Exit and Growth Strategies for Middle Market Businesses

Buyers & the Sell-Side Process

By Steve Hauser | Jun 27, 2016

sell-side processThe M&A environment in the U.S. is as heated as ever; and, while those of us in Middle Market Investment Banking more often than not represent sellers, we relish working with buy-side clients with well-defined missions and criteria.

We understand that the Holy Grail for any buyer is the one-on-one “negotiated” deal with a seller, where there is no sell-side advisor, no competition from other buyers, no hard-and-fast timetables, and the due diligence routine is very accommodating to the buyer.  However, though these “proprietary” deals do exist, they are uncommon, especially for those sellers at or exceeding $5 million in EBITDA. Instead, the buyer should expect that any well-run, solidly profitable Middle Market company will be represented by an Investment Banker and sold through what we call in the industry, “the Process”.

The M&A market in the U.S. has been and continues to be fueled by very low “real” interest rates, exceptional amounts of cash in PE firms, hedge funds, and large corporations, and moderate-at-best macroeconomic (i.e. organic) growth prospects.  Demand for good deals exceeds the available supply of good targets, and the sell-side auction-like process is an entrenched feature of our M&A market.  Prospective buyers, particularly bargain hunters from offshore, can find the experience to be a challenge, wishing they had more control, less pressure to modify their offers, and general freedom from the constraints of “the Process”. Read more »

M&A Industry News – Technology, Media & Telecom

By Dan Vermeire | Jun 23, 2016

M&A Industry News - Technology, Media & Telecom Technology giant Facebook had a very strong first quarter as earnings jumped 52% amounting to $5.4 billion. Approximately 82% of the growth came from the company’s mobile advertising platform. The website’s monthly active users jumped 21% year-over-year to 1.65 billion users per month.

One of the largest M&A deals of the quarter in the sector was information provider IHS (IHS) announcing plans to acquire its London-based rival Markit (MRKT), in a deal valued at $13 billion. The new company – IHS Markit – will have combined revenues of $3.3 billion and more than 50,000 customers globally, including 75% of the Fortune 500. This could have a large impact on the financial data sector, which is currently dominated by Thomson Reuters.

The biggest telecom announcement of the quarter was Vodafone, the world’s second-largest mobile operator by subscribers after China Mobile Ltd. Vodafone said it would pay €1 billion ($1.12 billion) to Europe-focused Liberty Global as part of the deal to combine their businesses in the Netherlands. Led by social media powerhouses Facebook and LinkedIn, North American technology equities had a very strong Q1.

The growing popularity of virtual reality (VR) systems such as Oculus Rift, Sony’s PlayStation VR, Microsoft’s HoloLens, and HTC’s Vive is creating demand for development of new 3D software. Shipments of virtual reality headsets are forecast to jump from just 140,000 in 2015 to 1.4 million in 2016 and up to 6.3 million in 2017, according to Gartner. Software for VR headsets primarily includes games and other consumer content for entertainment. However, an emerging opportunity comes from academic and business applications for training, simulation, and equipment troubleshooting. Examples include allowing medical students to explore human anatomy in 3D and helping companies attract potential customers through interactive product demos.

Industry Indicators

  • US retail sales for electronics and appliance stores, a potential measure of demand for computer software, decreased 2.2% in the first three months of 2016 compared to the same period in 2015.
  • Total US revenue for computer systems design and related services rose 1.8% in the fourth quarter of 2015 compared to the previous year.

Posted by Dan Vermeire.

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

Letter of Intent – The Start of a Beautiful Relationship?

By Craig Allsopp | Jun 22, 2016

Letter of IntentOne of the major milestones in the purchase or sale of a business is securing a Letter of Intent. Though not as sparkly as an engagement ring, a signed LOI represents the intentions of a buyer and a seller to march down the aisle together.

At the same time, the LOI serves as something like a pre-nuptial agreement – spelling out the general terms and conditions that govern the relationship necessary for a buyer to consummate a transaction.

Like most things marital, things can get a little sticky when discussing the particulars. Some deal principals and their advisors leave no stone unturned in crafting an LOI, while others prefer a simpler approach – a basic letter that covers important terms such as the purchase price and closing conditions while leaving most of the other details for the final sales agreement. Read more »

M&A News – Industrials Industry

By John Hammett | Jun 16, 2016

industrials industryM&A activity for North American based target companies in the Industrials industry for Q1 2016 included 216 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $126 million.

US production of manufactured goods increased 1.8% in February 2016 compared to the same month a year earlier. February’s rise represented the third consecutive monthly gain in US manufacturing output, which some economists are viewing as a sign that the sluggishness of the US manufacturing sector may be easing, according to the Wall Street Journal. US manufacturing growth has been hindered in recent months by weak global demand, a strong dollar that makes US goods more expensive in overseas markets, and low oil prices. The February gains in manufacturing production were led by motor vehicles and parts, which saw a 9.1% rise compared to February 2015. Growth in other key segments of the US manufacturing sector was muted in February. Consumer goods production rose 1.1%, while that of computer and electronic products saw a 1.5% gain. Production of industrial equipment declined 3.7%. Continued soft demand for US exports may prompt manufacturers to reduce their inventories, which could create further ripples of demand weakness within the overall manufacturing sector.

Industry Indicators

  • Total US manufacturers’ shipments, which indicate manufacturing sector activity, fell 2.2% year-to-date in February 2016 compared to the same period in 2015.  In combination with the increase in production (see above), this indicates a significant increase in inventories in the sector.  If this isn’t followed by a pickup in shipments in the coming months, industrial producers will have to cut back on production again. Total US wholesale sales of durable goods, a potential measure of industrial demand, rose 1.5% in November 2015 compared to the same month in 2014.
  • The spot price of crude oil, which indicates energy prices paid by manufacturers, fell 29.1% in the week ending April 8, 2016, compared to the same week in 2015.

Posted by John Hammett.

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

Canada M&A | Record Breaking 2015

By Kim Levin | Jun 14, 2016

Canada M&AIn 2015, Canada dominated the field of US cross border transactions, so we’re keeping a watchful eye on our neighbor to the north. One measure of Canada M&A health is private equity (PE) deal volume and value, which were at record breaking levels in 2015.  Buyers spent nearly $49 billion last year across 283 completed deals, according to Pitchbook, a private equity and venture capital database.

2016 is off to a slow start, as we have seen volume drop by 33% and value down nearly 16%.  This decline is not a signal of any fundamental shift in Canadian PE dynamic, but is, rather, a typical progression as fund managers swing from racing to complete deals by year’s end to deal sourcing anew, with the cycle coming full circle.

Like the United States, Canada is experiencing a trend toward smaller deals.  As we’ve mentioned before, financial buyers first look to large, well-managed companies with unique product offerings or niche markets to add to their portfolios as long as the price is right.  Over the past few years, competition for those prized companies has pushed prices to the stratosphere. As a result, many private equity investors have begun to focus on companies that have many prized company attributes but are smaller in size and fit their price objectives. In 2015, 61% of all transactions were smaller, add-on deals and as of the first quarter of 2016 that number is up to 68%.  Looking back, before the M&A bubble burst in 2008, 68% of investments were in larger, platform-size transactions so we’ve seen a huge shift in investment focus.

From a lending standpoint, Canadian banks are well capitalized and are aggressively lending to sponsors.  In addition, when compared with transactions in the US, the size of most Canadian deals are smaller, and thus less risky for lenders.

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Plastics & Rubber Industry M&A News

By Jim Zipursky | Jun 10, 2016

plastics & rubber industryM&A activity for North American based target companies in the Plastics & Rubber industry for Q1 2016 included 18 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $49 million.

One of the major deals in the sector this year was Trelleborg A.B. and Freudenberg Group moving forward with a plan where Freudenberg will become sole owner of joint venture TrelleborgVibracoustic GmbH. The acquisition of Trellborg’s half of the JV is based on an enterprise value of a little more than $2 billion. The company will receive about $7.7 billion in addition to a dividend of $1.6 billion it received in December, putting the total value of deal at approximately $9.3 billion.

In late March, private equity group Arsenal Capital made three acquisitions in the polyurethane foam space. Arsenal will combine Pacific Urethanes LLC (Ontario, CA), a majority stake in Elite Foam, Inc. (Newnan, GA) and the foam production assets of Hickory Springs Manufacturing Co. (Conover, NC) to form Elite Comfort Solutions. Purchase prices were not disclosed.

Commodity pricing for rubber products dropped significantly in the first quarter lowering materials prices for manufacturers. Read more »

The Do-it-Yourself Dealmaker

By John Hammett | Jun 08, 2016

Do-It-Yourself DealmakerWould a savvy company owner be his own doctor?

In 1961 Leonid Rogozov removed his own appendix. The 27-year-old Russian doctor was on an expedition to Antarctica; his team was frozen into their base for the winter.

Dr. Rogozov had no choice other than to do the surgery himself.

Operating mostly by feeling around, he worked for an hour and 45 minutes, cutting himself open and removing the appendix. The men he’d chosen as assistants watched as the “calm and focused” doctor completed the operation, resting every five minutes for a few seconds as he battled vertigo and weakness.

In 2016 some company owners will sell their companies by themselves. Most of them will survive the process, and most of those will leave big money behind because they don’t know what they don’t know about selling companies. Read more »

Evaluating the Offer When Selling Your Business

By Jay Carter | May 31, 2016

Evaluating the offerAs an owner, you are likely to have multiple opportunities to sell your business.  When you receive an offer, how do decide whether or not to accept it?  Should you negotiate for a better deal?  Should you find a different buyer altogether?  Should you do nothing?  Before answering these questions, it helps to put the offer into proper perspective.

First, consider the offer in the context of the market.  Second, consider the offer in the context of your goals.  A market rate offer that meets your personal and financial goals is one worthy of careful consideration.

Is this a market rate offer?  This can only be determined by obtaining multiple offers from qualified buyers and comparing them.  Valuing a privately-held company is tricky, and it cannot be done in a vacuum.  Rules of thumb and “comparable” valuations provide valuation pointers, but they do not determine the true market value of a business.  A well planned sale process produces multiple offers within a short period of time and enables objective evaluation of each.  Without multiple offers, it is impossible to know whether the valuation and terms offered are fair for your business. Read more »

Metal Fabrication Industry M&A News

By Robert Contaldo | May 25, 2016

metal fabricationMetal Fabrication Industry Update 

US shipments of metal fabrication products declined 0.6% in the first 11 months of 2015 compared to the same period in 2014; new orders fell 2.5% during the same period. Demand for fabricated metal products may be dropping due to an overall slowdown in US manufacturing output. US industrial production, a demand indicator for fabricated metal products, fell 1.8% in 2015 compared to the prior year; production of fabricated metal products declined 1.3%. In December 2015 US manufacturing activity dropped for the second consecutive month, according to the Institute for Supply Management (ISM). Fabricated metal products reported a December drop in activity, along with several end-use markets for fabricated metal including machinery; transportation equipment; and electrical equipment, appliances, and components. Economists suggest slower growth in China is contributing to a global economic slowdown. The strong US dollar also makes US goods more expensive and less competitive in export markets. If weak demand persists, fabricated metal product manufacturers may adjust production, staffing, and/or inventory strategies to preserve margins.

US orders for primary metals, a demand indicator for steel service centers and other metals wholesalers, dropped nearly 16% in January 2016 compared to the same month in 2015. Iron and steel mills orders were off nearly 21%, while aluminum and nonferrous metal orders fell more than 10%. New orders for ferrous metal foundry products were down nearly 13%. On a monthly basis, January’s durable goods orders increased 4.7%, and primary metal orders edged up 0.6%.

Industry Indicators

  • US durable goods manufacturers’ shipments of fabricated metal products, an indicator of fabricated metal parts production, fell 0.4% year-to-date in February 2016 compared to the same period in 2015.
  • US steel mill product prices, an indicator of commodity steel costs for fabricated metal products manufacturers, fell 15.8% in March 2016 compared to the same month in 2015.

Posted by Robert Contaldo.

Read the Entire Metal Fabrication 2nd Quarter Newsletter Here

Engineering & Construction Industry M&A Trends

By Jeff Johnson | May 19, 2016

engineering & constructionOne of the largest transaction announcements in the sector during Q1 was in the engineering space on March 29 when design firm Stantec (Edmonton, Alberta, Canada) entered into a definitive merger agreement to acquire MWH Global (Broomfield, CO), a 6,800-person engineering, consulting and construction management firm focused on water and natural resources for built infrastructure and the environment. The transaction is valued at approximately US$795 million or a multiple of approximately 7.3x adjusted 2015 EBITDA.

As more project owners require contractors to use certain technologies, construction companies of all sizes are now incorporating the Building Information Modeling (BIM) process into their implementations and more widely adopting emerging technologies such as 3D laser scanning. No longer limited to major companies, use of BIM is becoming a necessity for smaller firms in enhancing a project’s consistency and accuracy and speeding up the process of document generation. Additionally, owners primarily benefit from and capitalize on data that’s captured through BIM. Engineering & construction companies that use the modeling process can expect improved collaboration and coordination, as well, among a project’s stakeholders. Adoption of 3D laser scanning is also expanding. The emerging technology makes measurements more precise than conventional methods and isolates potential problems more clearly for client discussions. Laser scans produce a digital reproduction of objects and consist of millions of data points that are put into a BIM. Use of laser technology in construction projects is expected to grow for several years. Indeed, the global 3D laser scanning market is forecast to expand from an estimated $2.06 billion back in 2013 to $4.08 billion by 2018, according to industry research group MarketsandMarkets.

  • The value of US nonresidential construction spending, an indicator of the health of the construction market, rose 11.1% year-to-date in February 2016 compared to the same period in 2015.
  • The value of US residential construction spending, an indicator of the health of the construction market, rose 11.4% year-to-date in February 2016 compared to the same period in 2015.

Posted by Jeff Johnson.

Read the Entire Engineering & Construction M&A 2nd Quarter Newsletter Here

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