tech start-ups looking to scale. In contrast, ABL provides a more suitable option for firms without a great amount of cash on their books, or for smaller companies where cashflow levels tend to fluctuate.

ABL can also be a favourable alternative for the more machine-led firms within the TMT sector, given the large amount of machinery locked up within their businesses, not to mention the value of any commercial property. As a more specialised offering, ABL providers can also offer advice on how to maximise the liquidity of any items on a firm’s balance sheet, and help to minimise the risks of the deal’s execution.

Acquisitions in any sector are likely to experience unforeseen problems, particularly within the initial stages of the process. The focus on assets offered by ABL providers, however, means that this funding option is better able to accommodate any bumps in the road, and is flexible enough to cope with the needs of a growing business. For all these reasons, if a business in the TMT sector is thinking about an acquisition, it should look in to asset based lending as a flexible alternative to traditional finance.