Every business worth its salt has a plan for growth – and technology companies in particular have the ability to scale rapidly.
However, there can’t be many plotting to more than quadruple their market capitalisation in a few short years.
SysGroup, currently valued at more than £17 million, plans to do just that. “Our plan is to take the business to a £100m market cap,” says CEO Adam Binks. “It only takes two or three strategic acquisitions.”
The managed IT services and cloud hosting provider has already scaled significantly since Binks was appointed CEO in 2018 through a combination of organic and acquisitive growth. Significant acquisitions in recent years include the £9m purchase of Certus IT in February 2019 to aid expansion into South Wales and Hub Network Services for £1.45m in June 2019, which provides a wide range of enterprise-grade managed connectivity services for clients.
SysGroup also acquired Telford-based Rockford IT in 2018, significantly enhancing its capabilities in delivering managed security solutions.
“Organic growth is much slower in any business,” explains Binks. “In the managed IT services sector, the industry average is around 6% year-on-year; whereas acquisitive growth will accelerate the journey to get us to that £100m target.
“As we scale, our organic growth will scale with it because our customer base becomes bigger and we have more customers wanting to buy more of our services.
“We’re effectively buying market share to create a super-brand: by bringing these smaller companies into the fold, we’re giving their customer bases access to a broader and higher quality services, which enables them to extract the best value from their managed IT services provider.”
Binks, who has a deep background in IT, works together with the company’s CFO Martin Audcent to identify targets.
“During the COVID pandemic we demonstrated we have a solid business model and we’re targeting a return to 5-10% organic growth, but to get to that £100m market we’ll need to make bolt-on and transformational acquisitions that are complementary to what we already do,” says Audcent.
“You have to grow step by step: each acquisition builds EBITDA and cash generation and we can then ask our bank to extend our lending facilities which can be used for further growth opportunities. We also have supportive shareholders who are keen for us to make value enhancing acquisitions.
“We have specific criteria to find suitable targets to acquire, we like complimentary businesses who are growing and have a high levels of recurring contracted income. It’s then our job to navigate the bid and acquisition process, which always has bumps and wrinkles along the way! It doesn’t stop when you sign the deal, we have new people to welcome into SysGroup and must then work together to integrate the acquired business. Ultimately, we expect the acquired business to add revenue and EBITDA growth to SysGroup.”
SysGroup, which is listed on the London Stock Exchange’s AIM market, has seen revenue growth of 86% under Binks’s leadership, reaching £19.5m prior to lockdown. While the impact of the pandemic saw revenues for the last financial year decline, adjusted EBITDA was up 4% year-on-year to £2.91m.
Binks says he is planning further acquisitions as the business ramps up again following COVID-19.
“We’ve certainly seen a delay to our aggressive acquisition strategy because of the pandemic, but that’s something which clearly can’t be helped,” he admits. “As we come out of the pandemic further, I think things will start to accelerate at pace again and I’m excited by the opportunities that sit ahead of us.
“In every boardroom, IT will now be on the agenda because that is exactly what enabled their businesses to carry on throughout the pandemic in one form or another. I think the opportunity for managed IT services is going to be huge moving forward – we just need to get beyond that point where businesses have once again really got a grip of their own balance.”
On the subject of acquisition targets, Audcent adds: “COVID was a difficult period to assess companies: the IMs were showing their prior year numbers, which was difficult to assess when they’re in the middle of a pandemic and you’re trying to figure out where they’ll be coming out.”
The CFO says they look at four or five potential targets a month. “It’s part of our day job,” he says. “People know our strategy and that SysGroup is in an acquisition phase, which naturally brings an inflow of opportunities.
“However we also keep an eye on companies that may come up for sale in the future: there’s a network of people who work in this industry and if there is likely to be a right time for them to sell, they can talk to us early and let us know.”
A company can be rejected “in two minutes if they don’t meet the criteria”, says Audcent, at the initial stage. “If we think there’s something there, Adam and I will spend more time evaluating them and request a meeting with management to flush out our key questions.
“When you walk away from the meeting, you tend to know if there’s something good there… there’ll always be further data and information needed – particularly around their customer contracts – just to confirm what’s been said, but that’s when you may get a good feeling.”
A desirable target has a high level of recurring contract income and is already on a growth trajectory. “We’re not looking for turnarounds or companies in distress which need to get back on track,” says Audcent.
Headquartered in Liverpool, the four acquisitions to date have seen SysGroup establish bases in London, Newport and Telford, while it recently established a base in the centre of Manchester.
“On day one following an acquisition – whether it is a bolt-on with a rapid integration plan, or a more transformational deal with a slower integration – we start to drive our culture into that business,” says Binks.
“Prior to an acquisition, we do an analysis to understand the business’s culture. We’ve got a team of people to bring them in, demonstrate what our core values are and what they mean to us. We then give them real-world examples of how people in our business demonstrate those values on a daily basis.
“We gently massage our culture into the acquired organisation as smoothly and as quickly as possible to get people on board.”
Getting the message across that ‘acquired’ doesn’t mean ‘fired’ – in fact, quite the opposite – is key.
“When an acquisition takes place, people immediately think about headcount: we’re losing our jobs, the new company will get rid of us, they’re going to shut the office down,” explains Binks.
“We change payroll as quickly as we possibly can: I always believe that you work for the company which pays your salary. Once you see you’ve been paid by SysGroup, it’s easier for people to relate that they have been acquired and are straight away brought into the SysGroup family.
“Once you migrate the payroll, they realise that there is a long-term future for them here – and that’s what helps with the retention of staff.”
“A successful acquisition is when we have integrated the business into the SysGroup culture and way of working and are seeing the acquisition value benefits coming through.”