InSight

Exit and Growth Strategies for Middle Market Businesses

Plastics & Rubber M&A News

By Jim Zipursky | May 22, 2015

Plastics & RubberAs the economy strengthens and manufacturing and production pick up demand for plastics & rubber products is expected to grow. According to data from the Interindustry Economic Research Fund (IERF), revenue for U.S. plastics & rubber products manufacturing is forecast to grow at an annual compounded rate of 5 percent between 2015 and 2019.

US demand for clean, recycled polyethylene terephthalate (PET) plastic is surpassing supply, according to the National Association for PET Container Resources. While recycling rates for PET plastic continue to climb, the rate of usable PET per bale of recycled plastic is in decline. Single-stream recycling efforts lead to a higher rate of contamination per bale, and PET packaging designs such as shrink or barrier labels can make packaging more difficult to recycle. The trend of lightweight packaging has also resulted in the need to sort and process a higher volume of material to produce a pound of usable recycled PET flake. Supplies of recycled PET have also tightened amid rising demand from US consumers, as well as from exports markets. As a result, plastic container manufacturers that use recycled PET as a feedstock may alter packaging design to make products easier to sort and recycle. PET container companies that also operate plastics recycling processing plants may invest in more sophisticated sorting machinery to increase recycled PET recovery rates.

Posted by Jim Zipursky.

Read the Entire Plastics & Rubber 2nd Quarter Newsletter Here


Technology, Media & Telecom M&A News

By Arun Batavia | May 15, 2015

Binary CodeIn the ever-evolving Technology, Media & Telecom sector, M&A activity is as hot as ever as technologies change and cannibalize obsolescence. Hot sectors for the remainder of 2015 and beyond include cyber security, SAAS and big data.

US state and local government agencies will increase spending on information technology products and services by more than 3 percent annually over the next five years, according to market analysis firm Deltek. IT investments at the state and local levels are forecast to grow from about $60 billion in 2014 to $70 billion by 2019. Health care and public education are key growth areas for IT spending as states look to modernize Medicaid and update operational, instructional, and research technologies at schools to meet surging student enrollment. In addition, data center modernization, cloud storage, and mobile communications are expected to drive IT spending growth for general government operations.

The Internet of Things (IoT), defined as a network of dedicated physical objects that contain embedded technology to sense or interact with their internal state or external environment, is expected to grow rapidly in the near future. Some 4.9 billion connected “smart” devices will be in use in 2015, up 30 percent from 2014, according to Gartner. As many as 25 billion devices are expected to be connected by 2020. The IoT can be viewed as an ecosystem that includes not only things, but also communication, applications, and data analysis, all of which will drive a growing demand for information technology services to support them. Manufacturing, utilities, and transportation are forecast to be the top three verticals using IoT in 2015. Gartner estimates that IoT will support total services spending of $69.5 billion in 2015 and $263 billion by 2020.

Total US consumer spending, a driver for the IT needs of consumers, rose 0.3 percent, primarily from service expenditures, in February 2015 compared to the same month in 2014. US corporate profits, an indicator for corporate investment in information technology, fell 0.2 percent in the fourth quarter of 2014 compared to the same period in 2013. Total US revenue for computer systems design and related services rose 4.7 percent in the fourth quarter of 2014 compared to the previous year.

Posted by Arun Batavia.

Read the Entire Technology, Media and Telecom 2nd Quarter Newsletter Here


Healthcare M&A Industry Update

By Peter Heydenrych | May 08, 2015

stethoscopeHealthcare M&A activity for the sector for Q1 2015 included 167 closed deals according to data published by industry data tracker FactSet, with an average enterprise value of $236 million. Favorable credit markets and cash-rich balance sheets are spurring continued strategic activity in the healthcare sector and M&A in general. Private equity buyers are also increasingly active with interest rates remaining at or near record lows. Healthcare services represented more than half of Q1’s transaction total. Other sectors, such as behavioral healthcare and managed care, also had significant activity. Biotechnology and pharmaceuticals were also active sectors driven by investment from venture capital firms.

The Centers for Medicare and Medicaid Services (CMS) is proposing revisions to its accountable care organization (ACO) guidelines to increase incentives and reduce penalties for participating health care providers. About 330 Medicare ACOs have been formed since 2012 under rules established in the Affordable Care Act (ACA). ACOs can earn bonuses for lowering the cost of care and improving quality, but they were scheduled to begin facing penalties in 2015 for exceeding cost benchmarks. The CMS has determined that many ACOs are not ready to assume financial risks associated with the program. To maintain participation, officials have proposed an option where some providers can avoid penalties but earn smaller bonuses for another three years, according to Modern Healthcare.

US consumer prices for medical care commodities, an indicator of healthcare costs, increased 4.2 percent in March 2015 compared to the same period in 2014. US consumer prices for medical care services, an indicator of profitability for healthcare services, rose 1.9 percent in March 2015 compared to the same month in 2014. Total US revenue for healthcare and social assistance rose 5.4 percent in the fourth quarter of 2014 compared to the previous year.

Read the Entire Healthcare 1st Quarter Newsletter Here


Private Equity Seeking Smaller Deals

By Kim Levin | May 05, 2015

Money GraphRecent articles in both the Wall Street Journal and Reuters shine the spotlight on the conundrum facing Private Equity firms working under stricter regulatory guidelines designed to curb dangerous lending practices.  On one hand, it is understandable and prudent to expect policies to be in place to prevent the kind of financial melt-down we experienced during the recent sub-prime mortgage fiasco.  On the other hand, Private Equity firms have traditionally used substantial leverage to their advantage, boosting returns on investments for their portfolios and their investors.  Current regulatory guidelines urge banks to avoid putting debt of more than six times earnings before interest, taxes, depreciation and amortization, or EBITDA, on companies in most industries.

As major buyers of businesses, both public and private, private equity firms use a combination of cash and debt to finance their purchases.  The higher the level of debt, the greater the potential return when things go as planned.  However, when expectations fall short…use of leverage compounds the shortcomings.  We have begun to see both buyouts and loan levels dropping.  According to the Wall Street Journal article “Buyout Firms Feel Pinch From Lending Crackdown”, bankers and private-equity executives indicate the lending pullback is creating pressure on buyout firms to do smaller deals funded with less debt and more cash.  Less debt can mean less risk if the deal goes south, but also lower returns if it proves a success.

The fact that private equity will be seeking out smaller size deals plays into the hand of  middle-market business owners considering a sale.  Average debt levels on middle market deals have stayed within the regulatory guidelines since they went into effect in 2013, according to GF Data.  It is likely this trend will continue for middle-market transactions.

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M&A News in the Energy Sector

By Roy Graham | May 01, 2015

Oil BarrelsFalling oil prices in the energy sector are affecting valuations. Many owners are reluctant to test the M&A market as valuations have dipped significantly over the past six months.  Buyers, on the other hand, see the current market climate as an opportunity to acquire good companies at reasonable multiples. According to data published by Fitch Ratings, low prices for an extended period could lead to more acquisitions of smaller, potentially distressed companies by larger ones, while reducing the major oil companies’ ability to finance their operations through disposals. The combination of lower operating cash flows, fewer disposals and some potential acquisitions could put major oil companies’ credit metrics under pressure. However, the impact would depend on how they respond, as some might choose to cut capex and exploration expenses, while others might decide to operate with higher leverage, which could lead to downgrades if sustained. There has been a large number of private equity backed energy companies formed over the past five years capitalizing on the fracking trend. Many of these companies have significant debt to service, which could spark a flurry of M&A activity – even if multiples are lower than many of the sellers would like.

Industry publication World Oil’s annual forecast and review predicts that West Texas Intermediate crude oil prices will average about $55 per barrel in 2015. If this comes to fruition, exploration projects that require crude prices of more than $50 per barrel to break even, such as Arctic drilling and crude exploration in Canada, will likely lose funding. Shale drilling in North America is also expected to decline. New well activity in Texas, which leads the US in oil production, is expected to fall nearly 24 percent in 2015. Louisiana, North Dakota, and Oklahoma are also expected to see declines. Overall, US drilling is forecast to fall by nearly 20 percent in 2015.

Posted by Roy Graham.

Read the Entire Energy M&A 2nd Quarter Newsletter Here


Transportation and Logistics Sector M&A News

By Doug Nix | Apr 29, 2015

LogisticsM&A activity in the transportation and logistics sector was driven by an increase in trucking deals as larger companies looked to increase market share. Consolidation is being driven by overcapacity in shipping as larger players attempt to reduce competition and create more efficient economies of scale. Looking ahead to 2015, a decline in fuel costs could result in improved profitability and spark increased M&A activity.

According to First Research, an industry research organization, with plummeting crude oil prices driving diesel prices lower, operating costs at trucking companies are falling dramatically. Retail diesel prices in the US, which averaged $3.82 in 2014, hit a four-year low at the end of the year. Prices are expected to average only $3.07 per gallon in 2015, which could result in diesel surcharge savings of as much as $24 billion, according to Bloomberg. Reducing surcharges should free up trucking companies to raise shipping rates, which would help them cover rising salary and health care costs.

High levels of warehouse absorption in the US indicate an increased demand for warehouse space, driven by growing e-commerce activities. More than 160 of the 210 largest US warehouse markets showed positive net absorption – an increase in the amount of warehouse space occupied – in 2013 versus 2012. Overall in those markets, 162.6 million square feet of warehouse space was occupied in 2013, an increase of nearly 40 percent from 2012, according to CoStar. Much of the demand for warehouse space is directly related to e-commerce, a sector that’s growing globally by about 20 percent annually.

Posted by Doug Nix.

Read the Entire Transport, Logistics and Supply Chain 1st Quarter Newsletter Here


Successful Acquisitions Require Successful Integration

By Jordan Nix | Apr 27, 2015

Puzzle PiecesThe success or failure of an acquisition depends on how the target is integrated. The prevailing fallacy is to integrate based on relative size; smaller targets are fully merged in with the acquiring company while larger targets remain standalone operations.

Successful integration requires a clear understanding of what is being purchased. The best way to do that is to look at a business in terms of its basic elements, its resources, processes, and priorities.

Resources are physical things such as people, products, and customers. Processes are the way in which a business uses its resources; how it designs, sells, and manufactures its product or service. Priorities are what guide a business; they are its customer value proposition and profit formula.

Resources are easily integrated. Processes and priorities are not. Read more »


Print and Packaging M&A Update

By Anthony Contaldo | Apr 24, 2015

Color PrintingAccording to a report from international consulting firm Ernst and Young, M&A activity in the print and packaging sector is expected to sustain well into 2015 driven by industry continued growth, cross-border transactions and strong interest from the private equity looking for add-on acquisitions.

During According to First Research, an industry research organization, Global demand for folding cartons used in product packaging is forecast to grow more than 5 percent per year, reaching a value of $184 billion by 2018, according to paper and packaging research firm Smithers Pira. Growth will be led by rising demand in emerging markets for health care products, dry foods, frozen and chilled foods, and cigarettes; folding carton growth in developed markets is forecast to be relatively slow. Key trends that are expected to drive future growth for folding cartons include migration barriers that prevent printing inks and other chemicals from contacting foods, downsized packaging designs, and single-serving packs. Smart packaging – enabled by low-cost printed electronics – will soon allow companies to convey product information electronically on cartons. Key factors driving demand for smart packaging include an aging population, rising global affluence, and greater concern about product tampering.

Posted by Anthony Contaldo.

Read the Entire Print & Packaging 1st Quarter Newsletter Here


Business For Sale by Mobile App or Web Portal?

By Peter Heydenrych | Apr 20, 2015

Phone with appsFor business owners looking to execute an M&A transaction to buy, sell or merge, or to raise capital for a privately owned company, the world has changed quite dramatically in the last 20 years. It wasn’t that long ago that Investment Bankers hand-searched the printed Thomas Register of Manufacturing Companies to find prospective buyers for their clients. The Thomas Register, of course, has gone online, along with numerous other searchable “databases” such as Hoovers, OneSource, Capital IQ, and so on. Online databases, however, is not where the story ends. Through Google, Bing and other search engines, the internet has opened up a vast world of access and connectivity.

In an Inc. Magazine article “Merger and Acquisition Deals Moving Online” Erik Sherman points to the growth of online venues as a key deal sourcing element increasingly used by M&A Professionals. The article suggests to an exiting business owner that ” …  according to an online global survey … you’d better get yourself online in the right places .. [along with any other search avenues you may explore]”. In a Bloomberg News article “An App for Finding the Perfect M&A Match” Manuel Baigorri writes, “There are apps for dating, shopping, and hailing cabs. Now there are apps for matching companies for takeovers.”

A 2012 Lead Generation Benchmark Report noted: “Over the past decade, the way people buy products and services has completely transformed.” The report characterized as a “Monumental Shift”, the change in buying behavior amongst small business purchasing decision makers, from the traditional reliance on vendors’ salespeople, to the self-empowerment derived from the ability to become educated and informed through research and social media access. Read more »


M&A News from the Metal Fabrication Industry

By Robert Contaldo | Apr 17, 2015

Metal Fab EtchingM&A activity in the metal fabrication space has been driven by the growth in employment, construction projects and increased manufacturing. In particular, growing demand for aluminum products across a variety of end markets is driving component sales making aluminum fabricators highly attractive M&A targets to acquirers looking to be vertically integrated.

According to First Research, an industry research organization, US industrial production of fabricated metal products increased about 4 percent in December 2014 compared to the same period a year earlier. Forgings and stampings saw some of the largest gains, with growth of more than 10 percent. Improving US construction spending likely contributed to a 6 percent increase in architectural and structural metals production. Fabricated metal product manufacturers also likely benefited from increased production in some key end-use OEM markets. US machinery production rose 12 percent in December 2014, and production of motor vehicles and parts grew 7 percent. Production of aerospace products and parts increased about 4 percent.

US manufacturing activity, a key demand indicator for industrial supply wholesalers, rose for the 17th consecutive month in October 2014, according to the Institute for Supply Management (ISM). Of the 18 manufacturing industries reporting to the ISM, 16 reported growth in October. Industries experiencing the strongest growth included makers of plastic and rubber products, textile mills, fabricated metal products, primary metals, electrical equipment, appliances and components, and nonmetallic mineral products. Overall, manufacturers reported faster growth in production, new orders, and employment.

Posted by Robert Contaldo.

Read the Entire Metal Fabrication 1st Quarter Newsletter Here