Investment banking involves the ability to identify companies for potential acquisitions. It provides the experience and skills to grow companies quickly through acquisitions in a way that creates value for the buyer.
Daniyar Zhanbekov, a self-made international entrepreneur with experience and success in investment banking and private equity, provides insights into identifying ripe M&A opportunities and strategic deal-making.
Some industries may be too competitive or fragmented, working in siloes or comprised of organizations with too many layers of top management and high operating expenses. They spend too much on marketing and advertising, paying commissions, and lowering prices for competitive advantages to gain market share.
In fragmented industries where price points, operational spend, and marketing dollars negatively impact profitability, Daniyar Zhanbekov suggests purchasing several companies by executing a focus acquisition strategy known as a buy-and-build (roll-up). A buy-and-build strategy involves investing in the parent company, which will serve as the foundation to create a larger organization through acquisitions of other businesses in the same industry. The goal is to benefit from scaling the operation, cutting unnecessary management and marketing costs, and reducing competition, ultimately increasing profitability and shareholder value. What’s important is to find a company with robust underlying growth potential.
For example, take the insurance industry. Insurance companies compete for market share by paying commissions and bonuses to sales agents – either to in-house producers or intermediaries. Some don’t adequately price their products in order to gain market share; when they suffer losses, the premium barely covers their operating expenses and reserves for claims. In fact, many insurers have suffered underwriting losses in the last several years because of claims frequency and severity, rate inadequacy, and bloated operational and marketing costs. They end up exiting a specific region, reducing capacity for certain lines, adjusting their appetite, and boosting their underwriting guidelines, among other measures, to gain profitability.
A private equity company can invest in an insurance company or managing general agency (MGA) with several programs and product lines that can be profitable if specific measures are taken. The private equity company can then identify other companies that can serve to expand the parent company’s footprint by leveraging the management, technology, processes, brand reputation, and relationships in place.
One intelligent approach to executing a roll-up strategy, often used by private equity firms, involves offering 40% of the purchase price in the parent company’s stock, 40% in cash, and another 20% in cash that is subject to the selling shareholders reaching certain milestones, according to Daniyar Zhanbekov. This approach accomplishes two critical objectives: 1) The buyer only needs to put down 40% cash for the purchase, which is typically financed by a bank (i.e., there is no need for equity), and 2) By providing the seller with shares in the parent company, which the seller will cash in at a higher valuation, the seller is motivated to sell, perform and reach target goals, and no longer be a competitor in the space.
About Daniyar Zhanbekov
Mr. Zhanbekov owns Basel Insurance Company in Kazakhstan and is currently its sole shareholder. Since its formation in 2021, Basel Insurance Company has demonstrated high capital adequacy ratios compared to the growth of insurance premiums. It has a balanced investment policy and continues to expand and diversify its business.
Interesting Related Article: “Core Banking Platform: What is it?“
