InSight

Exit and Growth Strategies for Middle Market Businesses

Re-Casting of Earnings Analyses v. “Just the Facts Ma’am”

By Peter Heydenrych | Jun 10, 2019

In his May 15 Wall Street Journal Article “Tech Firms’ Creativity Meets Investor Reality”, Rolfe Winkler looks at the creative ways in which recent big startups going public, have come up with unusual, alternative ways for measuring their performance.

Uber and Lyft, Mr. Winkler’s examples, seem to be explaining their losses by offering up an IPO version of “the dog ate my homework” excuse for poor performance. Uber had a $3 billion operating loss last year, but presented an argument, that, on a “core platform contribution” basis, it actually made a profit of $940 million!

Comments on Mr. Winkler’s article include views that suggest some acceptability of the “alternative metrics”, provided that full and clear disclosure is made of how the conclusions were reached.

In the private M&A market, calculating earnings/profits by adjusting historic booked and even future earnings is very common. Is it a fair practice? GAAP provides detailed rules for calculating earnings, and FINRA holds its Broker-Dealer members to strict account on the question of “making promises about benefits including future profits.” Yet almost every private M&A transaction is negotiated around arguments that the “Re-Cast EBITDA”, a number often materially different than the booked EBITDA, should be used in place of the booked EBITDA.

For purposes of presenting “alternative ways to present performance”, private M&A transactions hold one significant advantage over the public buying and selling of securities, including IPOs, because private transactions are generally negotiated with full disclosure to buyer and seller and the Investment Banking, Legal and Tax professionals who advise them. Ample opportunity exists for the buyer to conduct a self-designed due diligence investigation which, in turn, will usually include scrutiny by the other professionals mentioned above.

Regarding “alternative metrics” or “Re-Cast EBITDA”, there is only one rule: “There are no rules!” Of course, both parties must agree, so that becomes the rule. The “Re-Cast Adjustments” that the seller seeks to present, and the buyer must accept for there to be an agreement, usually fall into 4 categories:

  1. Revenues and costs which will not continue after the sale
  2. Revenues and costs which were booked historically as a result of an extraordinary, non-recurring event
  3. Revenue and cost adjustments which will result from the engagement of synergistic benefits which the transaction will trigger
  4. Revenues and costs which the buyer will eliminate as a result of implementing strategic decisions (which the buyer won’t necessarily want the seller to be aware of)

Sometimes GAAP will even come to the rescue, permitting the capitalization of costs which can be demonstrated to build asset value with future benefit, such as the funding of IP creation with a view to generating earnings over subsequent years. For this and other reasons, often relating to the patterns of capital expenditure required to sustain the business model, the buyer will look at cash flows instead of or in addition to EBITDA earnings.

Re-Cast Adjustments are generally made to the historic results. The buyer is working to estimate future results, but is relying on historic results as an indicator. The buyer will also want to negotiate a purchase price based on historic results, arguing that he is paying only for what has already been created. The seller, on the other hand, is looking to paint as rosy a picture of the future as possible, arguing that the future is what the buyer is really getting and should be paying for. Again, there are no rules, only the need for the parties to agree.

A second measure to protect the buyer is often employed when the Parties are not, or are not equally, confident about the future and the valuation it will yield. An “Earn-Out” construct is not available to public market Parties, but is often used by private transaction parties. In an Earn-Out, the buyer promises to pay more money, but only if certain future performance or other criteria are met.

So, in a private sale of a business, there would seem to be a good argument supporting the idea that the seller should have the opportunity to claim an, as yet, unrealized vision, or to offer an alternative measure of the pro forma profitability of the company. The buyer can check the claims thoroughly and can even set aside some part of the consideration pending the successful achievement of a future milestone. Of course, this approach is justified only by the engagement of two fully advised, experienced and knowledgeable parties, who can, and do, engage in a thorough examination and negotiation of a transaction in circumstances which can be argued to be fully transparent.


M&A Quarterly News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | May 22, 2019

The report below gives a good overview of the second quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom sector for Q1 2019 included 328 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in March when Envestnet, Inc. acquired PIEtech, Inc. for US$521.2 million in cash and stock. Envestnet engages in the provision of intelligent systems for wealth management and financial wellness. PIEtech develops financial planning software for financial advisors. It offers MoneyGuidePro, an Internet based financial planning software that helps advisors to create, implement and maintain investment strategies to meet financial goals. The company was founded in 1997 and is headquartered in Powhatan, VA.

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M&A Quarterly News In The Metal Fabrication Industry Sector

By Jim Zipursky | May 16, 2019

The report below gives a good overview of the second quarter M&A activity in the Metal Fabrication Industry Sector. M&A activity for North American based target companies in the Metal Fabrication sector for Q1 2019 included 55 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in March when Tribus Aerospace LLC, a portfolio company of Shorehill Capital LLC acquired Midwest Precision LLC for an undisclosed amount. Antares Capital Corp provided debt and equity capital to Tribus Aerospace. The acquisition aims to expand the service offerings of Tribus Aerospace. Founded in 1953, Midwest Precision is located in Eastlake, Ohio and provides contract manufacturing services in precision machining of stainless steel, aluminum and exotic materials.

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M&A Quarterly News In The Industrials Industry Sector

By Steve Hauser | May 15, 2019

The report below gives a good overview of the second quarter M&A activity in the Industrials Industry Sector. M&A activity for North American based target companies in the Industrials sector for Q1 2019 included 503 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in February when The Toro Co. acquired Charles Machine Works, Inc. for US$700 million in cash. The acquisition includes Ditch Witch and several other brands within the underground construction market. Funding for the transaction was provided through Toro Co’s existing credit facility provided by JP Morgan and Merrill, Lynch, Pierce, Fenner & Smith. The acquisition would allow The Toro Co to further enhance its existing business portfolio of brands within the industry.

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M&A Quarterly News In The Print and Packaging Industry Sector

By Jeff Wright | May 15, 2019

The report below gives a good overview of the second quarter M&A activity in the Print and Packaging Industry Sector. M&A activity for North American based target companies in the Print and Packaging sector for Q1 2019 included 34 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in March when MC Sign LLC, a subsidiary of Arcapita Bank BSC, which is ultimately owned by Arcapita Group Holdings Ltd, acquired Coastal Signage + Wayfinding, Inc. for an undisclosed amount. The transaction enhances MC Sign’s portfolio of service offerings and it is in line with the growth strategy of MC Sign. Coastal Signage + Wayfinding is located in Oceanside, California and manufactures signs.

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M&A Quarterly News In The Business Services Industry Sector

By Brad Purifoy | May 14, 2019

The report below gives a good overview of the second quarter M&A activity in the Business Services Industry Sector. M&A activity for North American based target companies in the Business Services sector for Q1 2019 included 443 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in April when Juniper Networks, Inc. acquired Mist Systems, Inc., a portfolio company of NTT DOCOMO Ventures Inc, GV Management Co LLC, Norwest Venture Partners, Lightspeed Management Co LLC, Kleiner Perkins Caufield & Byers LLC, and Cisco Investments for US$405 million in cash. The acquisition would allow Juniper Networks to enhance its presence in the cloud-managed segment of the wireless networking market. Mist Systems is located in Cupertino, California and provides mobile related wireless network services.

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M&A Quarterly News In The Energy Industry Sector

By Roy Graham | May 10, 2019

The report below gives a good overview of the second quarter M&A activity in the Energy Industry Sector. M&A activity for North American based target companies in the Energy sector for Q1 2019 included 69 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in March when Diversified Gas & Oil Plc acquired gas assets, from HG Energy II Appalachia LLC, ultimately owned by HG Energy LLC for US$400 million in cash. The acquisition is expected to increase the production capacity of Diversified Gas & Oil Plc. The assets to be acquired comprise107 unconventional producing gas wells with a combined net daily production of more than 20,000boe. The wells are located in the West Virginia and Pennsylvania.

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M&A Quarterly News In The Healthcare Industry Sector

By Daniel Sirvent | May 09, 2019

The report below gives a good overview of the second quarter M&A activity in the Healthcare Industry Sector. M&A activity for North American based target companies in the Healthcare sector for Q1 2019 included 156 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in March when Acrotech Biopharma LLC, a subsidiary of Aurobindo Pharma Ltd, acquired the business and assets of 7 Hematology Products from Spectrum Pharmaceuticals, Inc. for $300 million in cash and contingent payout. The acquisition would allow Acrotech Biopharma to expand its product offerings.

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M&A Quarterly News In The Wholesale Distribution Industry Sector

By Jeremiah Hughes | May 03, 2019

The report below gives a good overview of the second quarter M&A activity in the Wholesale Distribution Industry Sector. M&A activity for North American based target companies in the Wholesale and Distribution sector for Q1 2019 included 141 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in March when Square Chain Corp acquired a 55% majority stake in Caravel Group, LLC from M Line Holdings, Inc. for an undisclosed amount in stock. The stock being issued to M Line Holdings for these companies gives M Line a controlling interest in Square Chain Corp. Caravel Group is located in Fremont, California brands and distributes beverages.

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M&A Quarterly News In The Hospitality and Leisure Industry Sector

By David Hulett | May 02, 2019

The report below gives a good overview of the second quarter M&A activity in the Hospitality and Leisure Industry Sector. M&A activity for North American based target companies in the Hospitality and Leisure sector for Q1 2019 included 64 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in January when A private group led by Elliott Management Corp and GFI Capital Resources Group, Inc. acquired Parker Hotel New York for US$420 million in cash. The transaction was funded from bank debt. The transaction would allow GFI Capital Resources Group to enhance its portfolio of hotel businesses.
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