InSight

Exit and Growth Strategies for Middle Market Businesses

Risk Assessment – Timing the Sale

By Dan Halvorson | Sep 27, 2019

In the first portion of my career I was trained as a grain/commodities trader.  It took years of experience to master the assessment of risk and the subsequent decision of timing – when to buy, sell, or do nothing while awaiting a better opportunity.  A multitude of factors were analyzed to enable these decisions – fundamentals such as supply & demand, macroeconomics, and current markets; technical analysis; as well as human perception/emotion as it related to the markets being traded.

A trader has three choices as to positions – long (owning at current market in anticipation of prices rising), even (neutral position holding dry powder for next market signal), or short (selling current market, betting on a price decline).  There is, of course, inherent risk in either a long or short position but in order to make money trading, one or the other must eventually be taken as being even over the long term has no profit potential.

Interestingly, in my experience, being short was often the most profitable position.  Why?  Because human nature isn’t comfortable selling something that it doesn’t own.  Human emotion favors the long position of ownership and anticipating/knowing/hoping that values go up.  Importantly, it also seeks to sell at the top of the market.  There is a fear of selling too soon and then seeing prices continue to rise.  This, unfortunately, often leads to selling too late – missing the top and trying to get out in a rapidly declining market. As I mentioned previously, it took years of trading experience to learn to minimize the effects of human nature/emotion on the timing of trading decisions; to cover a short before the bottom or sell out a long before the market topped. This was key to maximizing trading profitability. In the words of Bernard Baruch – “I made my money by selling too soon.”

The owners of a private company are obviously in an inherent long position through owning their company.  However, while they are nurturing the growth and profitability and enjoy running the company, I feel they are in effect – even.  From a transaction standpoint – they can do nothing. If they wish to grow through acquisition though, they are adding to their long position.

Once an exit is contemplated, whether it be 1, 2, or 5 years out, the owners’ position is definitively long; and the risk assessment and decision on timing of the sale/transaction become vitally important.  In other words, it’s time to have a trader mindset. Planning and preparing the company for maximum value is necessary, the same as upgrading and possibly staging a home for sale.  Assessing risk factors is also key – what is the impact on value/saleablility if the company loses a large customer?  Or incurs unforeseen product liability? – opioid pharmaceuticals and glyphosate (Roundup) are recent examples.  Or a high performing member of the management team leaves?  Can the recent growth curve be sustained?

It is difficult for owners to make the decision to sell when the company is doing very well.  Human nature is optimistic and there is a natural tendency to hold on for ‘just a few more years’ or conversely to ‘get back to where we were’ if there has been a recent dip in profitability.  Recognizing the potential impact of emotions on this decision is very important. A good M&A advisor will be invaluable in working with the owners to rationally assess risk and the timing of a sales transaction with the goal of selling their long into a strong, rising market – before the top.


M&A Quarterly News In The Healthcare Industry Sector

By Daniel Sirvent | Sep 27, 2019

The report below gives a good overview of the third quarter M&A activity in the Healthcare Industry Sector. Though Healthcare M&A activity moderated in Q2 2019, several substantial transactions held the quarter securely in line with prior trends. M&A activity for North American based target companies in the Healthcare sector for Q2 2019 included 181 closed deals, according to data published by industry data tracker FactSet.

A notable middle market transaction in the sector closed in June when Varian Medical Systems, Inc. acquired Cancer Treatment Services International, Inc., a portfolio company of TPG Growth LLC, for $283 MM in cash. Cancer Treatment Services International develops and operates cancer treatment facilities and is located in Pittsburgh, PA. Varian Medical Systems is headquartered in Palo Alto, CA and uses X-ray energy to develop new technologies to fight cancer. This transaction broadens Varian Medical Systems’ portfolio of cancer treatment service offerings. The acquisition was funded through Varian Medical Systems’ credit facility and cash on hand. The transaction is expected to increase Varian’s earnings per share during fiscal year 2021 and 2022.

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M&A Quarterly News In The Agriculture Industry Sector

By Dan Halvorson | Sep 26, 2019

The report below gives a good overview of the third quarter M&A activity in the Agriculture Industry Sector. M&A activity for North American based target companies in the Agriculture sector for Q2 2019 included 19 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector was announced in May Indus Holdings, Inc. acquired Humble Flower Co for an undisclosed amount in cash. The transaction enhances Indus Holdings’ portfolio of service offerings. Founded in 2016 Humble Flower engages in cultivating, extracting, producing and distributing cannabis products.

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M&A Quarterly News In The Transport, Logistics and Supply Chain Industry Sector

By Peter Heydenrych | Sep 25, 2019

The report below gives a good overview of the third quarter M&A activity in the Transport, Logistics and Supply Chain Industry Sector. M&A activity for North American based target companies in the Transportation and Logistics sector for Q2 2019 included 71 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector closed in June when Aurora Capital Group LP acquired Petroleum Service Corp from SGS SA for US$335 million. Founded in 1991, Aurora Capital Group is a private equity firm located in Los Angeles. Petroleum Service Corp. provides loading and unloading services for the refining, chemical and marine transportation industries. It offers tinkering barges, operating docks, switching railcars, material packaging and warehousing services. The company was founded in 1952 and is headquartered in Baton Rouge, LA.

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Swiss SMEs Are Increasingly Sold Abroad – A Blessing or a Curse?

By Andrés Zweig | Sep 24, 2019

Introduction

Currently there is a discussion going on in Switzerland, which shows the sellout of Swiss listed companies as very disadvantageous for Switzerland. Examples such as Kuoni, Clariant, Syngenta and others are cited. In this context it is criticized that after the takeover these companies typically do not become more competitive companies, no better employers and no higher Swiss taxpayers. It is therefore argued that this development is therefore detrimental and harmful to Switzerland. We are not competent to assess this development at the corporate level but have asked ourselves whether this sell-off will also take place in the SME environment in which we mainly operate and whether this is a “curse or blessing for Switzerland”.

Even though we cannot obtain comprehensive statistics, it seems that cross-border transactions in the SME sector on the sell side have been steadily increasing over the last 25 years and therefore more and more SMEs are being sold to foreigners. The statistics of our almost 30 years of M&A practice show that over 50% of sell mandates, especially succession arrangements, are now sold to foreigners.

Is this sell-out of SMEs abroad a “curse or blessing for Switzerland?

Reasons Why Foreign Investors Want to Buy Swiss SMEs

Switzerland continues to be one of the most competitive business and economic areas in the world. The arguments why foreigners continue to regard Switzerland as an attractive environment are well known:

• Stable political and economic conditions

• Liberal labor market

• Stable currency, hedge for foreign weakening currencies

• Attractive tax system

• High level of education and a strong education system

• Intensive R&D / Innovation activities

• Significant Life Science / ICT / Fintech, etc. hubs

• Multilingual marketplace

• Leading test market for Europe

All these are good reasons why an entrepreneurial investment in Switzerland makes sense for foreigners and is attractive. Some time ago, Switzerland also gained additional weight as an interesting “intermediary” and trading platform in connection with the customs discussions.

Reasons Why Swiss Investors Want to Buy Swiss SMEs

Of course, there are also good reasons why domestic transactions take place here, but they seem to have less a strategic than an operational background:

• Acquisition of market shares

• Market adjustments/shakeouts

• Cost optimization by exploiting synergies

• Purchase of innovations / new business models (e.g. digitization)

• Safeguarding jobs in Switzerland

For strategic reasons, within the framework of growth strategies or the optimization of the existing value chain, M&A strategies tend to lead Swiss SMEs into foreign markets instead of the home market.

For Swiss SMEs, the attractive arguments for foreigners are also a competitive advantage, which they prefer to exploit abroad.

Conclusions

It is not surprising that the number of cross-border transactions among SMEs is increasing. On the one hand, Swiss SMEs tend to seek target companies abroad within the framework of growth and M&A strategies, and on the other hand, foreigners try to exploit the advantages of Switzerland described above through acquisitions.

If Swiss SMEs are up for sale, offers are typically obtained from Swiss and foreign buyers. If we receive Swiss offers at all, we notice that the foreign offers are often more attractive and practically always ensure that the existing locations, jobs and infrastructures are maintained in the long term.

We expect this trend to continue. In our view, this will not be to the detriment of Switzerland.

Since these transactions by these foreigners are very deliberate and often of a strategic nature, we assume that the investments in Switzerland will be sustainable for the benefit of SMEs, employees and ultimately the tax authorities. The added value remains in the country even if the property is possibly held abroad – from this point of view this is a blessing.

Nobody, as in the aforementioned corporate discussion, can prove that these Swiss SMEs held by foreigners had a more prosperous future under Swiss ownership than under foreign ownership.


M&A Quarterly News In The Food and Beverage Industry Sector

By Terry Fick | Sep 16, 2019

food

The report below gives a good overview of the third quarter M&A activity in the Food and Beverage Industry Sector. M&A activity for North American based target companies in the Food and Beverage sector for Q2 2019 included 48 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector was announced in June when Butterfly Equity LP acquired Wm Bolthouse Farms, Inc. from Campbell Soup Co for US$510 million in cash, subject to customary adjustments. Founded in 1915, Wm Bolthouse Farms is located in Bakersfield, California and engages in growing and processing carrots. The deal was subject to customary closing conditions and was expected to close by the end of Campbell Soup Co’s fiscal year 2019.

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M&A Quarterly News In The Consumer Retail Industry Sector

By Joe Sands | Sep 16, 2019

The report below gives a good overview of the third quarter M&A activity in the Consumer Retail Industry Sector. M&A activity for North American based target companies in the Consumer and Retail sector for Q2 2019 included 175 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector closed in June when Euromarket Designs, Inc., trading as Crate & Barrel, a subsidiary of Otto GmbH & Co. KG, ultimately owned by OTTO AG für Beteiligungen, acquired Hudson Grace for an undisclosed amount. The transaction would expand Euromarket Designs’ business portfolio and online presence. Founded in 2012, Hudson Grace is located in California and operates retail showrooms of houseware and furniture.

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M&A Quarterly News In The Aviation, Aerospace and Defense Industry Sector

By Daniel Sirvent | Sep 16, 2019

The report below gives a good overview of the third quarter M&A activity in the Aviation, Aerospace and Defense Industry Sector. M&A activity for North American based target companies in the Aerospace and Defense sector for Q2 2019 included 13 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector closed in June when Consolidated Precision Products Corp, a portfolio company of Warburg Pincus LLC, acquired Pacific Cast Technologies, Inc. from ATI Ladish LLC, ultimately owned by Allegheny Technologies, for an undisclosed amount. The acquisition complements Consolidated Precision Products Corp’s aerospace and industrial focused portfolio. Pacific Cast Technologies engages in the production of titanium investment castings used by aerospace and defense OEMs.

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M&A Quarterly News In The Technology, Media and Telecom Industry Sector

By Dan Vermeire | Sep 12, 2019

The report below gives a good overview of the third quarter M&A activity in the Technology, Media and Telecom Industry Sector. M&A activity for North American based target companies in the Technology, Media and Telecom sector for Q2 2019 included 306 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector was announced in April when Lear Corp acquired Xevo, Inc., a portfolio company of MMV Financial, Inc., Intel Capital Corp, Shaw Ventures, Inc. and SPARX Group Co Ltd, for US$320 million in cash. The acquisition would broaden Lear Corp’s connectivity portfolio and enhance its capabilities in software. Xevo provides solutions to automakers and merchants. The company was founded in 2000 and is headquartered in Bellevue, WA.

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M&A Quarterly News In The Plastics and Rubber Industry Sector

By Jim Zipursky | Sep 12, 2019

The report below gives a good overview of the third quarter M&A activity in the Plastics and Rubber Industry Sector. M&A activity for North American based target companies in the Plastics and Rubber sector for Q2 2019 included 24 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions in the sector was announced in May when EPTAM Precision, a subsidiary of EPTAM Plastics Ltd. and a portfolio company of New Heritage Capital LLC, acquired Micro Molding, Inc. for an undisclosed amount. The transaction also includes MedConnection LLC. Micro Molding is located in Phillipsburg, New Jersey and manufactures precision plastic injection components specializing in precision injection molding, catheter tipping, finishing and assembly.

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