InSight

Exit and Growth Strategies for Middle Market Businesses

Archive for 2015

M&A News From Plastics & Rubber Industry

By Jim Zipursky | Nov 12, 2015

Plastics & RubberMany European plastics & rubber product manufacturers have not seen their costs drop even amid lower global oil prices, because supplies of raw materials have been constrained by petrochemical plant shutdowns at major plastics producers, according to the Financial Times. More than 40 shutdowns of European petrochemical plants, many of them unscheduled, took place in the first six months of 2015, compared to about 20 shutdowns during the whole of 2014. Many shutdowns have been due to underinvestment in plant infrastructure during the past decade.

Growing interest in passenger vehicles, rising exports of automotive plastics & rubber components, and increasing regulation of vehicular emissions are creating increased demand for automotive plastics in Brazil, Russia, India, and China (the BRIC countries). In a bid to expand its footprint in India’s growing automotive market, LyondellBasell agreed to acquire SJS Plastiblends, an India-based manufacturer of thermoplastics, in August 2015. The automotive plastics market in BRIC countries, which was valued at $11.2 billion in 2014, will experience a compound annual growth rate of 15.4% between 2015 and 2020, according to a recent report by Future Market Insights. The market research firm identified polypropylene, polyurethanes, acrylonitrile butadiene styrene, and polycarbonates as the materials with the highest automotive industry consumption rates. The automotive sector is one of the largest markets for plastics & rubber, which are used for parts ranging from upholstery and interior trim pieces to engine components and exterior panels.

Posted by Jim Zipursky.

Read the Entire Plastics & Rubber 4th Quarter Newsletter Here


U.S. Corporation Income Tax – Studies and Proposals

By David DuWaldt | Nov 10, 2015

Tax CalculatorIn my blog post of October 27, 2014, The Art of Corporate Inversions, I alluded to the fact that, relative to other countries, the United States has the highest income tax rate imposed on C corporations. And since the late 1990s, several multinational corporations have changed their domicile to another foreign territory or country. Federal lawmakers have passed stricter rules in an attempt to prevent corporate inversion transactions and income shifting strategies.

With the concerns about the shifting of income from the United States to lower tax rate countries and the effect upon the U.S. economy, several studies were conducted. An interesting recent article at the Tax Foundation website touches on some of the studies and suggests that a lower tax rate structure for corporations, which are subject to U.S. income tax, could reduce income shifting by multinational corporations and increase the tax base. In some ways, this concept is similar to the famous “Laffer Curve” that was introduced by Dr. Arthur Laffer in the late 1970s and supported the macroeconomic theory of supply-side economics.

Last February, as part of the 2016 budget proposal, President Obama recommended a reduction in the corporation income tax rate from 35% down to 28%, with a special rate of 25% for manufacturers. The proposal provided for unspecified cuts in tax preferences and a one-time tax on unrepatriated foreign earnings of U.S. based multinational corporations. At this moment, we are patiently waiting for Congress to pass a budget for the 2016 fiscal year.

Last July, Representatives Charles Boustany (Republican – Louisiana) and Richard Neal (Democrat – Massachusetts) released a discussion draft of their Innovation Promotion Act of 2015, which is an “innovation box” bill to provide for a 10.15% effective tax rate on income derived from certain intellectual property. This tax based incentive is not new to some of the countries that belong to the Organisation for Economic Co-operation and Development (OECD) and have their own “innovation box” low tax rate incentives. Unfortunately, with any specific tax incentive, legislation of this type adds to the complexity of the tax code and the cost of tax administration.

We do have some corporation tax reform proposals by some of the presidential candidates that rank high in the recent polls. Democratic candidate, Hillary Clinton, has not proposed a specific corporation tax rate but has commented that she likes the pre-Bush tax rates of the 1990s. Democratic candidate, Bernie Sanders, did not specify a proposed corporation income tax rate but did comment that it should be higher than the current rate. Republican candidate, Donald Trump, proposes a reduction in the corporation income tax rate from 35% to 15%. Dr. Ben Carson proposes a corporation income tax rate of between 15% and 20%. Marco Rubio proposes a reduction in the corporation tax rate to 25%. Jeb Bush proposes a reduction in the corporation income tax rate to 20%.

It is challenging to guess what the corporation income tax rate will be in a few years from now but it will be interesting to observe what happens when Congress addresses the issue.

Posted by David DuWaldt.

Subscribe to the Middle Market Pulse


News From the Industrial Industry

By John Hammett | Nov 05, 2015

Industrials FactoryDespite a decline in industrial production of late, US manufacturing production is forecast to increase 2.1% in 2015 compared to 2014, according to the MAPI (Manufacturers Alliance for Productivity and Innovation) Foundation. Manufacturing production is expected to further accelerate in 2016, with a rise of 3.4% amid employment and income growth, which should spur consumer spending. Credit availability and low interest rates should help stimulate demand for expensive purchases like automobiles and housing. Non high-tech manufactured goods production – which account for 95% of the manufacturing sector – is forecast to rise 2.3% in 2015 and 3.3% in 2016. Production of high-tech goods is expected to increase 1.5% in 2012 and 6.1% in 2016. While overall manufacturing production is forecast to be strong, demand for oil- and gas-related products, such as oil and gas field machinery, is expected to remain weak.

Industry Indicators

  • Total US manufacturers’ shipments, which indicate industrial industry activity, fell 3.8 percent year-to-date in July 2015 compared to the same period in 2014.
  • According to data from the Interindustry Economic Research Fund, Inc. (IERF), an economic research group, revenue for the US manufacturing sector is forecast to grow at an annual compounded rate of 5% between 2015 and 2019, based on changes in physical volume and unit prices.
  • US durable goods manufacturers’ shipments of machinery, an indicator of demand for industrial machinery, fell 0.9 percent year-to-date in July 2015 compared to the same period in 2014.
  • US steel mill product prices, an indicator of commodity steel costs for industrial machinery manufacturers, fell 14.1 percent in August 2015 compared to the same month in 2014.

Read the Entire Industrials M&A 4th Quarter Newsletter Here


Food & Beverage Industry News

By Terry Fick | Oct 29, 2015

SundaeFood & beverage  shipments remain the most frequently targeted type of merchandise in US cargo thefts, and many food wholesalers are investing in new tools and technologies to protect their fleets from criminals. Food and drinks accounted for about 16% of thefts committed in the second quarter of 2015 and for 19% of thefts in all of 2014, according to a new report by FreightWatch. Thieves have gravitated toward items like high-end meats, seafood, produce, and frozen foods as distributors and transporters have focused on tightening security for higher-value shipments of nonfood products like pharmaceuticals and electronics, according to The Wall Street Journal. Since 2008 the average value of stolen food shipments has steadily risen as the overall volume of food theft has declined, suggesting that criminal groups are getting better at identifying high-value loads. Food wholesalers are implementing security measures such as GPS trackers, interior locks on trailer and container doors, and vehicle monitoring systems that transmit real-time alerts when truck doors are opened, Food Logistics reports.

The consumer price index for food, an indicator of food product values, rose 1.6 percent in September 2015 compared to the same month in 2014.

US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, fell 1.2 percent year-to-date in August 2015 compared to the same period in 2014.

Read the Entire Food & Beverage 4th Quarter Newsletter Here


A Tide Change for Business Sellers?

By Catherine Patience | Oct 27, 2015

Low TideFor the past several years, conditions have been “ideal” for prospective business sellers, but the “tide” may be changing soon.  Cheap debt and elevated use of leverage have pushed prices to record multiple levels which have remained on a steady plateau.  But recent statements by Fed Chair Janet Yellen indicate that the Federal Reserve will raise interest rates later this year, in which case these elevated multiples will likely not last.

The average equity contribution in deal financing has declined steadily over the past two years, and debt multiples have increased.  After remaining in the 3.4 – 3.5 x range from 2011-2013, average total debt rose to 3.8x last year and in the first 6 months of the current year, the multiple has continued to rise to 4.0x.  When debt multiples rise, buyers must ensure the companies they purchase have sufficient earnings to service higher debt loads.  As a result, they end up paying higher prices for the companies they purchase, companies with steady cash flow, limited capital investment requirements and potential for at least modest future growth and improvement.

Competition for acquiring “best in class” businesses has been stiff between strategic and financial buyers alike, especially so with companies in the $10 million plus EBITDA range.  With a coming change in the debt markets, some theorize that although the competition will still exist, financial buyers may be better poised to continue buying at these near record levels, at least for the near term.

In all likelihood, we won’t be able to predict the timing on condition change in valuation and debt support.  Just know that there is only one direction in which it can move.

Subscribe to The Middle Market Pulse


Transportation & Logistics M&A News

By Doug Nix | Oct 22, 2015

Logistics 2M&A in the transportation & logistics space continues to be driven by non-asset logistics companies with proprietary technology. A deal that illustrates this is the whopping $1.8 billion cash acquisition of Coyote Logistics, LLC, a portfolio company of Warburg Pincus LLC, by United Parcel Service. The acquisition would allow UPS to expand its portfolio and transportation management services.

Proposed fuel efficiency rules will likely accelerate investment in fleet upgrades by the US trucking industry. Federal transportation and environmental regulators in June 2015 announced new fuel efficiency standards for heavy-duty trucks that aim to cut carbon emissions by 24% by 2027 and reduce oil consumption by 1.8 billion barrels over the lifetimes of the new trucks. Under the new rules, a best-in-class long-haul truck would get about 10 miles per gallon of fuel compared to the 5 to 7 miles today.

Technology companies are attempting to significantly streamline the processes used by shippers to book freight forwarding services. One such company, Freightos, recently received $14 million in Series B funding to expand its offerings, according to TechCrunch. Freightos has developed an online platform that helps forwarders manage their rates and automate their routing and pricing. Shippers can use the platform to receive instant competitive quotes that take into account a wide variety of shipping fees.

  • The average US retail price for diesel and regular gas, a major operating cost for trucking fleets, fell 33.9 percent and 31.3 percent, respectively, in the week ending September 14, 2015, compared to the same week in 2014.
  • According to data from the Interindustry Economic Research Fund, Inc. (IERF), an economic research group, revenue for US truck transportation is forecast to grow at an annual compounded rate of 5% between 2015 and 2019.

Posted by Doug Nix.

Read the Entire Transport, Logistics and Supply Chain 4th Quarter Newsletter Here


How To Avoid a Retrade in a Business Sale

By Dan Vermeire | Oct 19, 2015

Avoid a RetradeImagine this… You had several good proposals to buy your business and narrowed it down to the best one.  You’re ready to sign an LOI and start the diligence process.  But, how can you be sure they won’t change their price?

The situation is risky.  Before the LOI, you hold the power.  You have other options on the table and have controlled the process.  But, after the LOI is signed, your power declines.  You enter an exclusive relationship, other options must go to the sidelines, and you can’t go back to them later as “damaged goods”.  During the diligence period, every detail about your company will be on the table, nothing is held back.  Your choice of buyers is critical.

A retrade happens when the buyer changes the deal after signing the LOI.  Some retrades are for good reason – the situation changed, diligence found some previously unknown issues, or the business declined.  But, in other cases, a buyer will retrade the deal as part of a bait and switch strategy, or just because they think they can.

How can you avoid a retrade?  Here are a some strategies to use before signing an LOI. Read more »


Engineering & Construction Industry News

By Jeff Johnson | Oct 15, 2015

Hard HatAs with other industries the engineering & construction space is continuing to evolve with technology. This trend has had an impact on M&A and technology companies look to get a foothold in the space. As an example, Bentley Systems, Incorporated announced in March that it had acquired the business of Oakland, California based EADOC, LLC, a provider of construction management cloud services. Bentley said that this addition to its MANAGEservices (cloud services) offerings helps construction managers at engineering/construction management firms and infrastructure owner organizations with capital projects to reduce risk and staff hours, improve information quality, and provide owners with real-time visibility into costs. EADOC allows facility owners to increase return on investment through faster project completions, easily monitor project financial performance, and maintain detailed construction records without administrative staff.

US Construction Spending Hits New Post-Recession Peak, US construction spending has hit a new high. Construction spending nationwide rose 0.8% in May to a seasonally adjusted annual rate of $1.036 trillion. The welcome bump represents the highest level since October 2008, according to the Commerce Department. Spending broke the $1 trillion mark in March 2015. Reaching the new peak was possible because of private construction spending, the highest since July 2008. The latest milestone can be attributed to spending on private nonresidential building, which inched up 1.5% to $393 billion, as well as manufacturing spending during the past year. Looking at the latest figures, some economists also anticipate an increase in activity from homebuilders that should help boost the labor market and the overall economy.

Read the Entire Engineering and Construction M&A 4th Quarter Newsletter Here


Get a Higher Business Sales Price with this Trifecta

By Kim Levin | Oct 13, 2015

TrifectaThe first half 2015 GF Data report on private company mergers and acquisitions was recently released. They do a very good job of compiling private company transaction data. They take their time to make sure they get it right, analyze the data and report their findings quarterly.

Data confirms that companies in all industries who fall under the “trifecta” of categories…1) previously owned by institutional investors, 2) above average financial characteristics and 3) continuation of management post close…command much higher purchase prices when they go to market. Even on an individual category basis, the multiples are higher than the average multiple of 6.7x earnings. Companies that were formerly owned by institutional investors i.e., corporations and private equity, commanded a 7.2x multiple, while those companies with above average financials averaged 7.4x earnings. Companies with retained management averaged 6.8x earnings. However, if a company carried all three, or a “trifecta” of categories, the average multiple rose to 8.4x. And that’s just the average. Factoring for size, the numbers are even more remarkable.

In the first half of 2015, the preeminence of the stand-alone platform acquisition (where the acquired company becomes a “platform” for multiple “add-on” acquisitions over the next few years) seems to be re-establishing itself. The average multiple for platforms exceeded the average for add-ons 6.8x to 6.5x. Deals involving companies with above average financials accounted for 66% of all activity during the period, well above the historic average of 57 percent.

There’s a lesson to be learned here. If you work to place your company in any (or all) of the “trifecta” categories before you go to market, you will likely be rewarded with a higher purchase price.

Subscribe to The Middle Market Pulse


Private Equity Deal Flow

By Catherine Patience | Oct 09, 2015

Private Equity Deal FlowAccording to AARP, 8,000 people a day are turning 65. That’s over 40 million baby boomers hitting retirement age between now and 2029. Recent U.S. Bureau of Labor statistics confirms that approximately 13% of the U.S. work-force own businesses. Even a conservative estimate of the number of businesses that will change hands as the boomer population retires over the next fourteen years puts the number in excess of 4 million. The looming question is, as the “for sale” signs go up on those businesses, will there be sufficient capital resources and private equity deal flow for everyone to “cash out?”

For that reason, we keep a keen eye on capital resources. Private Equity investors are a huge source of investment capital. So, how is private equity faring this year? As we finish the first half of 2015, investment is down 7.1% from Q1 to Q2, and down 20% from Q4 2014. In this highly competitive market the number of quality investment targets has shrunk. The higher the quality, the higher the multiple, so many Private Equity Groups (PEGs) are finding it harder to find quality companies in their price range. To compensate, PEGs are looking to middle-market sized companies with slightly lower multiples. But even those “add-ons” are at the lowest levels we’ve seen since 2013.

With only a few large transactions to bump up average deal size, the upper and core middle market size companies comprise the majority of deals done year to date. Private equity investors have been shedding holdings at a fast clip, with corporate buyers having already spent about $160 billion, just $7 billion short of last year’s total.

53% of the $75.6 billion capital raised year-to-date has gone into the $1 billion – $5 billion size funds. This is likely due to PE portfolio consolidation and a trend toward larger fund managers. Confidence in larger firms is also expressed by a drop in average fund closing time.

Subscribe to The Middle Market Pulse