“Value creation is the result of doing a lot of things right”
Value creation in M&A and investing: Insights from Koen Hoffman, CEO of Value Square.
At the recent M&A Forum on Value Creation at Simont Braun, Koen Hoffman, the CEO of Value Square, offered a rich perspective on value creation in mergers and acquisitions (M&A) and investing.
With a robust background in investment banking, Hoffman’s journey began at KBC, where he held various roles such as acquisition financing, project financing, and equity sales. His extensive experience in corporate finance, particularly in M&A and capital market transactions, laid a strong foundation for his future endeavors. Approximately six years ago, he invested in Value Square, a wealth management firm, and became its CEO. Additionally, Hoffman serves on several boards, including Fagron and Greenyard, and holds advisory roles in various private equity funds and family offices.
Investment Strategy at Value Square
Value Square’s investment strategy is straightforward and heavily cashflow-driven. Hoffman emphasizes that they only consider companies with predictable cashflows, steering clear of sectors like start-ups, technology, and biotech due to their inherent unpredictability. This focus often leads them to invest in small and mid-cap companies, which are manageable and frequently have familial ties. Hoffman stresses the importance of cashflow in sustaining operations and enabling long-term investments. “We always come back to the same thing: what pays the bills? Cashflow, not stories”, he says. “A company goes bankrupt if there is no cash flow, not because it is not profitable or strategically sound.”
Value Square’s investment process is highly independent. They do not follow index recommendations, but instead conduct their own rigorous analyses. Hoffman believes in a different approach from many fund managers who align their investments with index movements. This independence allows Value Square to stay true to their value-driven methodology.
Koen Hoffman: “We have a small-cap fund in Europe and America, and a fund that only invests in listed holdings”, Hoffman explains. “We also have a focus fund, a bond fund and a purely Belgian fund. The results of the last five years have been good to very good. We’ll see what the future brings. But we stick to our investment style, grounded in cashflow analysis and value creation.”
Objective Measures of Value Creation
“It is our belief that cash flow is a good indicator of value creation”, Hoffman continuous. “The free cash flow and the return on invested capital in particular give us peace of mind. We are not looking for the best results in the world, but we do look for solid results. We bring this together every year in a study and an annual Value Creation Awards for listed firms in Belgium.”
Hoffman explains that Value Square’s Value Creation Awards is based on equity growth, adjusted for dividends and capital changes. This objective measure demonstrates that companies generating significant equity tend to perform better in the market over time. The award, unlike many popularity-based accolades, consistently recognizes companies that excel in creating shareholder value. Because of the objective assessment, it is possible for the same companies to win several years in a row, something you won’t see in many popularity awards.
“In our DCF analyzes we look at value creation from a financial perspective”, says Hoffman. “We believe that value creation is the result of all activities of a company. This can be done through a good HR strategy, product innovation, new markets, operational efficiency or an exceptional supply chain. Try not to focus on a single strategy: it is important to perform well on all these points. Management is an important factor here. We are not headhunters, but try to objectively look at how good management is and how they ensure value creation, which we can deduce from their financial performance. Value creation is financially measurable, but it is the result of doing a lot of things right.”
M&A as a Tool for Value Creation
M&A can be a powerful tool for value creation, but Hoffman advises caution. While acquiring a company might appear quicker and sometimes easier than developing a new product or entering a new market, it comes with significant risks, particularly in execution and integration.
“Everyone knows the different M&A strategies”, says Hoffman. “But what is often forgotten is that it is sometimes easier to spend 100 million euros on an M&A than to start a new activity, such as a new service, product, country or market, also for 100 million euros. It is easier to spend 100 million euros on a company that you buy and make sure the numbers are good at the beginning, than to start a greenfield project or tap into a new market.”
“However”, stresses Hoffman, “you pay a multiple for an M&A, but not for an internal project. Of course, the execution risk seems to be much higher with a new project, which is sometimes the case. But if you think about it carefully, this option is not considered enough. Many companies, especially listed ones, are penalized for the uncertainty of a heavy CAPEX project compared to an acquisition, because an acquisition shows results faster.”
Hoffman notes that many overvaluations occur due to the competitive nature of M&A transactions. “In a market with smart advisors, you are more likely to pay the full price than if you create value yourself.” Instead, Hoffman suggests that internal development, despite its slower pace, might be a more sustainable path to value creation.
Challenges of Succeeding in M&A Deals
Hoffman discusses the skepticism that often surrounds M&A announcements, given the high execution and integration risks. He points out that while the acquisition process is straightforward, making the acquired company work effectively within the existing structure is challenging. He highlights the importance of considering cultural compatibility in M&A to ensure successful integration.
“Making M&A deals work is not as simple as is often said”, says Hoffman. “All advisors involved in an M&A have only one goal: to implement the M&A. After signing you get a tombstone and then the wild stories about synergies and collaboration come, which is often disappointing when you look at the figures afterwards. An important point to pay attention to when realizing synergies is: do I want to integrate it? Some companies do buy-and-build without integration and have great success. It can be a good strategy to add a company including their cash flow, without full integration. Some companies let their managers, often very enterprising CEOs, follow their own course and realize synergies when they find it useful. They have the freedom to do it or not.”
“To be clear, finances should always be integrated so you can see the numbers and cash flow and prevent fraud”, Hoffman continues. “That is a minimum requirement. But with many large acquisitions, integration often ends in tears. The DNA is then incorrect, despite good intentions. The first time the numbers are not met, they send an expert team that does not work well with the existing team, which leads to problems. There are many theories about what needs to be done, but practice often proves more difficult.”
Effective Management and Value Creation
Hoffman believes that effective management plays a crucial role in value creation. Companies that reinvest their free cashflow for internal growth, a process Hoffman calls endogenous growth, tend to be more stable and profitable in the long run. He emphasizes that this growth strategy, although slower and more challenging, is ultimately more rewarding for shareholders.
“Companies that perform incredibly well over the long term often have a strong focus on entrepreneurship and intrapreneurship”, according to Hoffman. “They try to do things themselves, such as building new factories, developing new products and stimulating innovation. Effective management provides a layer of professionalization that should not be underestimated. They often invest deliberately with a plan. Nowadays we also see that private equity funds are taking companies off the stock exchange for further growth. When private equity sells on the stock exchange, we are less enthusiastic, because a lot of value has often already been realized and the chance of further success is smaller.”
The Role of ESG in Value Creation
While Value Square does not specifically promote sustainable funds, Hoffman underscores the importance of ESG principles in creating long-term value. “We believe that some funds promoting sustainability today do so more as a marketing tool than as a genuine effort. We like to see companies that continuously work on sustainability and ESG principles, because this improvement will lead to value creation in the long term. This must be embedded in the DNA of the company, which is super important to us.”
In the due diligence process for their investments, Value Square also pays attention to ESG aspects. Koen Hoffman: “We have internal parameters that we look at. If a company does not meet the required scores, we do not invest. Governance is the simplest aspect because it involves following rules. Environmental is an assessment, but the most difficult thing is the social aspect, the S. This is a kind of black box for us. Although remuneration reports provide a lot of data about the number of women, men and pay ratios, it remains difficult to gain real insight into how people are treated socially. This is a matter of culture and difficult to measure. It is important to us that sustainability is embedded in the company’s activities and that the company actively works on this. This is more important than just the data that comes from reports. I sit on the board of several companies and see that one company reports better than the other, but this is often not an exact reflection of how good or bad the company really is doing. Reporting is one thing, but you really have to do it as part of entrepreneurship. There are also opportunities for value creation here.”
Future Trends in Private Equity and Investing
Looking ahead, Hoffman predicts a shift back to traditional cashflow analysis in private equity. He notes that while sectors like AI are currently attracting significant attention, the true investment opportunities will emerge once the initial hype subsides. Additionally, he anticipates that public markets will regain prominence as an investment venue, offering liquidity and new opportunities for growth.
“There are a number of themes that will play a role, such as the growing sales markets in densely populated areas outside Europe, for example China. No one has a ready-made answer to that, but it is important to look at it carefully. Raw materials and their dependence will be a theme, just like energy. Raw materials in the broadest sense of the word will be an important factor in many investments”, according to Hoffman.
In conclusion, Koen Hoffman’s insights provide a comprehensive understanding of value creation in M&A and investing. His emphasis on cashflow-driven analysis, objective measures of value creation, and the importance of effective management and ESG principles offers valuable guidance for investors seeking sustainable and profitable growth.
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URL: https://manda.be/article/koen-hoffman-value-square-value-creation-in-acquisitons-and-investments/
