According to data collected by Ernst & Young, there has been a consistent trend throughout global M&A over the past three years associated with declining deal conversion rates and a longer average time to completion. Although these trends do not seem favorable, they may be attributed to an increase in pending bids caused by a more optimistic lending environment. Since September 2010, there have been 82 transactions under $1 billion in the transportation & logistics (“T&L”) industry within North America, totaling almost $6.5 billion in aggregate value.
There are many methods of calculating the value of the business; however, many in the mergers and acquisitions field believe that the discounted cash flow (“DCF”) method is commonly considered the best, recognizing the problems of dealing with the future. As the prominent physicist Niels Bohr said, “Prediction is very difficult, especially about the future”.
This methodology looks at the free cash flow (“FCF”), which is the operating profit of the company with non-cash costs, i.e. depreciation and amortization added back for the business for each year into the future. The FCF is critical as that is the cash that is available to the providers of capital to the company – both debt and equity. A business’ value is calculated by estimating the future FCFs and discounting them back by the company’s weighted average cost of capital (“WACC”) as shown below:
After World War II ended, returning GIs began a binge of family formation at a rate not previously seen in American history. Over 77 million babies were born in the US between 1946 and 1964, the generally excepted definition of the baby boom. Much has been written about the attitudinal and cultural traits of this generation. One thing is for sure: Boomers were entrepreneurial and formed businesses at an unprecedented rate. Over half the businesses in the US are owned by boomers, upwards of 10 million businesses.
Boomers are aging, with an average age of almost 60 years old and the oldest boomers almost 68. While it’s true that boomers think of themselves as younger than they are, this is still an age when many people look to retire. Or perhaps with boomers, re-invent. And this trend will continue for many years as the younger end of the boomer cohort ages and moves into retirement years. The number of people in the US in the 55 to 65 age range will continue to increase though 2018.
This means that is possible that there will be a flood of companies coming on to the market in the next several years. Based on 2010 census data, SME Research estimates that, excluding solo practices, the number of companies owned by someone 55 and older was about 2.7 million. PricewaterhouseCoopers in their recent Trendsetter Barometer Survey of Business Owners, estimates that 51% of owners over age 45 planned to sell their companies to other companies. Fewer than 18% planned to pass the business on to a family member and even less would consider selling it to their employees. Read more »
David Sinyard, Managing Director and Principal in the CFA Atlanta office, recently wrote a newsletter article based on his doctoral work done at Georgia State University discussing affect heuristics and the role it plays when private equity investors make decisions. Interestingly, the article was referred to in a recent blog article written by a private equity investor. Check out David’s newsletter article on private equity decision making…
How do Private Equity Groups Assess Potential Investments?
Before Private Equity Groups (PEGs) invest, they review a significant number of proposals hoping to find that diamond in the rough, that perfect addition to their investment portfolio. Three a day is not unheard of, so the annual volume can easily be 700-1000 proposals. Of these, the majority of PEGs typically close on 2-4 deals per year. There is a great deal of time and work involved in reviewing and ultimately deciding which deals to pursue. How do PEGs decide which deals to pursue? Their due diligence costs often exceed $100,000 per transaction. Before they commit the time and money, they have to be convinced that this is a company that they want to own. Read more »
According to a report from global consulting firm PwC, closed software transactions in the second quarter declined over the previous quarter as well as year-over-year. However, an uptick in announced and rumored deals points to a rise in M&A activity for the remainder of the year. Private equity buyers took a more active role in software M&A with deals announced across the spectrum of deal size, including some of the largest transactions announced so far this year.
For the past 4 years most business owners and executive teams included acquisitions as part of their strategic plan, but a funny thing happened on the way to the forum – very few of these companies were able to cross this item off their to-do list. Setting aside the frenzy of the capital gains tax-incented divestitures in late 2012, there has been lethargy in the market since 2008. We have also seen a marked decrease in transaction volumes through the first half of 2013.
Why is that? There a few things that have got in the way of a robust period of corporate M&A. These include the obvious – a consistent climate of business uncertainty. No sooner does the world stop talking about the pending collapse of the Eurozone, than our eyes are refocused on the prospects of the US government shutting down all non-essential spending and dark clouds looming around the possibility of it also defaulting on its debt. Hardly the type of news to inspire confidence in the predictability of the future. Read more »
According to data from S&P Capital IQ, transactional activity in plastics and rubber manufacturing since the end of 2010 has benefited from improving financing conditions, stable business growth and narrowing gaps in business valuations. In 2012, financial and strategic buyers became more active, resulting in an increase in the number of deals completed by approximately 3%. Plastics M&A volume increased more than 25% in 2012, with the highest amount of activity generated by plastic packaging and industrial plastics transactions. Many private equity began liquidating their holdings in the space, due to increasing multiples in 2012. 2013 is expected to see a slight increase in M&A activity for the plastics and rubber manufacturing industry in North America, mainly driven by sellers looking to take advantage of high valuation multiples and favorable access to capital.
It was certainly flattering when you received that unsolicited call from the CEO of one of the major players in your industry. Maybe he remembered you granting him that one foot “gimme” putt at the trade association golf tournament two years ago. In any case, during the call, he said some very nice things about your company and how teaming up with his would be a “win-win” situation for both of you.
During the discussion, he offered a price that seemed fair; and, in short order, you signed an LOI that took you off the market for 90 days while all the final details got worked out. Sure enough, he kept his word; paid his price on the designated close date; and you are now golfing near full time while regularly granting one foot “gimme” putts in anticipation of more good karma in the future.
So, looking back, have you ever wondered how much money you left on the table by accepting that seemingly “fair” price from that single offer? Actually, you will never know because you fell into the all too common trap of voluntarily binding yourself into a non-competitive process that, by design, was to the clear advantage of the buyer and to the distinct disadvantage of you, the seller. Read more »
M&A activity in the metal fabrication space continued on an upward trend in 2012, finishing the year with 38 transactions in the 4th quarter alone. Over the last 36 months, we have seen aggregate deal values rise with increasing leverage while equity contributions are on the decline. As cited in a report by Capstone Partners, the jump in M&A activity in 2012’s 4th quarter can be attributed to closing transactions strategically before tax hikes were implemented in January 2013. Though tax effects had a strong role, consolidation in metal fabrication has benefited from increasing demand in a recovering economy as well as healthy balance sheets for strategic buyers. Companies are now looking to take advantage of improving economic conditions through acquisitions in the sector. Middle market M&A activity in the industry has been mainly driven by strategic acquirers who have continued to drive up multiples and valuations. As Brown Gibbons Lang & Company notes in their “Metals Insider” Report, Private equity groups have hesitated to be involved in companies with less than $250 million EBITDA, as their main interest is large companies with stable cash flows. Nevertheless, private equity firms have high amounts of un-invested cash and are attracted to the sector’s consistent demand and growth, while they are also intrigued by opportunities for consolidation.
In his blog post of September 30, 2009, Lee Crawley did a great job of clarifying the business valuation process and he made reference to the fine business valuation article written by Gary Parker. Lee touched on the standard of value by raising an important initial question in a business valuation engagement: What is its purpose?
It may seem odd to some readers that you can value the same stock of a company and arrive at very different results just by a change in the standard of value. The standards of value include fair market value, fair value, investment value, liquidation value, marital value, intrinsic value, etc. For this blog post, I will address the three common standards of value – fair market value, fair value and investment value. Read more »