Exit and Growth Strategies for Middle Market Businesses

News from the Aviation Industry

By Joe Contaldo | Aug 27, 2015

airplane runwayStrong growth on the commercial side of the aviation industry, especially large manufacturers such as Boeing and Raytheon, have created strong cash stockpiles on the balance sheets of major corporate players. Those funds need a home and acquiring new technology (i.e. Raytheon’s merger with Websense) is a productive use of the money. In addition, limits on defense spending has had a tepid impact on companies heavily invested in the public sector leading them to branch out into the private sector through M&A (again, Raytheon’s merger with Websense).

As a result of near over-capacity utilization in the aircraft production industry, Airbus and Boeing booked fewer commercial aircraft orders during the Paris Air Show in June 2015 than they did two years earlier at the bi-annual event. Together, the rival aircraft makers booked $109 billion in orders and commitments; the two companies secured $134 billion in orders at the show in 2013. The drop in orders was not unexpected, as Boeing and Airbus have been building their order backlogs as the world’s airlines and aircraft leasing firms order new, more efficient aircraft to update their fleets. Airbus’ commercial jet backlog stands at about 6,300, and Boeing’s is about 5,700. Both companies have suggested that they may increase production rates to address the large backlogs and long waits for new planes, which could further reduce orders.

Posted by Joe Contaldo.

Read the Entire Aviation, Aerospace & Defense M&A 3rd Quarter Newsletter Here

Food and Beverage M&A News

By Terry Fick | Aug 20, 2015

Beverage CansAs the global trend toward healthier foods continues, a key driver for M&A activity are targets in the organic, gluten-free, natural food and beverage segments. Larger established brands are counting on M&A as means to grow in the newer healthier environment. An example is Hormel Foods’ recent acquisition of Applegate Farms and its Applegate brand for $775 million. Applegate is a leading brand in the natural and organic value-added prepared meats category.

The trend towards healthier foods is also impact the value of established “junk food” brands. Diversified food companies in the US are shedding manufacturing operations amid weak demand for cookies and snacks. Post Holdings announced plans in March 2015 to close its PowerBar manufacturing facility in Boise, Idaho and shift production of the products to a third-party provider. Post’s decision reflects the difficult environment in the food and beverage industry, which has struggled as consumers’ tastes have shifted to healthy, fresh food, according to The Wall Street Journal. Post’s announcement comes a month after General Mills announced it will close a Pillsbury refrigerated baked goods plant in New Albany, Indiana, and little more than a year after Kellogg decided to shutter a cookie plant in Charlotte, North Carolina.

  • US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, fell 0.8 percent year-to-date in May 2015 compared to the same period in 2014.
  • US retail sales for food and beverage stores, a potential measure of food demand, increased 3.2 percent in the first six months of 2015 compared to the same period in 2014.
  • According to data from the Interindustry Economic Research Fund, Inc. (IERF), revenue for US food manufacturers is forecast to grow at an annual compounded rate of 4 percent between 2015 and 2019.

Posted by Terry Fick.

Read the Entire Food & Beverage 3rd Quarter Newsletter Here

Interest Rate Hike and Middle Market Business Owners

By Kim Levin | Aug 17, 2015

Interest Rate UpWatercooler talk this spring has been centered on a potential rate hike by the Federal Reserve. It has been nearly nine years since we have seen an increase in rates and we’ve been operating in a near “zero” interest rate environment since late 2008. A rate hike, even a nominal one, will have far reaching implications for investors large and small, at home and abroad. When it arrives, whether later this fall or early next year, the M&A markets will indeed feel the effects of a change in interest rates.

The Federal Reserve has the power to influence the economy by increasing or decreasing the money supply. If the goal is higher rates, they remove money from circulation. When the money supply is reduced, the laws of supply and demand take over and rates begin to climb. When rates increase, investors who look for safe havens for cash will earn more and anyone who borrows money will pay more.

Both strategic and financial investors borrow a portion of the money they use to buy a company. In recent years, the use of leverage has been on the rise. Before making a specific acquisition, the investment team decides in advance what the target rate of return will be. If they pay more for the leverage portion… by necessity they will pay less for the asset itself, so that the overall rate of return goal can be met.

What does an interest rate hike mean to middle market business owners selling a company? Some have theorized that there has already been a “discount” built into asset pricing that will offset any rate hike. But, we’re not necessarily convinced. If you can get to market and close your deal before the Fed moves…that may be your best move.

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M&A News – Metal Fabrication Industry

By Robert Contaldo | Aug 13, 2015

MFIPG-Metal Welding,VerticalM&A activity for North American based target companies in the Metal Fabrication sector for Q2 2015 included 36 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $39 million.  According a report from the Fabricators & Manufacturers Association, an industry trade group, the industry appears to be ripe for significant consolidation. There is a recent trend among OEMs to limit the amount of shops they work with and instead award contracts to a select group of preferred suppliers. Many mid-size shops are looking to diversify their customer bases and acquire new capabilities to survive in this environment.  Those that don’t follow this trend are likely targets for acquisition.

Industry production continues to improve since a low point following the global recession in 2010. Fabricated metal product manufacturing capacity is at its highest point in more than five years. This has partially been driven by an uptick in U.S. based manufacturing as well as continued depression in the prices of raw materials.


Posted by Bob Contaldo.

Read the Entire Metal Fabrication 3rd Quarter Newsletter Here

SBA – Great Source of Business Capital

By David Sinyard | Aug 10, 2015

Business CapitalEntrepreneurship in America remains vital to the U.S. economic growth.    The number of new business establishments tends to rise and fall with the business cycle of the overall economy.  The U.S. Bureau of Labor Statistics collects data on new businesses and job creation. The number of business starts is roughly 550,000 per year, yet survival rates are tough.   A major reason is often lack of business capital.

A major source of entrepreneurial funding is through the Small Business Administration (SBA) loan programs.  The primary SBA lending program is the SBA 7(a) guaranty loan program which is extended to business owners to use for start-ups, expansion, business acquisition working capital, equipment and inventory.  The maximum loan amount is $5,000,000 and the terms vary and range between 7 years for working capital and 25 years for real estate.   As an example, the bank of which I am a director recently approved a $3 million loan to a restaurant owner to take out the construction loan on his building in which he has two different food service establishments.

Another popular SBA loan program is the SBA 504.  This program is focused on commercial real estate, either new construction or acquisition and some major equipment financing.  Maximum loan size is $13,500,000.  Loan terms can be up to 30 years.  A recent example that I have seen is a $12,000,000 loan to construct a new assisted living complex.

Community banks are very interested in pursuing these loans.  The SBA guarantees a major portion of the indebtedness.  The loans are often sold in the secondary market, freeing capital for the bank.  In addition to origination fees, the banks also earn a servicing fee.

The key for a business owner is to find an experienced SBA lending group that has an extensive record of underwriting and closing these loans for business capital.

Posted by David Sinyard.

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Print & Packaging M&A Industry Update

By Anthony Contaldo | Aug 06, 2015

PRIPG-Offset PressSparked by the RockTenn and MeadWestvaco transaction there appears to be a strong trend toward consolidation in the print & packaging sector. On the printing side there is a trend toward technological acquisitions and strictly print outlets look to acquire digital properties. An example was early in the year when A.H. Belo Corp., owner of the Dallas Morning News, purchased a majority ownership stake in three Dallas-based digital marketing companies for $15.3 million as part of the publishing company’s ongoing push to diversify.

Commercial printers continue to be challenged by the trend toward digital advertising formats. Global spending on newspaper and magazine advertising, a major demand driver for commercial printing services, is expected to decrease over the next two years as digital marketing activity increases. Spending on newspapers and magazines is expected to fall 3.8 percent and 1.7 percent, respectively, in 2015, according to a forecast released by media planning agency Carat in March 2015. Newspaper spending is projected to fall an additional 2.5 percent in 2016, while magazine spending is expected to drop 1.7 percent. Meanwhile, digital ad media spending is forecast to jump 15.7 percent in 2015 and 13.8 percent in 2016.

  • US nondurable goods manufacturers’ shipments of paper products, an indicator of converted paper product demand, rose 3.3 percent year-to-date in April 2015 compared to the same period in 2014.
  • US nondurable goods manufacturers’ shipments of printed goods, an indicator of demand for commercial printing, rose 3.5 percent year-to-date in April 2015 compared to the same period in 2014.
  • According to data published by the Interindustry Economic Research Fund, Inc. (IERF), revenue for US paperboard container production is forecast to grow at an annual compounded rate of 2 percent between 2015 and 2019.

Posted by Anthony Contaldo.

Read the Entire Print & Packaging 3rd Quarter Newsletter Here

Taxes Increasingly Important in Sale Strategies

By Robert Massengill | Aug 03, 2015

Upward Chart Money SignBusiness owners evaluating transition alternatives for their companies have a variety of  choices.  They can take their companies public, merge, sell to a third-party or sell internally.  While each of these alternatives has their benefits and limitations, prioritizing goals for the sale is a big step is narrowing down the choices.

Regardless of the method chosen for the sale, taxes play an important role and there’s a saying that “it’s not what you get, but what you keep.”  In today’s environment of increased capital gains rate, the ACA surcharge and growing state income tax rates,  more and more owners are seeking tax advantaged sale structures.  For owners with transition goals that include more than just price, there is no transaction more efficient than selling internally using an employee stock ownership plan, ESOP.

Sellers have the ability to indefinitely defer their capital gains tax, employees receive a deferred retirement benefit and companies can eliminate federal and most state corporate income taxes.  While tax efficiency isn’t the only criteria for a sale, it’s a strong motivator.

Consider the following example of a company generating cash flow of $3MM.  Assume the valuation is 6X cash flow and the company has no debt.  This yields an enterprise and equity value of $18MM.  The business is a C corporation, has an asset basis of $4MM and the owner has a stock basis of $3MM.  We’ll further assume an offer has been presented from a third-party and the owner is comparing a sale of assets or stock to the third-party and an ESOP. Read more »

Transportation and Logistics M&A News

By Doug Nix | Jul 30, 2015

Warehouse of ProductsThe U.S. economy remains strong, which bodes well for activity in the Transportation and Logistics sector, however, recent turmoil in Greece and further debt obligations faced by Puerto Rico may lead buyers to act more cautious in the second half of the year. Still, all that cash on corporate balance sheets combined with near-record levels of “dry powder” on the private equity side has to be put to work.

US freight forwarding companies continue to increase their investments in Asian countries to benefit from growing US-Asia trade.  By 2030 China is expected to surpass Mexico to become the second-largest US export trading partner, and South Korea is projected to become the fourth-largest market for US exports, according to a report released by HSBC and Oxford Economics in May 2015. Although Canada is expected to remain the top market for US exports, China, India, Malaysia, and Vietnam are forecast to be the fastest-growing markets for US goods, with annual growth of about 9%.

Consolidation has also had a strong effect on freight forwarding.  As non-asset freight forwarders and third-party logistics firms consolidate and expand their service portfolios, smaller players are finding it more difficult than ever to compete. The growth of Internet-based exchanges that can serve small customers puts additional pressure on small, independent brokers. E-commerce growth and expansion of intermodal and LTL trucking transportation are fueling acquisitions among non-asset freight brokers and logistics firms. An example includes the merger of Coyote Logistics and Access America Transport in March 2014, which formed a multimodal company with more than $2 billion in annual revenue.

Posted by Doug Nix.

Read the Entire Transport, Logistics and Supply Chain 3rd Quarter Newsletter Here


Private Equity Cashes In

By Steve Hauser | Jul 27, 2015

MoneyThe fine folks at Pitchbook recently published their Q3 2015 Private Equity Breakdown and there are 3 key story lines to note:

•  U.S. – based PE exits in throughout 2014 and H1 2015 were and remain at extraordinary levels in $. In 2014 PE exits totaled $167 Billion, a record, but with the rate of exits in 2015 that value will be exceeded by the time you read this. And we’ll have 5 months left in the year!

•  The Investments-to-Exits ratio (based on # transactions) was only 1.7X for H1 2015, the lowest ratio in 10 years.   To some degree, the PE industry is “emptying the closet”.

•  Corporations are the big customers for such exits, outspending larger PEs 8:1 in H1 2015, and they likely will double their spending over 2014 by year-end….exceeding $300 Billion. Read more »

M&A News From the Industrials Industry

By John Hammett | Jul 23, 2015

Car MfgAccording to a report from international consulting firm PWC, the industrials sector is expected to continue to prosper for the remainder of 2015 as larger corporate buyers seek to acquire improved technology, facilities and people. The US Federal Reserve’s decision to keep interest rates low has substantially lowered the cost of M&A funded by debt. For companies with limited growth opportunities, acquisitions are a natural path to bolstering market share. 

Manufacturers may be more cautious with inventory, production, staffing and capital expenditure strategies if US industrial production growth remains flat in the coming months.US industrial production of manufactured goods unexpectedly fell 0.2% in May 2015 compared to the month before. The recent stagnating US industrial output has sparked concern among some economists that US manufacturing may be in a technical recession. Economists polled by MarketWatch had expected to see May industrial production growth of 0.2%. Manufacturing activity has slowed as the strong dollar has made US exports less competitive in overseas markets. In addition, the decline in oil prices since mid-2014 has reduced investment in new equipment by energy producers. Overall global economic weakness also has contributed to reduced demand for US manufactured goods.

According to data from the Institute for Supply Management (ISM) industries in the industrials sector reporting growth in manufacturing include paper products; printing and related support activities; furniture; primary metals; nonmetallic mineral products; and food, beverage, and tobacco products. Three industries reporting a decline include textile mills; apparel, leather, and allied products; and computer and electronic products.

Posted by John Hammett.

Read the Entire Industrials M&A 3rd Quarter Newsletter Here