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Second Half of 2016 – Marked Increase in M&A Activity

By Kim Levin | Oct 13, 2016

Marked Increase in M&A ActivityAccording to data published by international financial data tracker Bureau Van Dijk, North American deal volume and value declined significantly during the first half of 2016 following the global trend. According to Bureau Van Dijk, there were 12,298 transactions completed in H1 2016 (a decline of 17.3% over H2 2015) with a combined value of $692.5 billion (a decline of 41.3% over H2 2015). During H1 2016 the U.S. saw 10,147 US deals worth a combined $633.4 billion. Canada saw 2,152 deals worth$59.9 billion.

Private Equity

Falling in line with general M&A trends, North American private equity and venture activity also slowed on the value and volume fronts. Private equity and venture investors took part in 6,487 deals in the region worth $120.8 billion. In contrast, H2 2015 saw 7,792 deals worth $262. 6 billion invested in the second half of 2015.

Sector Activity

Sectors that saw the most activity were metals/metal products (981 deals) followed by general capital machinery (799 deals) and publishing/printing (791) deals. Read more »


It’s a Seller’s Market For Now – Private Equity is Very Active

By Kim Levin | Sep 27, 2016

seller's marketThe flow of private equity funds into industry sectors is an ever changing investment stream channeling to the most attractive perceived returns on investment.

In 2015, a mega deal in the Business & Consumer Products and Services sector accounted for roughly half of the $103.8 billion invested by US private equity.  With the backing of 3G Capital and Berkshire Hathaway, H.J. Heinz Company and Kraft Foods Group (NASDAQ: KRFT) merged to create The Kraft Heinz Company, forming the third-largest food & beverage company in North America.

While not nearly as large as the Kraft Heinz deal, several deals in the Technology/Media/Telecom sector boosted 2015 investment significantly over 2014.  The $5B Informatica PIPE (private investment – public equity), $3.7B Riverbed Technology investment by Thoma Bravo and others, and the $3.5B Ellucian investment by TPG Capital collectively contributed to a substantial increase in this sector over 2014. So what does 2016 look like so far this year? Technology/Media/Telecom looks to be hot again this year.  A handful of large deals in this sector have already closed including; a $15B investment into ADT Security Services by Apollo, Koch and Protection 1, a $7.4B investment by The Caryle Group into Veritas Technologies, and billion dollar private equity investments into Solera Holdings, Solarwinds, Qlik Technologies and Marketo to name just a few.

The private equity community continues to be extremely active.  As of the end of 2015 PE dry powder across North America and Europe was $749B.  This is about the level at the end of 2014.  Debt capital remains cheap and plentiful with many non-bank funding sources ready to step in when traditional lenders are reluctant.

Companies looking to sell, secure growth capital or desiring a partial liquidity event are now operating in an extremely good environment. In fact, sourcing worthwhile deals has become a major challenge for private equity as valuations are high and the deal flow has been limited.  It is definitely a seller’s market, at least for now.

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M&A Deal Structure

By Kim Levin | Aug 23, 2016

deal structureDeal structure in an acquisition usually involves much more than deciding on selling stock vs. selling assets.  The devil is in the details and can involve significant dollars to the seller of a middle market business. GF Data, a company which collects data on middle market M&A transactions, recently reported on issues in deal structure.  One of the areas they considered is how seller financing or earnouts (SFE) effect a transaction in terms of purchase price.

When buyer and seller agree on the terms of the deal, one of the most important issues negotiated is the purchase price.  Generally, the buyer seeks assurance that he isn’t buying a business that will nosedive after the closing and the seller wants to be certain that the buyer will continue his business legacy.  As part of the deal structure, the buyer may ask the seller to assume some of the ongoing business risk by structuring part of the purchase price of the transaction in the form of an earnout.  And in some cases, in order for the transaction to move forward, the buyer may need the seller to finance part of the transaction in the form of a seller note that is paid in monthly instalments over a fixed period of time.  In either case, earnout or seller financing, both parties must be confident that the other will honor the terms of the purchase agreement.  This is why finding the right buyer-seller pairing is paramount.

GF Data recently reported the impact SFE clauses have had on deal values. Nearly half of all transactions in the $10-$25 million enterprise value range use seller financing or earnouts when structuring the deal.   The valuations on SFE deals in that size range was slightly lower, a half a turn.  However, with transactions over $50 million, use of SFEs was not as prevalent and the resulting valuations on those deals was at or above those that did not.  GF Data suggest that seller financing/earnouts is a way to bridge the gap against the seller’s sense of “market” on smaller deals and provide an added premium on larger ones.

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Another Banner Year for Manufacturing M&A

By Kim Levin | Aug 02, 2016

manufacturing M&AFour major business categories, manufacturing, healthcare, business services and distribution, account for approximately 80% of the deal activity reported to GF Data, a company charting middle market private company transactions.   The manufacturing M&A sector, coming off a banner year in 2015, is poised to continue right where it left off in 2016 in terms of middle market mergers and acquisitions activity.

During the first quarter of this year, manufacturing deal values averaged 6.5X EBITDA (earnings before interest, taxes, depreciation and amortization).  The averages are further segmented by whether or not there was a “branding” component involved in the manufacturing process, which added between 1.2X to 2.1X to the multiple. Deal size also played a role in manufacturing company valuation with transaction values between $50 and $100 million commanding the highest prices. Add-ons in the manufacturing sector between $25 and $50 million commanded slightly higher multiples than those under $25 million.

Data also suggests that the debt levels used to complete manufacturing transactions varies slightly by deal size, with the most debt being deployed for deals between $50 and $250 million at 4.1X EBITDA.

In addition, data shows that when an acquirer adds-on to an existing platform investment in their portfolio, they use markedly higher levels of debt than they do on the initial platform deal.  The deal is actually being financed based on the characteristics of an entity other than the business being acquired.

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Canada M&A | Record Breaking 2015

By Kim Levin | Jun 14, 2016

Canada M&AIn 2015, Canada dominated the field of US cross border transactions, so we’re keeping a watchful eye on our neighbor to the north. One measure of Canada M&A health is private equity (PE) deal volume and value, which were at record breaking levels in 2015.  Buyers spent nearly $49 billion last year across 283 completed deals, according to Pitchbook, a private equity and venture capital database.

2016 is off to a slow start, as we have seen volume drop by 33% and value down nearly 16%.  This decline is not a signal of any fundamental shift in Canadian PE dynamic, but is, rather, a typical progression as fund managers swing from racing to complete deals by year’s end to deal sourcing anew, with the cycle coming full circle.

Like the United States, Canada is experiencing a trend toward smaller deals.  As we’ve mentioned before, financial buyers first look to large, well-managed companies with unique product offerings or niche markets to add to their portfolios as long as the price is right.  Over the past few years, competition for those prized companies has pushed prices to the stratosphere. As a result, many private equity investors have begun to focus on companies that have many prized company attributes but are smaller in size and fit their price objectives. In 2015, 61% of all transactions were smaller, add-on deals and as of the first quarter of 2016 that number is up to 68%.  Looking back, before the M&A bubble burst in 2008, 68% of investments were in larger, platform-size transactions so we’ve seen a huge shift in investment focus.

From a lending standpoint, Canadian banks are well capitalized and are aggressively lending to sponsors.  In addition, when compared with transactions in the US, the size of most Canadian deals are smaller, and thus less risky for lenders.

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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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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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Middle Market M&A Valuations Surged in 2015

By Kim Levin | 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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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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Healthcare – Major Merger & Acquisition Focus

By Kim Levin | Feb 23, 2016

Healthcare - Major Merger & Acquisition FocusHealthcare – Major Merger & Acquisition Focus

Recent reports shine a spotlight on mergers and acquisitions in the healthcare industry.  2015 was a banner year for M&A in this sector and reports suggest that healthcare will still be a major M&A focus in 2016, lagging only behind the technology and biotechnology/pharmaceutical industries

Three driving forces behind the continued activity in the healthcare sector include large cash reserves on corporate balance sheets, improving consumer confidence and readily available credit. With the Affordable Care Act’s emphasis on improving patient outcomes while at the same time lowering costs, healthcare companies are looking for competitive advantages.  During the second half of 2015 healthcare insurers made headlines with mega-merger announcements and if the deals pass regulatory muster, we could see just three major insurance players by 2017.  Smaller insurers may benefit from the fallout of such deals should mandatory divestitures spin off acquisition targets for other plans.

2016 will see patients becoming more “brand” conscious when selecting their healthcare providers, seeking the best care their money can buy. For health systems, this attention to brand will be critical as they seek to differentiate themselves to attract consumers. Affiliations, partnerships and joint ventures with well-known entities may be a growth strategy that makes more sense than a traditional merger from a branding standpoint.

Independent hospitals, clinics and medical groups may have a difficult time competing on their own and find it necessary to acquire complimentary groups.

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