InSight

Exit and Growth Strategies for Middle Market Businesses

M&A Quarterly News In The Industrials Industry Sector

By Steve Hauser | May 15, 2019

The report below gives a good overview of the second quarter M&A activity in the Industrials Industry Sector. M&A activity for North American based target companies in the Industrials sector for Q1 2019 included 503 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in February when The Toro Co. acquired Charles Machine Works, Inc. for US$700 million in cash. The acquisition includes Ditch Witch and several other brands within the underground construction market. Funding for the transaction was provided through Toro Co’s existing credit facility provided by JP Morgan and Merrill, Lynch, Pierce, Fenner & Smith. The acquisition would allow The Toro Co to further enhance its existing business portfolio of brands within the industry.

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M&A Quarterly News In The Print and Packaging Industry Sector

By Jeff Wright | May 15, 2019

The report below gives a good overview of the second quarter M&A activity in the Print and Packaging Industry Sector. M&A activity for North American based target companies in the Print and Packaging sector for Q1 2019 included 34 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in March when MC Sign LLC, a subsidiary of Arcapita Bank BSC, which is ultimately owned by Arcapita Group Holdings Ltd, acquired Coastal Signage + Wayfinding, Inc. for an undisclosed amount. The transaction enhances MC Sign’s portfolio of service offerings and it is in line with the growth strategy of MC Sign. Coastal Signage + Wayfinding is located in Oceanside, California and manufactures signs.

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M&A Quarterly News In The Business Services Industry Sector

By Brad Purifoy | May 14, 2019

The report below gives a good overview of the second quarter M&A activity in the Business Services Industry Sector. M&A activity for North American based target companies in the Business Services sector for Q1 2019 included 443 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in April when Juniper Networks, Inc. acquired Mist Systems, Inc., a portfolio company of NTT DOCOMO Ventures Inc, GV Management Co LLC, Norwest Venture Partners, Lightspeed Management Co LLC, Kleiner Perkins Caufield & Byers LLC, and Cisco Investments for US$405 million in cash. The acquisition would allow Juniper Networks to enhance its presence in the cloud-managed segment of the wireless networking market. Mist Systems is located in Cupertino, California and provides mobile related wireless network services.

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M&A Quarterly News In The Energy Industry Sector

By Roy Graham | May 10, 2019

The report below gives a good overview of the second quarter M&A activity in the Energy Industry Sector. M&A activity for North American based target companies in the Energy sector for Q1 2019 included 69 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in March when Diversified Gas & Oil Plc acquired gas assets, from HG Energy II Appalachia LLC, ultimately owned by HG Energy LLC for US$400 million in cash. The acquisition is expected to increase the production capacity of Diversified Gas & Oil Plc. The assets to be acquired comprise107 unconventional producing gas wells with a combined net daily production of more than 20,000boe. The wells are located in the West Virginia and Pennsylvania.

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M&A Quarterly News In The Healthcare Industry Sector

By Daniel Sirvent | May 09, 2019

The report below gives a good overview of the second quarter M&A activity in the Healthcare Industry Sector. M&A activity for North American based target companies in the Healthcare sector for Q1 2019 included 156 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in March when Acrotech Biopharma LLC, a subsidiary of Aurobindo Pharma Ltd, acquired the business and assets of 7 Hematology Products from Spectrum Pharmaceuticals, Inc. for $300 million in cash and contingent payout. The acquisition would allow Acrotech Biopharma to expand its product offerings.

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M&A Quarterly News In The Wholesale Distribution Industry Sector

By Jeremiah Hughes | May 03, 2019

The report below gives a good overview of the second quarter M&A activity in the Wholesale Distribution Industry Sector. M&A activity for North American based target companies in the Wholesale and Distribution sector for Q1 2019 included 141 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in March when Square Chain Corp acquired a 55% majority stake in Caravel Group, LLC from M Line Holdings, Inc. for an undisclosed amount in stock. The stock being issued to M Line Holdings for these companies gives M Line a controlling interest in Square Chain Corp. Caravel Group is located in Fremont, California brands and distributes beverages.

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M&A Quarterly News In The Hospitality and Leisure Industry Sector

By David Hulett | May 02, 2019

The report below gives a good overview of the second quarter M&A activity in the Hospitality and Leisure Industry Sector. M&A activity for North American based target companies in the Hospitality and Leisure sector for Q1 2019 included 64 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in January when A private group led by Elliott Management Corp and GFI Capital Resources Group, Inc. acquired Parker Hotel New York for US$420 million in cash. The transaction was funded from bank debt. The transaction would allow GFI Capital Resources Group to enhance its portfolio of hotel businesses.
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We Have No Debt

By Dan Vermeire | Apr 30, 2019

We Have No Debt. I hear this from some business owners, early in our first meeting.

It seems “Debt” has a bad reputation. As a family-owned business, “no debt” may sound like a stronger company. But, things are quite different when you consider a growth opportunity, or a transaction for the business. The fact is, debt should not be feared – it is fundamental in financial engineering – because it greatly increases the rate of return on the equity investments. Here’s what you should know about debt.

Different Types of Capital– a business should layer different types of investment in the capital stack, some layers are debt and some are equity. Why? Because each type has a different level of risk vs. return. So, to be most efficient, the company can be structured with the cheapest capital first, then the more expensive capital is used later. Of course, the company can only handle so much debt, and that is easily analyzed in the cash flow models. Here are the basic layers:

  • Senior debt, or “bank debt” is typically the cheapest, today around 5%. It is secured against assets and may involve a personal guarantee. It amortizes monthly, that is, you pay against the principal and interest monthly.
  • Sub-debt, or Mezzanine debt, is more flexible, but more expensive, today around 10-12% interest. Some Mezz debt may include warrants on stock as a sweetener. This type of debt is subordinate to any senior debt and is generally not secured by assets. The good news is that it is not paid monthly, and often, the interest is just rolled into the note – that means there is little or no strain on the monthly cash flow. This type of debt behaves very much like an equity investment in that it is paid when the business has the cash, typically when the business is bigger, in a future sale. The Mezz investor’s return is capped at the interest rate, and may be less than the equity return. But, the Mezz investor will get paid before any equity gets paid.
  • Preferred stock may be used and it behaves very much like Mezz debt. Typically there is an interest payment, which may be rolled into the stock, and it may have a feature to convert to common stock. Even though it has “stock” in its name, it behaves like debt.
  • Equity – last in the capital stack is equity, which is cash invested by the buyer. Today, most buyers expect 15-20% return on their equity investment, which is down significantly from prior years, because of the competitive nature of the M&A market. As you would expect, the equity does not have any returns, unless the company has paid off the debt and can declare a dividend, or in the case of a sale of the business. Equity can have an unlimited return – if the company sells for greater value, the equity holders reap the benefits. However, the equity investment is not secured and could be entirely at risk.

As you can see from the list above, only the senior debt is a burden to the company’s monthly cash flow. The rest can be viewed as different forms of “partner-investors” in the business. They win, to different degrees, as the business does well. And they can lose, to different degrees, if the business does poorly. Industry reports show that the average level of debt for transactions during 2018, on companies of $20M to $50M in valuation, was 3.9 times EBITDA. Most valuations are 6-8 times EBITDA, so you can see that some form of debt generally accounts for more than half of the capital stack.

The return for the different layers of capital can be illustrated this way. Think about a company that is valued at $30M, and is capitalized in 3 equal parts, $10M each of senior debt at 5%, Mezz debt at 10% and the rest in equity. Five years in the future, the business has paid the senior debt and sells for $36M, a modest 20% increase in value.
But how is that 20% return divided between each layer, per year? It would be: Senior 5%, Mezz 10%, and Equity about 40%. Which would you prefer?

Seller’s Options – in a business transaction, the seller also can participate in the new capital stack. In many deals, if the seller is not quite sure what he’ll do with all the proceeds, then he may consider the option to partially finance the transaction with a seller note, very similar to being a provider of Mezz debt. This may provide better returns than other investment options he is considering, post transaction.

Perhaps more importantly, the seller may choose to “rollover” some equity into the new capital stack. The rollover investment is done at the leveraged cost of equity, meaning after the debt is applied. In this case, the new debt is your friend, because you buy equity in the company at a discounted rate. For example, if the value of the company is $50M, that is what you would receive. If the buyers use $30M leverage, in a combination of senior and Mezz debt, then the new equity value is $20M. Then, you may choose to buy back in 30% of the equity, which would cost $6M at the leveraged rate, so your net proceeds would be $44M. Without any debt in the transaction, then 30% would cost $15M, and your net proceeds would be $35M, a difference of $9M to you.

In summary – don’t fear the name “debt”. Not all debt instruments are the same, and most don’t affect the monthly cash flow. How do you avoid any risk? By understanding the different types of debt and using them wisely, especially with a conservative cash flow model. Any good investment banker can work through the details with you.


M&A Quarterly News In The Financial Services Industry Sector

By David Sinyard | Apr 19, 2019

The report below gives a good overview of the second quarter M&A activity in the Financial Services Industry Sector. M&A activity for North American based target companies in the Financial Services sector for Q1 2019 included 187 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions closed in February when Mercer Global Advisors, Inc., a subsidiary of Mercer Advisors, Inc., acquired Arbor Asset Management LLC for US$350 million. The transaction allows Mercer Global Advisors to further expand its existing business operations. Founded in 1996, Arbor Asset Management is located in Ann Arbor, Michigan and provides investment advice.

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M&A Quarterly News In The Commercial Real Estate Industry Sector

By Peter Moore | Apr 19, 2019

The report below gives a good overview of the second quarter M&A activity in the Commercial Real Estate Industry Sector.  According to data released by CBRE, a leading commercial real estate firm, commercial real estate investment volume rose 20.6% year-over-year in Q4 to $152.4 billion. Total investment for the year was $534.8 billion, a sizable increase of 14.8% from 2017.

The largest investment in Q4 was in the major metro markets of New York, Los Angeles and the San Francisco Bay Area. Those three regions accounted for 27.7% of all investment dollars. Additionally, the top-15 markets accounted for 64.4% of total Q4 investment volume.
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