Exit and Growth Strategies for Middle Market Businesses

Archive for 2016

Plastics & Rubber Industry M&A News

By Jim Zipursky | Jun 10, 2016

plastics & rubber industryM&A activity for North American based target companies in the Plastics & Rubber industry for Q1 2016 included 18 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $49 million.

One of the major deals in the sector this year was Trelleborg A.B. and Freudenberg Group moving forward with a plan where Freudenberg will become sole owner of joint venture TrelleborgVibracoustic GmbH. The acquisition of Trellborg’s half of the JV is based on an enterprise value of a little more than $2 billion. The company will receive about $7.7 billion in addition to a dividend of $1.6 billion it received in December, putting the total value of deal at approximately $9.3 billion.

In late March, private equity group Arsenal Capital made three acquisitions in the polyurethane foam space. Arsenal will combine Pacific Urethanes LLC (Ontario, CA), a majority stake in Elite Foam, Inc. (Newnan, GA) and the foam production assets of Hickory Springs Manufacturing Co. (Conover, NC) to form Elite Comfort Solutions. Purchase prices were not disclosed.

Commodity pricing for rubber products dropped significantly in the first quarter lowering materials prices for manufacturers. Read more »

The Do-it-Yourself Dealmaker

By John Hammett | Jun 08, 2016

Do-It-Yourself DealmakerWould a savvy company owner be his own doctor?

In 1961 Leonid Rogozov removed his own appendix. The 27-year-old Russian doctor was on an expedition to Antarctica; his team was frozen into their base for the winter.

Dr. Rogozov had no choice other than to do the surgery himself.

Operating mostly by feeling around, he worked for an hour and 45 minutes, cutting himself open and removing the appendix. The men he’d chosen as assistants watched as the “calm and focused” doctor completed the operation, resting every five minutes for a few seconds as he battled vertigo and weakness.

In 2016 some company owners will sell their companies by themselves. Most of them will survive the process, and most of those will leave big money behind because they don’t know what they don’t know about selling companies. Read more »

Evaluating the Offer When Selling Your Business

By Jay Carter | May 31, 2016

Evaluating the offerAs an owner, you are likely to have multiple opportunities to sell your business.  When you receive an offer, how do decide whether or not to accept it?  Should you negotiate for a better deal?  Should you find a different buyer altogether?  Should you do nothing?  Before answering these questions, it helps to put the offer into proper perspective.

First, consider the offer in the context of the market.  Second, consider the offer in the context of your goals.  A market rate offer that meets your personal and financial goals is one worthy of careful consideration.

Is this a market rate offer?  This can only be determined by obtaining multiple offers from qualified buyers and comparing them.  Valuing a privately-held company is tricky, and it cannot be done in a vacuum.  Rules of thumb and “comparable” valuations provide valuation pointers, but they do not determine the true market value of a business.  A well planned sale process produces multiple offers within a short period of time and enables objective evaluation of each.  Without multiple offers, it is impossible to know whether the valuation and terms offered are fair for your business. Read more »

Metal Fabrication Industry M&A News

By Robert Contaldo | May 25, 2016

metal fabricationMetal Fabrication Industry Update 

US shipments of metal fabrication 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. If weak demand persists, fabricated metal product manufacturers may adjust production, staffing, and/or inventory strategies to preserve margins.

US orders for primary metals, a demand indicator for steel service centers and other metals wholesalers, dropped nearly 16% in January 2016 compared to the same month in 2015. Iron and steel mills orders were off nearly 21%, while aluminum and nonferrous metal orders fell more than 10%. New orders for ferrous metal foundry products were down nearly 13%. On a monthly basis, January’s durable goods orders increased 4.7%, and primary metal orders edged up 0.6%.

Industry Indicators

  • US durable goods manufacturers’ shipments of fabricated metal products, an indicator of fabricated metal parts production, fell 0.4% year-to-date in February 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 15.8% in March 2016 compared to the same month in 2015.

Posted by Robert Contaldo.

Read the Entire Metal Fabrication 2nd Quarter Newsletter Here

Engineering & Construction Industry M&A Trends

By Jeff Johnson | May 19, 2016

engineering & constructionOne of the largest transaction announcements in the sector during Q1 was in the engineering space on March 29 when design firm Stantec (Edmonton, Alberta, Canada) entered into a definitive merger agreement to acquire MWH Global (Broomfield, CO), a 6,800-person engineering, consulting and construction management firm focused on water and natural resources for built infrastructure and the environment. The transaction is valued at approximately US$795 million or a multiple of approximately 7.3x adjusted 2015 EBITDA.

As more project owners require contractors to use certain technologies, construction companies of all sizes are now incorporating the Building Information Modeling (BIM) process into their implementations and more widely adopting emerging technologies such as 3D laser scanning. No longer limited to major companies, use of BIM is becoming a necessity for smaller firms in enhancing a project’s consistency and accuracy and speeding up the process of document generation. Additionally, owners primarily benefit from and capitalize on data that’s captured through BIM. Engineering & construction companies that use the modeling process can expect improved collaboration and coordination, as well, among a project’s stakeholders. Adoption of 3D laser scanning is also expanding. The emerging technology makes measurements more precise than conventional methods and isolates potential problems more clearly for client discussions. Laser scans produce a digital reproduction of objects and consist of millions of data points that are put into a BIM. Use of laser technology in construction projects is expected to grow for several years. Indeed, the global 3D laser scanning market is forecast to expand from an estimated $2.06 billion back in 2013 to $4.08 billion by 2018, according to industry research group MarketsandMarkets.

  • The value of US nonresidential construction spending, an indicator of the health of the construction market, rose 11.1% year-to-date in February 2016 compared to the same period in 2015.
  • The value of US residential construction spending, an indicator of the health of the construction market, rose 11.4% year-to-date in February 2016 compared to the same period in 2015.

Posted by Jeff Johnson.

Read the Entire Engineering & Construction M&A 2nd Quarter Newsletter Here

Private Equity – Sellers in the Driver’s Seat

By Kim Levin | May 17, 2016

Sellers in the Driver's SeatIn a sluggish unpredictable economy with volatile stock and bond markets, investors continue to rely on Private Equity investments as a safe haven for their dollars.  Recent PE returns have surpassed expectations, so continuing to raise new capital has not been an issue for Private Equity Groups (PEGs).  In fact, in the first quarter of 2016, fundraising in the private equity markets was up 14% over the same period last year.  With new capital sitting on the sidelines, Private Equity must now seek out solid companies to buy, decide what they’re worth and hope they can seal the deal before another investor beats them to it.

Deal sourcing has been a challenge for the past several years.  PEGs have wrestled with two investment approaches: “overspending” for larger or best in class companies vs. purchasing smaller, lower quality companies at lower multiples and then devoting significant time and resources to rebuild and grow.  Statistics tell us that given a choice, PEGs would prefer do the former, but in many cases are forced to do the latter. Smaller transactions, or Add-Ons (to existing base portfolio companies), represented nearly 70% of all private equity transactions in the first quarter of this year, a continuing upward trend.

In addition, PEGs continue to face stiff competition for quality deals from strategic buyers looking to grow by acquisition.  Many PEGs are willing to offer incentives to selling companies, like a quicker close, to gain an advantage in the auction process. The current competitive environment has put sellers in the driver’s seat.  As long as value expectations are realistic, this may be a very good time to be selling a middle market business.

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Food & Beverage Industry M&A Trends

By Terry Fick | May 12, 2016

food & beverageOn the public markets, the S&P Food & Beverage Index held steady compared to the rest of the market in January but remained somewhat flat as the quarter ended. Starbucks (SBUX) continues to be one of the sector’s public leaders. The stock has appreciated 49% over the past year and currently yields 1.33%.

As consumers become more interested in products free from artificial dyes and flavors, a growing number of food manufacturers are using natural spices to color their packaged foods. Kraft Heinz recently began using turmeric as a replacement for yellow #5 and yellow #6 in its flagship macaroni and cheese brand. Annatto is another spice that is increasingly being used in place of yellow dyes, while paprika gives an orange color to products ranging from sausages to cake icing, according to The Wall Street Journal. Several other major food companies, including Hershey’s and General Mills, are also increasing their use of spices and other natural ingredients. Food manufacturers must invest heavily in research and development to ensure that the new recipes don’t affect an item’s taste or texture. 

Sales of coconut water are growing steadily in the US and globally as consumers continue to stock up on healthier beverages. The US coconut water market reached $778 million in annual revenue in 2015, a 27% increase from the previous year, according to Technavio. The research firm expects US sales to continue growing by about 26% per year through 2019, to about $1.9 billion. Leading US coconut water brands include Coca-Cola’s Zico, PepsiCo’s O.N.E., and Vita Coco.

  • US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, fell 0.6% year-to-date in February 2016 compared to the same period in 2015.
  • US retail sales for food & beverage stores, a potential measure of food demand, increased 3.2% in the first three months of 2016 compared to the same period in 2015.
  • US nondurable goods manufacturers’ shipments of beverages, an indicator of beverage products and bottling production, rose 5.2% year-to-date in February 2016 compared to the same period in 2015.

Posted by Terry Fick.

Read the Entire Food & Beverage 2nd Quarter Newsletter Here

Healthcare – M&A News From the Industry

By Peter Heydenrych | May 05, 2016

healthcare m&AHealthcare M&A activity for North American based target companies in the Healthcare sector for Q1 2016 included 180 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $114 million.

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

The rate of growth in healthcare spending in the US continues to increase 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. 

Rural hospitals in the US, which continue to struggle financially, are hindered by an inability to pay for IT enhancements that would help improve efficiency. Historically challenged by low-income populations and low patient loads, many rural hospitals are critical access facilities that rely on government support. Economic difficulties, federal budget cuts, lower insurance reimbursements, and new Medicare penalties for poor quality of care have worsened the situation. More than 65 rural hospitals have closed in the past five years, and about two-thirds operate with negative operating margins, causing them to eliminate or delay capital outlays including IT investments, according to Health Data Management.

Posted by Peter Heydenrych.

Read the Entire Healthcare 2nd Quarter Newsletter Here

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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