Have your cake and eat it

‘Over the years, we have funded our growth through cash flow from different sources,’ recounts chief executive Bruce Thompson. ‘Firstly, operating cash flow, because once you get scale in distribution you become a positive cash generator. Secondly, we have been fortunate in that we had land from legacy business that was surplus to requirements, and we have generated about £18 million over three or four years from the sale of three phases of land at Stamford for residential development.

‘Thirdly, going back a few years,’ he continues, ‘we went through a major restructuring and sold off a number of non-core businesses in areas like building products and specialist steels for £90 million, though we actually returned £70 million of that cash to shareholders. ‘So on the one hand, we generated cash ourselves, and have used that to make acquisitions, but we have also been in the position to make acquisitions through cash (no dilution), and in my view, that certainly strengthens your hand when it comes to negotiations.’

Diploma’s recent half-year figures to March were excellent, with Thompson announcing a 20 per cent rise in profits to £9.7 million on sales up 17 per cent to £63.5 million. Profits after the sale of that third phase of land rocketed higher from £8.3 million to £20.3 million, and Diploma closed out the financial reporting period with a fat £30.3 million cash pile that will help the business expand further.

Banking on the virtuous circle
Of course, the most obvious way to avoid losing control of your business and future rewards, is to build up a venture with strong foundations and good cash flows (easier said than done), and then borrow from the bank to fund organic and acquisitive growth.

This is exactly what chief executive Vin Murria of thriving software consolidator Computer Software Group (CSG) has done over the past three years.
As well as being CEO, Vin is also a partner at Elderstreet Investments, which owns around 25 per cent of the business. She has been at the helm of CSG since 2002, steering its turnaround from a loss-making, moribund business to one that has just posted a 79 per cent improvement in sales to £25.9 million for the six months to February. Profits leapt even more, from £0.9 million to £2.35 million.

‘We have combined acquisitions with organic growth, buying seemingly weak businesses that actually had real value and underlying profits, but which had been run as lifestyle companies. What we have done each time is release the potential within.’

In all, CSG has completed ten acquisitions in the past three years. The first three were a mixture of cash and equity, the fourth was a pure cash deal, the fifth entailed ‘a little bit of equity’, but from there on in, all the acquisitions ‘have been about cash and debt, with no dilution’.

‘In the early days, you will need an element of dilution to get the ball rolling,’ concedes Murria, ‘where an acquisition is structured perhaps as 50 per cent equity and 50 per cent cash. But if you’ve got the model right, as you go along, you will end up with a bigger chunk of debt [or cash] and a smaller slice of equity, because the business should be generating sufficient resources for you to use cash flow to fund the bank debt. It then becomes a virtuous cycle.’