Exit and Growth Strategies for Middle Market Businesses

What Keeps M&A Transactions From Closing?

By Jim Zipursky | Oct 25, 2016

What keeps M&A transactions from closing? A recent survey of investment bankers at CFA regarding their experience with M&A deal failures leads to interesting results, as can be seen in the accompanying graphic.


Failure reasons can be broken into five general categories: Seller Issues, Buyer Issues, Company Issues, External Factors, and The Process. Not surprising, Seller Issues and Company Issues account for nearly 66% of deal failures. Buyer Issues and The Process account for 28% of deal failures.

What is the number one reason for deal failures? Earnings fluctuations, which means the earnings are not as projected. This causes significant problems for buyers, making valuations and lending much more difficult. Not surprising, the number two reason is Seller valuation issues, which means Sellers want more than their company is worth. Taken in the aggregate, across all five categories, valuation-related issues account for more than 52% of deal failures. Clearly, valuation/earnings issues are the number one cause of deal failures.

Surprisingly, external factors and the process itself do not cause as many deal failures. The silver lining in these results? Seller Issues and Company Issues can be avoided with proper preparation of the seller and the company. A seller who has reasonable valuation expectations, clean financial statements with verifiable earnings and realistic financial projections help keep most deals out of the ditch.

Posted by Jim Zipursky.

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M&A News | Construction and Engineering Sector

By Jeff Johnson | Oct 20, 2016

Construction and Engineering SectorM&A activity in the Construction and Engineering Sector for North American based target companies in the Engineering & Construction sector for Q3 2016 included 63 closed deals, according to data published by industry data tracker FactSetThe average transaction value was $383 million.

Nonresidential construction and heavy engineering activity continued along an upward path during the quarter and funding for government infrastructure projects continues to be strong.

As demand for new homes rises, builders nationwide are struggling to find workers at all levels, according to the National Association of Home Builders. The association estimates that 200,000 US construction jobs are unfilled, 81% more than just two years ago. Some states, including Arizona, California, Georgia, and Missouri, are seeing 20% fewer people working in construction than at the market peak, according to the Associated General Contractors of America. The ratio of construction job openings to hiring, a measurement maintained by the Department of Labor, is at its highest level since 2007. In the meantime, the persistent lack of skilled trades has spurred companies to increase pay for hourly workers, ramp up in-house training, and add more overtime hours.

Industry Indicators

  • The value of US nonresidential construction spending, a demand indicator for builders, rose 5.1% year-to-date in July 2016 compared to the same period in 2015.
  • US steel mill product prices, an indicator of commodity steel product costs used in construction, rose 0.3% in August 2016 compared to the same month in 2015.

Posted by Jeff Johnson.

Read the Entire Engineering & Construction 4th Quarter Newsletter Here

Second Half of 2016 – Marked Increase in M&A Activity

By Kim Levin | Oct 13, 2016

Marked Increase in M&A ActivityAccording to data published by international financial data tracker Bureau Van Dijk, North American deal volume and value declined significantly during the first half of 2016 following the global trend. According to Bureau Van Dijk, there were 12,298 transactions completed in H1 2016 (a decline of 17.3% over H2 2015) with a combined value of $692.5 billion (a decline of 41.3% over H2 2015). During H1 2016 the U.S. saw 10,147 US deals worth a combined $633.4 billion. Canada saw 2,152 deals worth$59.9 billion.

Private Equity

Falling in line with general M&A trends, North American private equity and venture activity also slowed on the value and volume fronts. Private equity and venture investors took part in 6,487 deals in the region worth $120.8 billion. In contrast, H2 2015 saw 7,792 deals worth $262. 6 billion invested in the second half of 2015.

Sector Activity

Sectors that saw the most activity were metals/metal products (981 deals) followed by general capital machinery (799 deals) and publishing/printing (791) deals. Read more »

M&A Trends in the Transport & Logistics Industry

By Doug Nix | Oct 06, 2016

transport & logisticsTransport & Logistics: Trucking industry employment declined for a fifth straight month in June 2016. The freight economy began to soften during the first quarter of 2016 – after an uptick in employment in January, according to the American Trucking Associations (ATA), and driver demand weakened. Total employment for for-hire trucking fell by a noteworthy 6,300 jobs in June, according to a recent Department of Labor Employment Situation Report. Driver turnover rates also declined during the quarter, per the ATA, with turnover at large truckload fleets falling to an annualized rate of 89%. The turnover rate at small truckload carriers – fleets generating less than $30 million in annual revenue – came in at 88% during the same time frame. Turnover at less-than-truckload carriers, a small but growing part of the market, maintained its low rate, falling three points to just 8%.

Expansion by Amazon and other online retailers is boosting demand for warehouses in cities across the US, according to Bloomberg. E-commerce customers are becoming more accustomed to speedy shipping service, thanks in part to Amazon’s emphasis on same-day delivery, requiring retailers to find more warehouse space closer to population centers. The demand for warehouse space in cities is driving up rents: over the past year, prime warehouse rents are up nearly 10% across the US. The increase has been even greater in some large urban areas. Retailers that historically had one or two large warehouses in the middle of the country are now looking for smaller spaces in cities such as Atlanta, Dallas, and Kansas City to cut down their shipping times. Read more »

Adapt or Die – Build a Plan

By George Walden | Oct 04, 2016

Two weeks ago I was at the 45th annual Turbomachinery and 32nd Pump Symposium underwritten by the Turbomachinery Lab from Texas A&M supporting my investment banking business partner Matt Register and Texas Business Radio. I found myself fascinated by the tone of the room. It was like two different types of exhibitors were exhibiting at the same event. There were companies doing well, excited about the prospects of the future. Then there were those companies that were experiencing a significant slowdown in their orders and they were very concerned about their viability in the marketplace. In a video I posted on Vimeo, I explain about “Adapt or Die.”  Click on the play button below to see the entire video.

As everyone in the energy sector knows, explorations and many of the ancillary services tied to exploration have slowed down in Texas. What has started as just a regular cycle of slowdown has become more extended and while I heard a lot last year that 2016 will be a better year, now I hear 2018 will begin the recovery of the drilling cycle. You could probably flip a coin on 2018 and be just as right in a prediction. So why are some companies excited about their growth prospects and others worried that the orders aren’t going to arrive soon enough? Read more »

Packaging & Printing | M&A News Update

By Anthony Contaldo | Sep 29, 2016

packaging & printingM&A activity for North American based target companies in the packaging & printing sector for Q2 2016 included 39 closed deals, according to data published by industry data tracker FactSetThe average transaction value was $22.5 million.

One of the largest international transactions of the quarter was announced at the end of May when CVC Capital Partners announced that it signed a binding agreement to acquire ÅR Packaging Group AB. Under the terms of the transaction, CVC will acquire 100% of the company from its current owners, Ahlstrom Capital and Accent Equity. AR Packaging is one of Europe’s leading packaging companies with sales of approximately 560 million EUROS.

US demand for corrugated and paperboard boxes is forecast to grow 2.6% per year, reaching a value of more than $41 billion by 2020, according to an April 2016 report by The Freedonia Group. While market maturity and increased use of competing packaging materials are expected to limit volume growth, box manufacturers are responding by offering higher-margin, value-added products, including high-quality printing, easy-open tear strips, and special coatings. Corrugated box demand is forecast to rise 3% per year through 2020 amid demand related to e-commerce and rising use of shipping containers that double as retail displays. Folding carton demand is expected to post slower annual growth of 1.5% amid increased competition from flexible packaging such as stand-up pouches. However, pharmaceutical demand and the environmental benefit of folding cartons relative to plastic and foam restaurant containers should help sustain moderate growth. Read more »

It’s a Seller’s Market For Now – Private Equity is Very Active

By Catherine Patience | Sep 27, 2016

seller's marketThe flow of private equity funds into industry sectors is an ever changing investment stream channeling to the most attractive perceived returns on investment.

In 2015, a mega deal in the Business & Consumer Products and Services sector accounted for roughly half of the $103.8 billion invested by US private equity.  With the backing of 3G Capital and Berkshire Hathaway, H.J. Heinz Company and Kraft Foods Group (NASDAQ: KRFT) merged to create The Kraft Heinz Company, forming the third-largest food & beverage company in North America.

While not nearly as large as the Kraft Heinz deal, several deals in the Technology/Media/Telecom sector boosted 2015 investment significantly over 2014.  The $5B Informatica PIPE (private investment – public equity), $3.7B Riverbed Technology investment by Thoma Bravo and others, and the $3.5B Ellucian investment by TPG Capital collectively contributed to a substantial increase in this sector over 2014. So what does 2016 look like so far this year? Technology/Media/Telecom looks to be hot again this year.  A handful of large deals in this sector have already closed including; a $15B investment into ADT Security Services by Apollo, Koch and Protection 1, a $7.4B investment by The Caryle Group into Veritas Technologies, and billion dollar private equity investments into Solera Holdings, Solarwinds, Qlik Technologies and Marketo to name just a few.

The private equity community continues to be extremely active.  As of the end of 2015 PE dry powder across North America and Europe was $749B.  This is about the level at the end of 2014.  Debt capital remains cheap and plentiful with many non-bank funding sources ready to step in when traditional lenders are reluctant.

Companies looking to sell, secure growth capital or desiring a partial liquidity event are now operating in an extremely good environment. In fact, sourcing worthwhile deals has become a major challenge for private equity as valuations are high and the deal flow has been limited.  It is definitely a seller’s market, at least for now.

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Plastics & Rubber M&A Industry News

By Jim Zipursky | Sep 22, 2016

plastics & rubberPlastics & rubber production capacity has been on a steady decline since July of 2015. Global supplies of polyethylene (PE) and polypropylene (PP) are increasing as producers in the US and China ramp up capacity. More than one-third of new PE capacity added globally between 2015 and 2020 will come from the US, where PE and PP producers are benefiting from ample supplies of low-cost natural gas, according to research group IHS. Using coal as a feedstock, manufacturers in China are also expected to significantly expand their polyethylene and polypropylene production over the next five years. US exports of PE and PP should increase as producers expand capacity beyond domestic needs and achieve cost-competitiveness with suppliers in the Middle East, which have traditionally been the lowest-cost producers.

Increased production capacity for plastic and rubber in the US, China, and the Middle East is expected to create a global surplus of polyethylene and polypropylene, according to analysis released in May 2016 by market research firm IHS. Between 2015 and 2020, IHS expects more than 24 million metric tons of new polyethylene capacity to come online; more than 30% of which is expected to come from the US. The spike in plastics feedstocks derived from shale gas has increased the competitiveness of the US, especially relative to the Middle East, which historically has been the industry’s low-cost producer. Supplies from China also are surging, due to recent additions of coal-to-olefin production capacity. Although a surplus of global polyethylene and polypropylene resins will mean reduced prices for plastics product converters, it will likely result in tighter margins for resin producers.

Industry Indicators

  • US nondurable goods manufacturers’ shipments of chemical products, an indicator of demand for plastic resin and synthetic fibers, rose 3.5% year-to-date in May 2016 compared to the same period in 2015.
  • The spot price of crude oil, a key raw material in plastic resin and synthetic fiber manufacturing, fell 10.8% in the week ending July 8, 2016, compared to the same week in 2015.

Posted by Jim Zipursky.

Read the Entire Plastics & Rubber 3rd Quarter Newsletter Here

Is This the End of Valuation Discounts for Intra-Family Transfers of Ownership Interests?

By David DuWaldt | Sep 20, 2016

valuation discountsOn August 2, 2016, the U.S. Treasury Department released proposed regulations that pertain to IRC Section 2704. The intent of the proposed regulations is to eliminate the use of valuation discounts with respect to the transfer of ownership interests between family members. Consistent with the rulemaking process of proposed regulations, the submission of written comments must be received by November 2, 2016 and a public hearing is scheduled for December 1, 2016.

To gain a better understanding of how these proposed regulations came into existence, it is beneficial to look back at some legislative history. Chapter 14 of the Internal Revenue Code (i.e., Sections 2701 through 2704) became law in 1990. Chapter 14 is entitled “Special Valuation Rules” which specifically pertains to the federal estate, gift and generation-skipping transfer tax. The adoption of Sections 2701 through 2704 of the Internal Revenue Code was an attempt by Congress to eliminate the use of valuation discounts for tax planning and compliance purposes. Although there was a lot of attention placed on the use of family limited partnerships, the scope of Chapter 14, and the recently released proposed regulations, includes all family businesses such as corporations, general partnerships, limited liability companies, and other arrangements that are considered business entities. Read more »

Fabricated Metal Industry News

By Robert Contaldo | Sep 15, 2016

fabricated metalFabricated metal products manufacturers with high levels of exposure to markets relating to energy and mining are likely to remain cautious with staffing and production until more concrete evidence of a commodities price recovery emerges. US industrial production, a demand indicator for metal fab products, declined 2% in March 2016 compared to the same month a year earlier. US industrial output has been hurt by low commodity prices and reduced production in the mining and energy sectors, which has reduced demand for machinery and metals. Throughout 2015, a strong dollar made US exports less competitive, and low oil prices hurt demand for machinery and equipment. But so far in 2016, those headwinds have abated somewhat as oil prices stabilized and the dollar weakened relative to some other key currencies, according to The Wall Street Journal. Also pointing to a possible turnaround, the manufacturing portion of the industrial production index rose 0.4% in March year-over-year. Additionally, in April 2016 the Institute for Supply Management reported that March manufacturing activity marked the first increase in six months.

US new orders for manufactured goods, a demand indicator for metal coating, engraving, and heat treating services, fell by 2.3% in the first four months of 2016 compared to the same period a year earlier. New machinery orders were off by 4.8% overall, as construction machinery orders fell 20% and mining and oil and gas field machinery orders declined by 56%. New orders increased in a couple of key markets for metal coating, engraving, and heat treating services, however. Transportation equipment orders rose by 4.5%, and orders for fabricated metal products were up 2.4%.

Industry Indicators

  • US durable goods manufacturers’ shipments of fabricated metal products, an indicator of fabricated metal parts production, rose 0.7% year-to-date in May 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 4.6% in June 2016 compared to the same month in 2015.

Posted by Bob Contaldo.

Read the Entire Metal Fabrication 3rd Quarter Newsletter Here