Fast-growth companies: Alliances & joint ventures surpass M&A, says new research

Collaboration, innovation and purpose, key to fast-growth success

• 82% of fast-growth companies have acquired a minority stake in the last three years
• 40% say alliances and joint ventures are key to their success
• 38% of revenue growth has resulted from M&A
• 62% has resulted from organic growth and non-M&A activities

Europe's fast-growth companies are turning to alliances, joint ventures and minority stakes to deliver  rapid growth, according to new research from international law firm, Pinsent Masons.

The report, titled "Pacesetters: How Europe’s fastest-growing companies stay ahead of the pack", reveals that an average of 38% of revenue growth in Europe's fastest growing companies over the last three years is attributable to M&A, whereas 62% has resulted from organic growth and non-M&A activities.

Alliances and joint ventures are the most cited factor amongst the 400 companies surveyed, with 40% listing them in their top three most important drivers of growth over the last three years.

A staggering 82% of the companies surveyed have acquired a minority stake in another company in the last three years. Nearly two thirds (65%) have entered into licensing or franchising arrangements, and 60% have embarked on an equity joint venture.

The research suggests that these external collaborations give fast-growing businesses rapid access to skills, experience, technologies and processes that their own organisations do not yet have.

Edward Stead, who leads Pinsent Masons' private equity team, comments:

“This trend towards collaboration through alliances and joint ventures reflects an increasing focus on partnership rather than control. These are partnership capital deals conducted on a grown-up basis where both sides are looking to work together, rather than the acquirer taking control. The varied deal structures being adopted reflect the need to move quickly to gain market advantage while taking a commercial approach to risk.”

Traditional M&A is however still an important component of the companies' growth strategies, with the percentage of revenue growth attributable to dealmaking expected to rise from 38% over the last three years to 43% over the next three years.

Motivations for pursuing M&A activity centre on a number of key growth drivers. Some 51% expect to do deals in order to increase market share through consolidation, while 49% are focused on acquiring intellectual property or new technology. The need for expansion into new product lines or geographies is also prompting many companies to think about M&A opportunities.

In many cases, fast-growing companies are considering a number of options before making a final decision about collaboration. For example, 83% of companies making an acquisition said they had also considered exploring some form of alliance with the target company instead. Among companies opting for alliances, 48% had considered acquiring the business with which they ended up working.

John Tyerman, Head of Corporate UK, Pinsent Masons commented:

"Traditionally, businesses needing to get beyond organic growth have looked towards M&A, but the options for collaboration and alliance are much wider today. They often provide a means to experiment with innovation and transformation without making irrevocable decisions. This is all about seizing the best opportunities in a very broad landscape – and doing so with scale and speed.”

Andrew McMillan, a corporate partner at Pinsent Masons commented:

"An unprecedented number of fast-growth companies are engaging in minority investments and alliances, allowing them to gain exposure to a market without taking the full risk that would be incurred through a traditional acquisition. By engaging in partnerships and alliances, companies are able to access new technologies, new platforms and customers, and in some cases entrepreneurial management teams.

"This could be termed a 'try before you buy' approach to M&A that allows both parties to assess each other and decide whether to progress with a more permanent arrangement.

This enables companies to be agile and move quickly to take advantage of opportunities as they arise. The business landscape is changing quickly, and this dictates that players within the market have to move faster if they want to be successful. This is the nature of M&A for Generation Z."

Three drivers of fast growth

The research identifies three factors that have enabled Europe's fast-growth companies to succeed, namely collaboration, innovation, and purpose. Of those surveyed, 58% believe that investing in and utilising technology effectively will be among the top three most important growth factors over the next three years. 76% say that they are a purpose-led business.

Surprisingly, only 7% of the companies surveyed believe that having an inspirational leader has been key. This result may not appeal to the likes of Tesla's Elon Musk, Alibaba's Jack Ma and Amazon's Jeff Bezos, amongst other well-known 'inspirational' leaders.

"Pacesetters"

The research, produced by Pinsent Masons and conducted by MergerMarket, drew its sample of 400 companies from the fastest-growing Western European-based companies evenly split across the following sectors: Advanced Manufacturing & Technology, Financial Services, Energy and Infrastructure. There were 177 private equity owned companies, 133 privately owned, and 90 listed companies.

Identified as "Pacesetters", the companies' growth rates were calculated based on turnover reported in accounts for the past three years. To be eligible for inclusion the companies had to have shown growth in each of the previous two years. There was a minimum turnover threshold for inclusion based on the most recent set of accounts.

John Tyerman, Head of Corporate UK, Pinsent Masons commented:

"Europe’s fastest-growing companies drive job creation, generate additional tax revenue and provide new opportunities for a broad range of stakeholders. Despite playing this vital role, we know comparatively little about the make-up of our fastest-growing businesses – specifically, the skills and qualities that enable them to leave the pack behind.

"Our research identifies three characteristics that are shared by many of the businesses posting the highest growth rates in Europe: collaboration and alliances with other companies, innovation, and a sense of purpose. Other businesses plotting a growth strategy for the years ahead would benefit from understanding what has enabled these 'pacesetters' to succeed."