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How do you standardize M&A/PMI?
In order to accelerate our achievement of ¥100 billion in sales, SHIFT has proactively conducted M&A to add service functions and recruit highly talented engineers. We have identified candidates by preparing a long list and short list, secured sufficient capital capacity, and clarified our selection and decision-making standards. This is how we standardize our decision-making in order to accelerate our M&A activities. As a result, we have conducted M&A at a pace of once every two months between the end of 2019 to July 2021.
What size do you look at in terms of M&A capacity?
We have not set a limit to the size of targets. We focus on companies that share the vision and mission of the SHIFT Group as well as possessing the services, technology, and engineers that will allow them to grow alongside SHIFT. If a target fits those criteria, we have prepared a sufficient financial foundation and capital leeway to be able to perform M&A activities, even for companies at or above a certain size.
How does SHIFT determine whether to proceed with an M&A deal?
First, the potential target company needs to align SHIFT Group’s M&A policies. Then we examine four additional criteria before reaching a decision:
・Whether it has sufficiently high added-value and the potential for gaining projects with higher unit price for engineers
・Whether its customer population can be used to generate group synergies
・Whether it can immediately contribute to profit in excess of goodwill
・Whether it can be acquired at an attractive price (generally around 5 times EBITDA)
How does SHIFT finance its acquisitions?
We use a balanced combination of equity financing and bank loans depending on the circumstances and usage of funds.
In FY2019, for example, we raised ¥5.2 billion through equity financing, and in FY2020 we raised ¥4.0bn using bank loans.
How does SHIFT handle post-merger integration (PMI)?
Centrifugal force and centripetal force are key concepts in SHIFT Group’s approach to running its business.
Specifically, when we add newly acquired companies into SHIFT Group, we leave it up to those individual Group companies to determine how they run their business. In fact, we generally leave their management teams in place and make no changes to their personnel policies. Standardizable functions such as recruiting, sales activities, and accounting, however, are centralized in the SHIFT parent company, which enables us to streamline costs and thoroughly leverage SHIFT’s strengths.
Included in SHIFT’s internal organization is a dedicated PMI implementation team, which works to promote collective overall Group vision through a range of measures, such as holding regularly scheduled executive retreats where all Group presidents and other members of management get together. Through efforts such as these, we promote the mutual sharing of individual Group company visions, and build relations that help generate synergistic effects.
What is the reason for SHIFT’s preference for M&A over other potential options, such as alliances?
The reason is that SHIFT Group aims for synergistic effects. Capital and operational alliances do have potential benefits, such as creating a stronger sales force, but when the aim is to bolster our internal sales structure and enhance our recruiting abilities, we believe the most effective method is to integrate new businesses into SHIFT Group through M&A. Given SHIFT Group’s ample track record in M&A, we also believe this is the most beneficial choice for the acquired company as well in terms of enhancing its recruiting and sales capabilities.
What kind of groundwork for M&A does SHIFT have?
SHIFT has positioned itself to purse M&A in a strategic manner. Our alliance with Nihon M&A Center Inc. provides us with steady stream of referrals on top-notch deals that meet the criteria we require. This allows us to maintain ample long lists and short lists of M&A candidates.
The impacts of the COVID-19 pandemic have also led to beneficial changes in the M&A landscape. Specifically, we have identified three distinct trends during the pandemic:
・Among companies that run diverse business portfolios, there has been increase in those seeking M&A deals (i.e. looking for buyers) due to the need to liquidate certain lines of business.
・There has been an increase in deals involving companies with large-scale sales as we have gained recognition for our proactive stance on M&A.
・Our successful M&A record has attracted more frequent proposals from M&A candidates, free agents, and similar parties.
With the implicit message that joining SHIFT Group is pathway to growth, our track record and branding have begun to resonate, as the companies have become part of SHIFT Group via M&A have all since gained higher sales and stronger recruiting power and otherwise seen their businesses grow.
What is SHIFT’s policy on M&A?
SHIFT conducts M&A manoeuvers as means of achieving further corporate growth and augmenting the services portfolio of SHIFT Group. In making M&A selections, we look for companies that satisfy four main criteria:
・Companies that, according to our M&A strategy road map, will provide coverage in new areas of business where SHIFT Group has so far had little presence
・Small and medium sized IT companies that employ talented engineers but are grappling with business succession issues
・Major prime vendors with customers consisting of business corporations
・Companies that possess the kind of business assets required (namely information on personnel, products, and financial resources) for building a platform business
What companies has SHIFT recently acquired?
M&A announced during FY08/20 consisted of seven companies (excluding holding companies): Analytics Japan Co., Ltd., Realglobe Automated Inc., Nadia Inc., xbs Inc., SNC Co., Ltd., CLUTCH Inc., and HOPES Corporation.
Further details are available at the link provided.