InSight

Exit and Growth Strategies for Middle Market Businesses

Energy Industry M&A News

By Roy Graham | Apr 28, 2016

energy industryOil prices increased roughly 60 percent since late January. However, the global over-supply of oil worsened in March. According to data from the Energy Information Administration (EIA), the net surplus (supply minus consumption) increased to 1.45 million barrels per day in March. In February, the surplus increased 270,000 barrels per day. This is not a positive signal for an extended price recovery.

On the public markets, the Energy industry started out in decline with the rest of the market, but picked up significantly heading into the second quarter.

If more exploration and production companies restructure under bankruptcy protection, attractive assets may be available to the survivors at a discount. As many as one-third of US oil and gas producers may seek bankruptcy protection by mid-2017 if oil prices remain near current levels, according to a forecast by Wolfe Research reported by The Wall Street Journal. A host of factors, from China’s economic slowdown to the dollar’s rise to producers themselves continuing to flood the market, have pushed oil prices lower and lower since mid-2014. Prices below $40 per barrel are viewed as unsustainable for the vast majority of US operators, especially those with significant debt loads. 

With oil and gas prices remaining well below highs reached in mid-2014, major companies are cutting back on new exploration and drilling fewer wells. Only six new oil and gas development projects were approved in 2015, according to research from Morgan Stanley reported by The Wall Street Journal. Normally companies race to add to their reserves through exploration as fast as they pump oil from the ground. But the current glut of supply and corresponding low prices are discouraging companies from investing in exploration. The number of drilling rigs in the seven key US tight oil and shale gas regions –sources of the vast majority of recent production growth – has declined sharply, according to the US Energy Information Administration.

Posted by Roy Graham.

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


M&A in the Business Services Industry – Inflated Valuations

By Kim Levin | Apr 13, 2016

inflated valuations2015 Mergers and Acquisition activity in the Business Services industry was characterized by inflated valuations and a highly competitive landscape.  According to Pitchbook, a data collection platform that covers Private Equity Group (PEG) investment, there were 3,521 transactions worth just shy of $184 billion in the business services sector alone.

To date, private equity firms still remain eager to deploy money sitting on the sidelines into both platform (large base) and add-on (smaller niche) investments in the business services sector.  However, competition from strategic corporate buyers over the past few years has resulted in an uptick on purchase prices for platform size deals and its very much a seller’s market.  Private equity investors are being forced to pick their battles wisely.  When they determine they have an advantage over a corporate investor, you will occasionally see a PEG even overpay for an acquisition in a bidding war if they can envision a positive outcome over the entire hold period.  But with inflated prices comes a more cautious approach to due diligence.  We see the breadth and length of due diligence both increase and deals take longer to close.

Add-on deals offer private equity investors an opportunity to put money to work and many times these transactions can often be negotiated and completed outside the competitive auction process offering shorter closing time frames.  Such deals accounted for 62 percent of all buyouts in the fourth quarter of last year, a historically high percentage.

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Media, Technology & Telecom M&A News

By Dan Vermeire | Apr 06, 2016

ITIPG-Global WavesMedia, Technology & Telecom – 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.

The latest generation of hybrid tablets is gaining traction within the enterprise market, driving demand for business software optimized for the higher-performance 2-in-1 devices. Enterprise software vendors were initially slow to move into the mobile realm because few corporate customers worked with early-generation tablets, InformationWeek reports. Meanwhile, consumer demand has fallen sharply as larger, faster smartphones cannibalize sales. Global tablet shipments fell 12.6% in the third quarter of 2015 compared to a year earlier, according to research by IDC. To break out of the slump, device makers are shifting their focus to high-powered tablets with detachable keyboards and more computing power, such as Microsoft’s Surface Pro and Apple’s iPad Pro. These devices are more compatible with business-oriented apps like Microsoft Excel and PowerPoint, and they can also be more easily integrated with corporate enterprise systems — a key selling point for CIOs.

Industry Indicators

  • US retail sales for electronics and appliance stores, a potential measure of demand for computer software, decreased 5.4% in the first month of 2016 compared to the same period in 2015.
  • Total US revenue for computer systems design and related services rose 2.6% in the third quarter of 2015 compared to the previous year.

Posted by Dan Vermeire.

Read the Entire Technology, Media and Telecom 1st Quarter Newsletter Here


M&A News – Metal Fab Industry

By Robert Contaldo | Mar 31, 2016

Metal Fab IndustryUS shipments of metal fab industry 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.

US industrial production, a demand indicator for metal fabrication, only grew 0.3% in October 2015 compared to the same month a year earlier. However, metal coating, engraving, and heat treating production increased 3.1%. Demand for metal coating services is likely being sustained by healthy demand from the automotive industry; industrial production of motor vehicles and parts rose nearly 11% in October 2015 compared to the same period a year earlier.

US nonresidential construction spending, a demand indicator for architectural and structural metals, is expected to rise 7.4% in 2016, according to a December 2015 report by Associated Builders and Contractors (ABC). The steady recovery of the US economy and strong growth in consumer spending are expected to drive demand for new construction. Projects related to manufacturing are forecast to experience the strongest growth with a rise of nearly 15%, followed by lodging with gains of more than 11%.

  • US durable goods manufacturers’ shipments of fabricated metal products, an indicator of fabricated metal parts production, fell 0.6% year-to-date in November 2015 compared to the same period in 2014.
  • US steel mill product prices, an indicator of commodity steel costs for fabricated metal products manufacturers, fell 19.8% in December 2015 compared to the same month in 2014.

Posted by Bob Contaldo.

Read the Entire Metal Fabrication 1st Quarter Newsletter Here


Middle Market M&A Valuations Surged in 2015

By Catherine Patience | Mar 29, 2016

M&A valuationsThe use of “averages” doesn’t always tell the whole story when studying middle market mergers and acquisitions.  Case in point, middle-market M&A “average” valuation multiples would have you believe that 2015 ended the year in step with 2014.  The average valuation multiple for both years on all transactions, regardless of size, was 6.7x.  However, when you drill down into the specific data, a clearer picture is painted.

2015 saw M&A valuations surge in both the lower and upper tiers of the middle market.   In the $10-25 million enterprise value range, valuation multiples rose from 5.4x in 2014 to 5.9x in 2015, or an increase of 9.25% year over year.  In the upper tier of the middle-market, companies with enterprise values between $100 and $250 million, the rise was even more dramatic; from 7.8x to 9.0x, or an increase of 15.38%.  Interestingly, valuation multiples actually dropped nearly 13% for companies in the $50 – $100 million enterprise value range.  Acquirers were concentrating on two things last year:  building “platforms” in their investment portfolios via larger acquisitions and adding substance to existing portfolios via smaller addon purchases.

Company size and quality still matter in middle-market M&A.  Larger, better run companies have continually been rewarded with higher prices at sale.  When existing management remains post-close in a large, well-run concern the multiples jump even higher.

In 2015, the use of leverage continued its rise, but its use was not consistent across all middle-market size tiers. The equity percentage contributed by buyers of smaller companies was under 40% and climbed steadily with an increase in the size tier…the larger the deal size, the greater the equity contribution.

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Healthcare Industry News

By Peter Heydenrych | Mar 24, 2016

healthcare industryThe healthcare industry was the most active segment for global M&A in 2015 with deal value of $723.7 billion, up 66% over $436.4 billion in 2014 and the highest annual level on record, according to data published by industry tracker Dealogic.  Drug giant Pfizer’s proposed $160 billion merger with Allergan, announced on November 23, is the second largest M&A deal announced on record and the largest Healthcare M&A deal globally on record.

US Health Spending Jumps as Number of Insured, Medicine Costs Rise – The rate of growth in health care spending in the US increased in 2014 after years of historic lows. The jump is due primarily to rising numbers of newly insured patients under Obamacare using more health services, higher government Medicaid spending, and prescription drug cost increases. Spending rose 5.3% in 2014, faster than growth in the previous dozen years, according to a report from actuaries at the Centers for Medicare and Medicaid Services (CMS). Government spending on programs including Medicare and Medicaid increased 11.7%, while prescription drug spending growth rose 12.2%. The increase was anticipated by economists, and the Obama administration called the escalating growth temporary, according to The Wall Street Journal. The CMS actuaries state that outcomes in future years hinge on whether new expensive drugs hit the market, according to US News.

Several companies are working to make data from patient blood glucose monitors more easily available in health tracking apps and medical records. Johnson & Johnson’s OneTouch Verio Sync monitor has added capability to support the Apple HealthKit app, the first glucose device to do so; the device also has its own mobile app. Data collected through such devices can be extracted, analyzed, recorded, and easily accessed by patients and physicians, providing a more holistic view of a patient’s health including glucose levels, diet and exercise, and medication impacts. Other companies developing devices and apps to improve care coordination for diabetics include Royal Philips, Medtronic, Insulet, and Dexcom, according to FierceMedicalDevices.

Industry Indicators

  • US consumer prices for medical care commodities, an indicator of healthcare costs, increased 1.5% in December 2015 compared to the same period in 2014.
  • US consumer prices for medical care services, an indicator of profitability for healthcare services, rose 2.9% in December 2015 compared to the same month in 2014.

Posted by Peter Heydenrych.

Read the Entire Healthcare 1st Quarter Newsletter Here


Middle Market M&A Business Insights – Declines in 2015

By Kim Levin | Mar 22, 2016

According to data published by international financial data tracker Bureau Van Dijk, middle market (deal value of $50 million to $500 million) deal volume and value in North America declined in 2015. There were 10,517 middle market deals worth an aggregate $254.93 billion announced in 2015 compared to 11,296 deals worth $313.73 billion in 2014. The year-over-year volume decrease was 10%, while value declined 19%.

Private Equity

Private equity and venture capital volume and value mirrored the rest of the market in 2015. There were 3,224 deals valued at 81.5 billion in 2015, down from 3,420 deals worth 84. 7 Billion in 2014.

Sector Activity

Healthcare and technology were the most active sectors driven by multiple mega deals in each segment. The biggest deal announced in 2015 was drug giants Pfizer and Allergan’s pending $160 billion merger. On the technology side, the largest transaction was the $78 billion Charter Communications Time Warner Cable merger. Another mammoth deal took place in the food and beverage sector when Anheuser-Busch InBev reached an agreement to buy U.K. rival SABMiller in mid-November for $120 billion.

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Energy News From the M&A Sector

By Roy Graham | Mar 17, 2016

Energy Oil PumpEnergy News

As many as one-third of US oil and gas producers may seek bankruptcy protection by mid-2017 if oil prices remain near current levels, according to a forecast by Wolfe Research reported by The Wall Street Journal. A host of factors, from China’s economic slowdown to the dollar’s rise to producers themselves continuing to flood the market, have pushed oil prices lower and lower since mid-2014. Prices below $40 per barrel are viewed as unsustainable for the vast majority of US operators, especially those with significant debt loads.

Oil and gas companies are revising production targets and cutting capital spending amid a global slump in oil prices. Royal Dutch Shell, which posted a $6.1 billion loss in third quarter 2015, cut its losses related to some major projects, resulting in $7.9 billion in charges. The company has decided to abandon an Arctic exploration well off the coast of Alaska, as well as construction of an oil sands project in Western Canada. Although Chevron and Exxon Mobil were profitable during Q3, both companies announced plans to cut capital spending in an effort to weather the price slump; Chevron will also cut up to 10% of its workforce, according to The Wall Street Journal. The US Energy Information Administration projects Brent crude prices will remain below $60 a barrel until mid-2016. Prices averaged more than $100 a barrel as recently as August 2014.

Removal by the US Interior Department of some of the remaining obstacles to drilling in the Arctic creates a new market for oil and gas field services companies, but key restrictions remain. Arctic oil drillers must keep active rigs at least 15 miles from wildlife, which could make transport between drilling sites more burdensome.

Industry Indicators

  • The average US retail price for diesel and regular gas, which influences profitability for oil and gas companies, fell 28% and 7.4%, respectively, in the week ending January 18, 2016, compared to the same week in 2015.
  • The spot price of crude oil, which affects profitability for oil and natural gas operations, fell 29% in the week ending January 8, 2016, compared to the same week in 2015.

Posted by Roy Graham.

Read the Entire Energy M&A 1st Quarter Newsletter Here


Plastics & Rubber Industry M&A Trends

By Jim Zipursky | Mar 10, 2016

Plastics & RubberPlastics & rubber production and commodity pricing declined significantly in 2015 and has shown limited signs of improvement in early 2016.

M&A activity for North American based target companies in the Plastics and Rubber sector for Q4 2015 included 26 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $311 million.

US resin manufacturers pursuit of growth in other countries could intensify if the plastics & rubber industry’s production capacity expands beyond domestic needs. An abundance of cheap natural gas has attracted billions of dollars in domestic and foreign investments in US chemical manufacturing in recent years, and production and export of plastics is expected to rise as a result. Net US plastic resin exports will more than triple by 2030 compared to 2014, increasing from $6.5 billion to $21.5 billion, according to a report from the American Chemistry Council and Nexant Consulting. Among the packagers and distributors pursuing export opportunities, a new company called Sea Pac LLC is spending $32 million to build a shipping hub for plastic resins near The Port of Charlestown in South Carolina. The company, which is expected to be operational in early 2017, will transfer plastic resins delivered by rail to containers for shipment overseas, according to Plastics News.

Industry Indicators

  • US nondurable goods manufacturers’  shipments of chemical products, an indicator of demand for plastic resin and synthetic fibers, fell 2.3% year-to-date in November 2015 compared to the same period in 2014.
  • The spot price of crude oil, a key raw material in plastic resin and synthetic fiber manufacturing, fell 29% in the week ending January 8, 2016, compared to the same week in 2015.
  • According to data from the Interindustry Economic Research Fund, Inc., (IERF) revenue for US plastics and synthetics production, which includes resins and fibers, is forecast to grow at an annual compounded rate of 7% between 2016 and 2019.
Posted by Jim Zipursky.

M&A News from the Food & Beverage Industry

By Terry Fick | Mar 03, 2016

Food & BeverageFood & beverage wholesalers may see labor costs rise in the short term as heavy demand for truck drivers in the US puts pressure on employers to increase salaries. Average annual pay for truckers reached a record $57,000 in 2015, up 17% from the average two years earlier, according to the National Transportation Institute. In that same period, average wages for all US industries rose by less than 4%. The strengthening economy is creating stiff competition for drivers as companies expand their distribution networks to transport higher volumes of products. Trucking industry groups estimate that nearly 50,000 additional drivers are needed just to keep up with demand, The Wall Street Journal reports. Many distributors pass the costs of salary increases along to grocers, retailers, and other customers.

The improving public image of natural saturated fats is helping food manufacturers sell more butter, whole milk, red meat and other full-fat products. US butter sales rose about 15% in 2014 and another 6% in the first three months of 2015, and global sales are increasing at a rate of 2% to 4% per year, according to a recent analysis by Credit Suisse. Meanwhile, sales of whole milk rose 11% in the first six months of this year, compared to a 14% decline in skim milk purchases. Consumers are cutting back on heavily processed foods and trans-fats in favor of foods with more natural ingredients, including items rich in saturated fats such as organic dairy products, grass-fed meats, natural oils, and nuts.

Industry Indicators

  • US retail sales for food services and drinking places, a potential measure of food demand, increased 8.1% in 2015 compared to 2014.
  • US tourism spending for food services and drinking places, an indicator for food distributor revenues, increased 7.7% in the third quarter of 2015 compared to the same period in 2014.

Posted by Terry Fick.

Read the Entire Food & Beverage 1st Quarter Newsletter Here




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