InSight

Exit and Growth Strategies for Middle Market Businesses

M&A News in the Metal Fabrication Industry Sector

By Jim Zipursky | Aug 09, 2018

The report below provides a good overview of the third Quarter M&A activity in the Metal Fabrication Industry Sector. M&A activity for North American based target companies in the Metal Fabrication sector for Q2 2018 included 52 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in June when Steel Dynamics, Inc. acquired Companhia Siderúrgica Nacional, LLC for US$400 million in cash. The transaction is expected to be accretive to near-term earnings and cash flow per share. In addition, the transaction is believed to expand Steel Dynamics’ annual flat roll steel shipping capacity to 8.4 million tons and total shipping capability to 12.4 million tons. Companhia Siderúrgica Nacional is located in Terre Haute, Indiana and manufactures coiled steel sheet products.

Tariffs on steel imposed by the Trump administration have had the sector in flux. The graph below illustrates how tariffs effect certain states.
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Still Not Licensed to Deal

By Robert St. Germain | Aug 09, 2018

Several years ago this author penned an article titled “Licensed to Deal”, which discussed the federal and state requirements for intermediaries (i.e. business brokers, M&A advisors, investment bankers) to legally facilitate business sale/purchase transactions having a security (i.e. stock, promissory note, earn-out agreement) in their deal structures.

That article described in detail what licenses and registrations were required by intermediaries party to such transactions; why many intermediaries refuse to become licensed and registered (i.e. to avoid the costs to set up and maintain a registered broker-dealer in full compliance with the various applicable federal and state regulations); and the potential onerous consequences of utilizing the services of an unlicensed and unregistered intermediary (i.e. under the Sarbanes-Oxley Act, an aggrieved party to an illegal securities transaction exercising their right of rescission up to five years post-close and also initiating legal proceedings against the parties to the transaction).

Since the publication of the original article, many intermediaries continue to practice without the required licenses and registrations while putting their clients at risk as described above. However, they do so more boldly today claiming they are now protected by the M&A Brokers No Action Letter published by the SEC staff on Jan. 31, 2014.

At first glance, it might appear that those unlicensed and unregistered intermediaries are now finally operating within the law and, in so doing, finally protecting the interests of their clients. Closer examination, however, tells a very different story.

First, no action letters represent the opinion of the staff of the SEC and are not rules promulgated by the SEC Commission itself. Therefore, these letters have absolutely no force of law.
Second, because SEC no action letters have no force of law, they can be and have been ignored by the courts.

The D.C. Circuit first broke ground by differentiating between SEC no action letters and actual SEC rulemaking in its Roosevelt v. E.I. du Pont de Nemours & Co. decision wherein it stated that the principle of judicial deference as described in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. did not apply to SEC no action letters.

That ground was further plowed by the Second Circuit, which found in both Amalgamated Clothing & Textile Workers Union v. SEC and NYCERS v. SEC that judicial deference for SEC no action letters was not warranted.

Examples of where SEC no action letters were actually ignored by the courts include Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores Inc. and NYCERS v. American Brands, Inc. both by the Federal District Court for the Southern District of New York, and Trinity Wall Street v. Wal-Mart Stores, Inc. by the Federal District Court for the District of Delaware.

Given the above, the requirement under both federal and state securities laws that anyone who “effects the transaction of securities” be a Registered Representative working in the context of a Registered Broker-Dealer and be regulated by an organization such as the Financial Industry Regulatory Authority (FINRA) continues to apply. Intermediaries not meeting those requirements are still not licensed to deal.

Business buyers and sellers would be wise to only engage the services of an intermediary who is also a Registered Representative (i.e. is sponsored by a Registered Broker-Dealer); has their required securities licenses (i.e. Series 79 plus the Series 63 that is separately required for interstate transactions); and, further, is registered in the state where their practice is located, the state where the seller is located, if different, and the state where the buyer is located, if different again. Proof of licensures and registrations is available at http://brokercheck.finra.org/ and at your state’s division of securities. Seek legal counsel first to ensure that you are selecting a legally qualified intermediary.


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

By David Hulett | Aug 08, 2018

The report below presents you with a good overview on the third quarter M&A activity in the Hospitality & Leisure Industry Sector.  M&A activity for North American based target companies in the Hospitality and Leisure sector for Q2 2018 included 70 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in June when a private group led by MLB Advanced Media LP and The Seidler Co LLC, doing business as Seidler Equity Partners acquired Rawlings Sporting Goods Co, Inc., a subsidiary of K2, Inc. and ultimately owned by Newell Brands, Inc. for US$395 million. The acquisition complements MLB Advanced Media LP’s brands in the sports industry and strengthens The Seidler Co’s investment portfolio. Founded in 1887, Rawlings Sporting Goods is located in St. Louis, Missouri and manufactures & markets sports equipment and apparel.

The Restaurant Performance Index (RPI), a monthly composite index that tracks the health of and the outlook for the U.S. restaurant industry, posted a modest decline in Q2. The RPI stood at 101.2 in May, down slightly from April’s level of 101.3. Read more »


M&A Quarterly News In The Financial Services Industry Sector

By David Sinyard | Aug 07, 2018

The report below presents you with a good overview of the third 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 Q2 2018 included 206 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in June when 360 Treasury Systems AG, a subsidiary of Deutsche Börse AG, acquired Gain GTX LLC from GAIN Capital Holdings, Inc. for US$100 million in cash, subject to a customary adjustment. The transaction allows Deutsche Börse AG to provide financial flexibility to enhance its investment opportunities. Following the transaction, the GTX ECN business will be integrated into Deutsche Börse’s 360T forex unit. Gain GTX LLC is located in Bedminster, New Jersey and provides foreign exchange services.

Household wealth continues to rise across North America, Western Europe and Asia, which has bolstered the financial services sector.

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M&A News In The Commercial Real Estate Industry Sector

By Peter Moore | Aug 06, 2018

The report below gives a good overview of the third quarter M&A activity in the Commercial Real Estate Industry Sector. M&A activity for North American based target companies in the Commercial Real Estate sector for Q2 2018 included 57 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in June when industry leader CBRE Group, Inc., diversified its services by acquiring FacilitySource LLC from Warburg Pincus LLC for US$290 million in cash. The acquisition strengthens CBRE’s ability to deliver integrated solutions for occupier clients. Founded in 2005, FacilitySource is located in Columbus, Ohio and provides outsourced integrated facility support services.

The 30-year fixed rate mortgage in the United States steadily rose in 2018 but began to decline slightly toward the end of Q2, which could spur activity in the commercial sector.
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M&A News In The Healthcare Industry Sector

By Daniel Sirvent | Jul 31, 2018

The report below provides a good overview of the third Quarter  M&A activity in the Healthcare Industry Sector.  According to data published by industry data tracker FactSet, M&A activity for North American based target companies in the Healthcare sector for Q2 2018 included 193 closed deals.

One of the notable middle market transactions was announced in April when Precision Engineered Products LLC, a subsidiary of NN, Inc., acquired Paragon Medical, Inc, a portfolio company of Beecken Petty O’Keefe & Co LP, for $375 Million in cash. The transaction expands Precision Engineered Products’ life sciences portfolio. Paragon Medical is located in Pierceton, Indiana and supplies surgical instruments and implantable components. The company was founded in 1991.

In the US, the healthcare sector is dominated by hospitals, though of the roughly 7,000 hospitals in the country around 75% are not-for-profit.
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M&A Quarterly News In The Energy Industry Sector

By Roy Graham | Jul 31, 2018

The report below presents you with a good overview on the third Quarter M&A activity in the Energy Industry Sector. M&A activity for North American based target companies in the Energy sector for Q2 2018 included 63 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in April when Triple Crown Resources, LLC acquired Permian Oil & Gas Assets from Broad Oak Energy II, LLC for US$400 million. The acquisition would expand Triple Crown Resources’ oil and gas asset portfolio. The Permian Oil & Gas Assets are located in Irion County, Texas.

The price of oil fluctuated in the second quarter driven, in part, by OPEC production rates.
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M&A News In The Wholesale Distribution Industry Sector

By Jeremiah Hughes | Jul 20, 2018

The report below gives a good overview of the third 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 Q2 2018 included 122 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in June when Ryerson Holding Corp. acquired Central Steel & Wire Co for US$163.8 million in cash. The consideration for each Central Steel & Wire Co share is composed of US$616.32 in cash, plus US$50 in special dividends. Funding for the transaction was through Ryerson’s internal resources. Central Steel & Wire Co is located in Chicago and distributes ferrous and nonferrous metal products.

Distribution of electronic products rose sharply in the second quarter spurred by general growth in the economy and high consumer confidence.

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M&A Trends in 2018

By Terry Fick | Jul 12, 2018

I was recently interviewed by Andy Jones of Private Equity Info about recent trends in mergers and acquisitions. Below are the highlights of our conversation.

Valuation Trends
The most prominent trend is in valuations over the past 3 years. We always see cycles, but this cycle has pushed company valuations higher than they have been in the 30+ years I have been in the industry. From businesses generating $2-3 million in EBITDA all the way up to $50 million in EBITDA, every company’s valuation is higher than in the past.

Baby Boomer Bulge in the M&A Pipeline
Being a baby boomer myself, I expected the past several years to have been almost a glut of sell-side opportunities. But it hasn’t happened. I think we all thought it would come to pass. The baby boomers are aging better than their parents did. Many are still having fun working 50-60 hours per week.
This is a friendly industry. We frequently talk to our competitors and we generally get the same feedback that we see ourselves. That is, when it was about time for the baby boomers to exit, the economy started doing well. So, these baby boomers’ businesses are making good money. Right or wrong, (mostly wrong), they tend to say, “If things are going great right now, why would I sell?”.
Sooner or later they are going to transfer their businesses. At some point, not only will their age start to make it more imperative, but the economy may start to turn down as well. If we are right, and it happens when the economy isn’t great, their valuations are going to plunge. If the seller-to-buyer ratio starts to shift (in favor of the buyer), that will drive valuations down further. For those that hang on until the last minute, all I can say is “looking back won’t be fun”.

I tell people, if I had a brother or sister or child with a business that was doing well right now and it wasn’t for sale, I would hit them with a two-by-four… unless they want to keep it for another 10 or 20 years.

Increased Valuations Impact on Deal Structure
I don’t think higher valuations are impacting deal structure. We don’t see any more or less earn-outs or notes than we used to as a percentage of transactions. But increased valuations have impacted two things:

One, due diligence is much tougher than before. With buyers paying high multiples, they are making sure to look under every rock, that it’s a squeaky-clean deal.

And two, there is more renegotiation of price than there used to be during the due diligence phase. The rubber band is so tight, the deal has no flexibility. If one little thing is out of place, the buyer wants to re-trade. We see this from both corporate buyers and private equity firms.

Main Challenges in Closing Deals
Most deal challenges now are related to due diligence. It’s almost to the point of being silly. There are a lot of questions being asked and analyses being done that really aren’t relevant.

Quality of Earnings (QE) is the driver of due diligence… and it has become onerous. It can be a difficult process because so much of it is a matter of opinion, not fact. That is the biggest challenge of any deal, the buyer’s QE.

We encourage our clients to do their own due diligence prior to entering the sale process, to have more robust data rooms and to hire someone to do a Quality of Earnings analysis. The buyers are still going to do their own due diligence work. But if the seller has a reputable firm do QE in advance, then the seller has some ammunition to fight gray-area claims that come from the buyer’s QE later. Furthermore, if there’s a real issue, like a revenue recognition issue that needs to be addressed, the seller can address it early in the process rather than having a surprise in the third month of due diligence.

Difference in Contract Terms
The biggest difference in contract terms now is the use of rep & warrants insurance. This insurance is becoming a significant piece of offers and is now used on a larger percentage of deals (including smaller deals). We are seeing a lot of contracts include reps & warrants insurance to give both sides a better feeling about who is going to pay for any future problems with the deal.

Reps & warrants insurance takes the risk off the seller for future discoveries where a rep & warrant is breached. With this insurance in place, instead of having a $5 million cap on reps & warrants going forward, the seller might only have a $500,000 cap. Anything above this is taken care of by the insurance company.

The buy-side usually purchases this insurance because it is easier to collect from an insurance company if a claim is valid than from someone who may now be your partner. So, there’s also a social reason for it. You hate to sue your partner. Buyers now use this as an extra bit of ammunition when they are bidding on a deal.

There are probably a dozen companies aggressively offering reps & warrants insurance for M&A transactions. There were perhaps as many as 3,000 policies written last year (2017). Now, with sufficient history with these policies, the underwriters are realizing there are very few claims.

We are also seeing heftier letters of intent (LOI), meaning that more of the detail that used to be reserved for the final purchase documents is at least addressed in the LOI due to sellers’ concerns about re-trading.


M&A Quarterly News | Engineering and Construction Industry Sector

By Peter Heydenrych | Jun 28, 2018

The report below gives a good overview of the second quarter M&A activity in the Engineering and Construction Industry Sector. M&A activity for North American based target companies in the Engineering and Construction sector for Q1 2018 included 81 closed deals, according to data published by industry data tracker FactSet.

One of the notable middle market transactions was announced in March when TopBuild Corp acquired USI, Inc., formerly known as United Subcontractors, Inc., a portfolio company of Reinet Investments Manager SA and Trilantic Capital Management LP, for US$475 million in cash. Founded in 1998, USI is located in St. Paul, Minnesota and engages in the installation of residential and commercial products. It generated revenues of approximately US$375 million for the year ended 2017.TopBuild Corp. is an installer and distributor of insulation products.

Housing starts continued on an upward curve in the first quarter as the economy remains strong.
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