Hold too.

Getting into a new vertical also presents some risks - From conference call below:

"I think the other one is we are -- certainly have interest in what will be a third vertical for the company. And I can assure you we are doing a lot of background work because the idea of buying in to a new vertical; and taking a lot of fundamentals of Hansen about dealing with data, regulatory and all those things that we know we're very good at -- we're going to make sure, if we are to buy in to a new vertical, that [ the effect is ] going to be a long tail that we see, other acquisitions which we can build on top."

....

Garry Sherriff

Yes, understood. 2 questions on M&A. I know you've been talking a lot about a third vertical. Can we get a sense? I mean assuming they're likely going to be defensive regulated industry targets. Does that mean that we should be thinking around the health medical field, financial services type verticals or others that you can articulate?

Andrew Hansen

Yes, Garry, I think that's a good question. We're seeing those things. What -- as Hansen, what are our strengths? And what we deal with, probably [indiscernible] volumes, [ important guys which cover ] [indiscernible] regulated industries. [ So they're normally ] things which we think that we [indiscernible]. So [ you take that sort of part of our marketplace. Who's going to -- who is buying it ] into an industry [ we have coming ]? So look. You're 100% right. We would see financial sector, health care or other industries which are regulated would be all the areas which we have some interest in. A lot of the work in the background is trying to understand those businesses; who's available, whether that's just a regional product or whether they're an international product; and other things we're all taking forward, but it is mainly around the pension, superannuation, financial, health care, insurances, all those industries where we think we can bring something to the table other than just good, old-fashion operational efficiencies.

Garry Sherriff

Understood. And the final one, in terms of the deployment of capital for M&A, you've given a large range in terms of target sizes between $30 million and $500 million. Do you envisage that, that third vertical is more of a smaller step out, with larger M&A deals, I guess, reserved for those existing verticals? How are you thinking about the deployment of that M&A and back into existing, [ rough sizing ] it, versus stepping out into a new vertical?

Andrew Hansen

Yes. Look. A bit of a combination answer because we can't be assured of the timing, Garry, when these things happen, so I think we're just trying to give an indication of where the Board and I feel comfortable of where we could actually spend our money. So it could be a combination. I think it's important to note we would only embrace a new, third vertical if we thought we will be able to do other deals on the back of it. We don't need to go and do a deal and, I think, only have $10 million of revenue if we don't think it's going to go anywhere. And to be honest: We've looked at a number of businesses which we just could not find what the recurring deals on the back of it would be to try and go in an ideal situation, but aspirationally, in 5 years, we'd love to have a third vertical [ which syncs with the other 2 ] verticals because we -- I think Richard [indiscernible]. We don't like to really have a country, a currency, a customer or a product which actually could cause, [ in a way ], harm to the organization. So it's the same thing when looking at all these third verticals.

@chagsy, thanks.

Having elevated interest rates will be a natural filter, I feel, as it will force significantly more critical evaluation of deal economics with much higher hurdle rates than the days of free money.

I went back to my 1HFY23 notes where I made the point that debt decks were being cleared for a potential M&A but thus far, nothing has been forthcoming. It thus feels that this higher hurdle rate is perhaps forcing deeper evaluation.

Completely agree that HSN will do a decent job of any M&A, fundamentally, but this additional hurdle forced by the rates will keep them even more honest!

Thanks for this @mujo. I missed the call and could not find a recording for it, so this was really helpful.

Adding a completely new vertical was always going to involve a lot of work, but devil they do (hard work & risk, but opens new avenues for growth), devil they don't (no risk, boring growth).

I really like Andrew's comment on the need for a decent tail in any 3rd vertical - that, plus high interest rate hurdles will absolutely keep HSN honest.

The question that will be interesting is does HSN do a large-sized 3rd vertical deal (higher risk as they are stepping out of their comfort zone but potentially higher reward) or do they start with a small deal, then scale (less reward but less risky entry).

Time will reveal all!