Exit and Growth Strategies for Middle Market Businesses

M&A News from the Print and Packaging Industry

By Anthony Contaldo | Nov 25, 2015

Print & PackagingGlobal demand for digital printing of packaging materials is expected to experience strong growth over the next five years, according to a recent report by Smithers Pira, a packaging consulting group. The volume of digitally printed packaging products is forecast to increase by more than 16% per year through 2020. Labels continue to be the segment’s primary product, but new digital printing applications for cartons, corrugated containers, flexible packaging, rigid plastics, and metal decorating are forecast to experience rapid growth. Other key drivers of demand include improving economic conditions and a trend toward shorter print runs, for which digital technology can be more cost-effective than traditional print and packaging techniques.

The Asia Pacific region is forecast to be the chief demand driver for folding cartons as the global market rises from $87 billion in 2014 to $106 billion by 2020, according to a recent report by Smithers Pira. Global demand is expected to increase 5% in 2015, then slow to 3.5% per year through 2020. The Asia-Pacific region’s share of global folding carton consumption is forecast to rise from 52% in 2014 to more than 60% in 2020. China’s share of world consumption is expected to increase from 31% in 2010 to 39% in 2020. The Indian sub-continent is expected to be the second-largest market, accounting for 6% of global consumption. The top folding carton end-use markets are health care products, tobacco, household care, hardware and electrical products, and dry foods. Amid pressure from brand owners that wish to differentiate their products from competitors, folding carton manufacturers will be challenged to invest in innovative new products and carton printing techniques.

Posted by Anthony Contaldo.

Read the Entire Print & Packaging 4th Quarter Newsletter Here

M&A News From the Healthcare Industry

By Peter Heydenrych | Nov 19, 2015

Stethoscope 2Medical practices across the US began adding new medical codes after the new ICD-10 medical coding system finally took effect October 2015. The new system of diagnostic and procedural codes is more complex and represents a significant increase in the number of codes used by physicians to get paid by insurers. Codes now number about 70,000 compared to about 14,000 codes used in the old ICD-9 system, which was established in 1979. Hospital codes also increased from 4,000 to 72,000. Healthcare industry experts worry that claims denials could double in number as providers and payers adjust to the more specific codes, according to the Wall Street Journal.

Health insurers struggle to attract millennials, some of whom believe they are too young and too healthy to need insurance. Marketing departments are working to create communications geared to these younger consumers, people who often research health conditions online and may be equipped with inaccurate information, according to Modern Medicine. Experts recommend focusing on young families experiencing life transitions such as relocation, employment, or childbirth. Social media campaigns, wellness webinars, and website videos can be effective, as can straightforward, easy-to-find information on billing, covered services, and physician networks. Although baby boomers are currently the largest target audience for health insurers and providers, millennials are poised to surpass boomers as the largest US generation.

Posted by Peter Heydenrych.

Read the Entire Healthcare 4th Quarter Newsletter Here

Where Have All the Baby Boomer Business Owners Gone?

By Robert St. Germain | Nov 17, 2015

Baby BoomerIt has long been predicted that the “baby boomers” (i.e. the population cohort born between the years 1946-1964), who own businesses in the U.S., would begin to exit their businesses en masse as they began reaching the age of 65, starting back in 2011. The related prediction was that this mass exit would represent the greatest private transfer of wealth in the history of the U.S. To put those predictions into perspective, it is estimated that some 8+ million businesses in the U.S. with a total valuation of $10+ trillion are owned by boomers; and, for most of them, the vast majority of their personal net worths are tied up in their businesses.

Have those predictions come true? The answer, like so many other predictions in life, is a resounding no. While some boomers have certainly elected to exit and pursue their personal “bucket lists”, the majority, so far, seem to be hanging on to their companies. So, what is going on, especially in this period of plentiful and low cost capital, an abundance of buyers, and, as a result of the previous two factors, high purchase multiples?

In an effort to answer that question, The Wall Street Journal looked into this phenomenon; and on Oct. 14, 2015 published the related article titled “The Missing Boom in Small-Business Sales” with the sub-title “An expected rush in sales of small firms by the baby boomer generation has yet to materialize”. Their findings, in my words, were very interesting.

First, this is not their fathers’ generation that looked upon age 65 as the automatic start of the last stage of their lives i.e. wearing the stereotypical gold watch while golfing/fishing throughout their golden years. The boomers are a healthier and longer living generation with the energy and interest to continue running their companies. Read more »

M&A News From Plastics & Rubber Industry

By Jim Zipursky | Nov 12, 2015

Plastics & RubberMany European plastic product manufacturers have not seen their costs drop even amid lower global oil prices, because supplies of raw materials have been constrained by petrochemical plant shutdowns at major plastics producers, according to the Financial Times. More than 40 shutdowns of European petrochemical plants, many of them unscheduled, took place in the first six months of 2015, compared to about 20 shutdowns during the whole of 2014. Many shutdowns have been due to underinvestment in plant infrastructure during the past decade.

Growing interest in passenger vehicles, rising exports of automotive plastic components, and increasing regulation of vehicular emissions are creating increased demand for automotive plastics in Brazil, Russia, India, and China (the BRIC countries). In a bid to expand its footprint in India’s growing automotive market, LyondellBasell agreed to acquire SJS Plastiblends, an India-based manufacturer of thermoplastics, in August 2015. The automotive plastics market in BRIC countries, which was valued at $11.2 billion in 2014, will experience a compound annual growth rate of 15.4% between 2015 and 2020, according to a recent report by Future Market Insights. The market research firm identified polypropylene, polyurethanes, acrylonitrile butadiene styrene, and polycarbonates as the materials with the highest automotive industry consumption rates. The automotive sector is one of the largest markets for plastics & rubber, which are used for parts ranging from upholstery and interior trim pieces to engine components and exterior panels.

Posted by Jim Zipursky.

Read the Entire Plastics & Rubber 4th Quarter Newsletter Here

U.S. Corporation Income Tax – Studies and Proposals

By David DuWaldt | Nov 10, 2015

Tax CalculatorIn my blog post of October 27, 2014, The Art of Corporate Inversions, I alluded to the fact that, relative to other countries, the United States has the highest income tax rate imposed on C corporations. And since the late 1990s, several multinational corporations have changed their domicile to another foreign territory or country. Federal lawmakers have passed stricter rules in an attempt to prevent corporate inversion transactions and income shifting strategies.

With the concerns about the shifting of income from the United States to lower tax rate countries and the effect upon the U.S. economy, several studies were conducted. An interesting recent article at the Tax Foundation website touches on some of the studies and suggests that a lower tax rate structure for corporations, which are subject to U.S. income tax, could reduce income shifting by multinational corporations and increase the tax base. In some ways, this concept is similar to the famous “Laffer Curve” that was introduced by Dr. Arthur Laffer in the late 1970s and supported the macroeconomic theory of supply-side economics.

Last February, as part of the 2016 budget proposal, President Obama recommended a reduction in the corporation income tax rate from 35% down to 28%, with a special rate of 25% for manufacturers. The proposal provided for unspecified cuts in tax preferences and a one-time tax on unrepatriated foreign earnings of U.S. based multinational corporations. At this moment, we are patiently waiting for Congress to pass a budget for the 2016 fiscal year.

Last July, Representatives Charles Boustany (Republican – Louisiana) and Richard Neal (Democrat – Massachusetts) released a discussion draft of their Innovation Promotion Act of 2015, which is an “innovation box” bill to provide for a 10.15% effective tax rate on income derived from certain intellectual property. This tax based incentive is not new to some of the countries that belong to the Organisation for Economic Co-operation and Development (OECD) and have their own “innovation box” low tax rate incentives. Unfortunately, with any specific tax incentive, legislation of this type adds to the complexity of the tax code and the cost of tax administration.

We do have some corporation tax reform proposals by some of the presidential candidates that rank high in the recent polls. Democratic candidate, Hillary Clinton, has not proposed a specific corporation tax rate but has commented that she likes the pre-Bush tax rates of the 1990s. Democratic candidate, Bernie Sanders, did not specify a proposed corporation income tax rate but did comment that it should be higher than the current rate. Republican candidate, Donald Trump, proposes a reduction in the corporation income tax rate from 35% to 15%. Dr. Ben Carson proposes a corporation income tax rate of between 15% and 20%. Marco Rubio proposes a reduction in the corporation tax rate to 25%. Jeb Bush proposes a reduction in the corporation income tax rate to 20%.

It is challenging to guess what the corporation income tax rate will be in a few years from now but it will be interesting to observe what happens when Congress addresses the issue.

Posted by David DuWaldt.

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News From the Industrial Industry

By John Hammett | Nov 05, 2015

Industrials FactoryDespite a decline in industrial production of late, US manufacturing production is forecast to increase 2.1% in 2015 compared to 2014, according to the MAPI (Manufacturers Alliance for Productivity and Innovation) Foundation. Manufacturing production is expected to further accelerate in 2016, with a rise of 3.4% amid employment and income growth, which should spur consumer spending. Credit availability and low interest rates should help stimulate demand for expensive purchases like automobiles and housing. Non high-tech manufactured goods production – which account for 95% of the manufacturing sector – is forecast to rise 2.3% in 2015 and 3.3% in 2016. Production of high-tech goods is expected to increase 1.5% in 2012 and 6.1% in 2016. While overall manufacturing production is forecast to be strong, demand for oil- and gas-related products, such as oil and gas field machinery, is expected to remain weak.

Industry Indicators

  • Total US manufacturers’ shipments, which indicate industrial industry activity, fell 3.8 percent year-to-date in July 2015 compared to the same period in 2014.
  • According to data from the Interindustry Economic Research Fund, Inc. (IERF), an economic research group, revenue for the US manufacturing sector is forecast to grow at an annual compounded rate of 5% between 2015 and 2019, based on changes in physical volume and unit prices.
  • US durable goods manufacturers’ shipments of machinery, an indicator of demand for industrial machinery, fell 0.9 percent year-to-date in July 2015 compared to the same period in 2014.
  • US steel mill product prices, an indicator of commodity steel costs for industrial machinery manufacturers, fell 14.1 percent in August 2015 compared to the same month in 2014.

Read the Entire Industrials M&A 4th Quarter Newsletter Here

Food & Beverage Industry News

By Terry Fick | Oct 29, 2015

SundaeFood & beverage  shipments remain the most frequently targeted type of merchandise in US cargo thefts, and many food wholesalers are investing in new tools and technologies to protect their fleets from criminals. Food and drinks accounted for about 16% of thefts committed in the second quarter of 2015 and for 19% of thefts in all of 2014, according to a new report by FreightWatch. Thieves have gravitated toward items like high-end meats, seafood, produce, and frozen foods as distributors and transporters have focused on tightening security for higher-value shipments of nonfood products like pharmaceuticals and electronics, according to The Wall Street Journal. Since 2008 the average value of stolen food shipments has steadily risen as the overall volume of food theft has declined, suggesting that criminal groups are getting better at identifying high-value loads. Food wholesalers are implementing security measures such as GPS trackers, interior locks on trailer and container doors, and vehicle monitoring systems that transmit real-time alerts when truck doors are opened, Food Logistics reports.

The consumer price index for food, an indicator of food product values, rose 1.6 percent in September 2015 compared to the same month in 2014.

US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, fell 1.2 percent year-to-date in August 2015 compared to the same period in 2014.

Read the Entire Food & Beverage 4th Quarter Newsletter Here

A Tide Change for Business Sellers?

By Catherine Patience | Oct 27, 2015

Low TideFor the past several years, conditions have been “ideal” for prospective business sellers, but the “tide” may be changing soon.  Cheap debt and elevated use of leverage have pushed prices to record multiple levels which have remained on a steady plateau.  But recent statements by Fed Chair Janet Yellen indicate that the Federal Reserve will raise interest rates later this year, in which case these elevated multiples will likely not last.

The average equity contribution in deal financing has declined steadily over the past two years, and debt multiples have increased.  After remaining in the 3.4 – 3.5 x range from 2011-2013, average total debt rose to 3.8x last year and in the first 6 months of the current year, the multiple has continued to rise to 4.0x.  When debt multiples rise, buyers must ensure the companies they purchase have sufficient earnings to service higher debt loads.  As a result, they end up paying higher prices for the companies they purchase, companies with steady cash flow, limited capital investment requirements and potential for at least modest future growth and improvement.

Competition for acquiring “best in class” businesses has been stiff between strategic and financial buyers alike, especially so with companies in the $10 million plus EBITDA range.  With a coming change in the debt markets, some theorize that although the competition will still exist, financial buyers may be better poised to continue buying at these near record levels, at least for the near term.

In all likelihood, we won’t be able to predict the timing on condition change in valuation and debt support.  Just know that there is only one direction in which it can move.

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Transportation & Logistics M&A News

By Doug Nix | Oct 22, 2015

Logistics 2M&A in the transportation & logistics space continues to be driven by non-asset logistics companies with proprietary technology. A deal that illustrates this is the whopping $1.8 billion cash acquisition of Coyote Logistics, LLC, a portfolio company of Warburg Pincus LLC, by United Parcel Service. The acquisition would allow UPS to expand its portfolio and transportation management services.

Proposed fuel efficiency rules will likely accelerate investment in fleet upgrades by the US trucking industry. Federal transportation and environmental regulators in June 2015 announced new fuel efficiency standards for heavy-duty trucks that aim to cut carbon emissions by 24% by 2027 and reduce oil consumption by 1.8 billion barrels over the lifetimes of the new trucks. Under the new rules, a best-in-class long-haul truck would get about 10 miles per gallon of fuel compared to the 5 to 7 miles today.

Technology companies are attempting to significantly streamline the processes used by shippers to book freight forwarding services. One such company, Freightos, recently received $14 million in Series B funding to expand its offerings, according to TechCrunch. Freightos has developed an online platform that helps forwarders manage their rates and automate their routing and pricing. Shippers can use the platform to receive instant competitive quotes that take into account a wide variety of shipping fees.

  • The average US retail price for diesel and regular gas, a major operating cost for trucking fleets, fell 33.9 percent and 31.3 percent, respectively, in the week ending September 14, 2015, compared to the same week in 2014.
  • According to data from the Interindustry Economic Research Fund, Inc. (IERF), an economic research group, revenue for US truck transportation is forecast to grow at an annual compounded rate of 5% between 2015 and 2019.

Posted by Doug Nix.

Read the Entire Transport, Logistics and Supply Chain 4th Quarter Newsletter Here

How To Avoid a Retrade in a Business Sale

By Dan Vermeire | Oct 19, 2015

Avoid a RetradeImagine this… You had several good proposals to buy your business and narrowed it down to the best one.  You’re ready to sign an LOI and start the diligence process.  But, how can you be sure they won’t change their price?

The situation is risky.  Before the LOI, you hold the power.  You have other options on the table and have controlled the process.  But, after the LOI is signed, your power declines.  You enter an exclusive relationship, other options must go to the sidelines, and you can’t go back to them later as “damaged goods”.  During the diligence period, every detail about your company will be on the table, nothing is held back.  Your choice of buyers is critical.

A retrade happens when the buyer changes the deal after signing the LOI.  Some retrades are for good reason – the situation changed, diligence found some previously unknown issues, or the business declined.  But, in other cases, a buyer will retrade the deal as part of a bait and switch strategy, or just because they think they can.

How can you avoid a retrade?  Here are a some strategies to use before signing an LOI. Read more »