Exit and Growth Strategies for Middle Market Businesses

M&A Information from the Industrials Industry

By John Hammett | Sep 08, 2016

industrials industryOne of the most significant deals in the industrials industry announced this year was the announcement of Johnson Controls (JCI) merging with Tyco International (TYC), an Ireland-based fire and security provider. The two companies announced their merger agreement on Jan. 25 for approximately $14.35 billion in cash and stock. The transaction is expected to close in early September.

On the whole, US manufacturers do not anticipate major business disruptions to result from the UK’s decision to exit the European Union, according to polling conducted by the Institute for Supply Management (ISM) in July 2016. Among manufacturing industry purchasing executives polled, 58% said Brexit would have a negligible financial impact on their organizations. However, 38% reported they believed Britain’s exit would have a negative or slightly negative impact. Among those who expect a negative impact, more than half said it would stem from a change in the exchange value of the US dollar; 14% expected disruptions in global demand. Nearly 85% of those polled said Brexit would have a negligible impact on capital spending, and fewer than 15% expected it to negatively affect their workforces. The ISM also reported that US manufacturing activity grew in June 2016 for the fourth consecutive month, and that 13 of 18 reporting industries reported expansions in activity. After a prolonged period of weak growth, US manufacturing may be improving amid a weaker dollar and strengthening energy markets, according to The Wall Street Journal.

Industry Indicators

  • Total US manufacturers’ shipments, which indicate manufacturing sector activity, fell 2.7% year-to-date in May 2016 compared to the same period in 2015.The spot price of crude oil, which indicates energy prices paid by manufacturers, fell 29.1% in the week ending April 8, 2016, compared to the same week in 2015.
  • The spot price of crude oil, which indicates energy prices paid by manufacturers, fell 10.8% in the week ending July 8, 2016, compared to the same week in 2015.

Posted by John Hammett.

Read the Entire Industrials M&A 3rd Quarter Newsletter Here

Selling a Business | The Auction Process

By George Walden | Sep 06, 2016

George Walden, CFA Houston, has an interesting take on why you should create an auction process to raise the value of your company when selling a business.  In a video he posted on Vimeo, he explains the process.  Click on the play button below to see the entire video.

Conduct an auction:

I have heard all kind of reasons over the years for not conducting an auction process for the sale of a company.

  1. I am afraid my employees will find out.
  2. I am afraid my competition will find out.
  3. I don’t want a lot of people walking through and disrupting my business.

Create an auction process:

One of the many roles of the investment banker is to create an auction process. With competition your situation usually gets better. Creating competition keeps everyone a little more honest in the process. A lone buyer feels no competition. When a buyer knows others want the same company they tend to become more aggressive. When you have multiple potential buyers, all of whom want the same company, the buyers feel the competition. Buyers don’t lead with their lowest price because they know the competition wants to win just as much as they do. The seller typically through an auction has other offers to consider. The price often goes up! Auctions provide built-in competition for the value of your company.

Each buying group will see the company a little different from the other. What is important to one buyer is not necessarily important to the other. Those differences in perspective can create tremendous value. A fundamental in our office is try to find the buyer whose acquisition solves a problem.  Look for the situation where 1+1= 3. Make that argument effectively and watch value be created and resistance reduced. Read more »

Food & Beverage Industry M&A News

By Terry Fick | Sep 01, 2016

food and beverage industryFood & Beverage Industry – A major recall of frozen foods contaminated by listeria bacteria is putting pressure on government regulators to take a closer look at safety practices in the food manufacturing sector. Millions of packages of fruits and vegetables made by Washington-based CRF Frozen Foods were pulled from store shelves in April and May 2016, making the incident one of the largest food recalls in recent history, according to the Associated Press. The company’s recall includes more than 350 product lines under 40 different brand names, and CRF’s retail customers — which include Costco, Target, Trader Joe’s, and Safeway — have imposed secondary recalls of at least 150 additional products, Food Safety News reports. There is evidence that past enforcement of health and safety regulations has been lax at the CRF plant where the listeria outbreak originated: FDA and state agriculture inspectors documented several code violations at the facility since 2014 that were never adequately resolved. The US Justice Department is investigating a similar incident in which Dole Food recalled listeria-contaminated packaged salad products earlier this year, more than a year after federal investigators first found evidence of contamination at one of the company’s production plants.

Commercial water bottlers may face increased opposition from the public and government agencies concerned about water usage and pollution caused by discarded bottles. A recent vote by residents near Portland, Oregon, to halt construction of a commercial water bottling plant could signal growing opposition to the industry. Hood River County voters defeated an eight-year effort by Nestlé Waters North America to build a bottling plant, citing drought and environmental issues. An appeal is possible, according to the Wall Street Journal. A similar fight is underway in Flathead County, Montana.

Industry Indicators

  • US nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, rose 0.2% year-to-date in May 2016 compared to the same period in 2015.
  • US retail sales for food and beverage stores, a potential measure of food demand, increased 2.5% in the first six months of 2016 compared to the same period in 2015.

Posted by Terry Fick.

Read the Entire Food & Beverage 3rd Quarter Newsletter Here

M&A Trends | Engineering & Construction Industry

By Jeff Johnson | Aug 25, 2016

Engineering & construction industryEngineering & Construction industry companies reliant on business from energy producers may consider shifting their bidding efforts to other sectors. While 44 US states and the District of Columbia added construction jobs between March 2015 and March 2016, five energy-producing states logged construction employment declines, according to Associated General Contractors of America. Job gains were concentrated in California, Florida, New York, and Massachusetts, states that altogether added 100,400 construction jobs year-over-year. Two of the nation’s smallest states, Hawaii and Rhode Island, saw the highest percentage increases in new construction jobs. Due to declining prices for coal, oil, and other fuels, demand for construction is waning in states that rely on energy extraction for economic stability. North Dakota and Alaska, big producers of coal and natural gas, suffered the highest percentage of construction job losses during the year, along with Wyoming, Kansas, and West Virginia.

Engineering services firms that specialize in infrastructure projects should anticipate rising requests to bid on tunneling projects as more big cities turn to underground development. Creating demand for specialized engineering services, more cities worldwide are extending their reach underground rather than building up, thanks to new technologies, analytical tools, and materials. Urban centers are tunneling at a record pace, according to The Wall Street Journal, as subterranean development has grown highly technical and surprisingly less expensive. Digging manually can cost nearly $1 million per foot as compared to about $19,000 per foot using a giant boring machine.

Industry Indicators 

  • The value of US nonresidential construction spending, an indicator of the health of the construction market, rose 7.1% year-to-date in May 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 9.8% year-to-date in May 2016 compared to the same period in 2015.
  • US steel mill product prices, an indicator of commodity steel product costs used in construction, fell 4.6% in June 2016 compared to the same month in 2015.

Posted by Jeff Johnson.

Read the Entire Engineering and Construction M&A 3rd Quarter Newsletter Here

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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Energy Sector M&A News

By Roy Graham | Aug 18, 2016

energy sector m&a newsEnergy Sector M&A news for North American based target companies in the Energy sector for Q2 2016 included 162 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $113 million.

Pressured by continued low oil prices and a global supply glut, several leading US oil explorers are selling more than $4 billion in assets. For companies still holding cash, it could be time to buy. Anadarko, Chesapeake Energy, Noble Energy, and Statoil ASA recently announced plans to sell assets totaling about $4.3 billion. Marathon Oil has already sold $1.3 billion worth of assets. Meanwhile, US rig counts continue to decline, as oil prices remain at less than half of their 2014 peak.

Utilities in several US states are piloting residential smart energy storage programs to reduce emissions and generation costs during peak times. Companies in Kentucky, New York, and Vermont — Glasgow Electric Plant Board, Consolidated Edison, and Green Mountain Power — are installing smart energy storage devices in selected customer homes. The devices capture power from the grid during periods of low demand and release power during high-cost peak demand periods, reducing the need to supply power from traditional generation plants. All three programs use software to remotely manage the residential units as if they are a single power source, according to UtilityDIVE; the model is called a virtual power plant. The utilities are partnering with device manufacturers Sunverge, SunPower, and Tesla Motors.

Industry Indicators

  • The average US retail price for diesel and regular gas, which influences profitability for oil and gas companies, fell 14.2% and 20.5%, respectively, in the week ending July 11, 2016, compared to the same week in 2015.
  • The spot price of crude oil, which affects profitability for oil and natural gas operations, fell 10.8% in the week ending July 8, 2016, compared to the same week in 2015.

Posted by Roy Graham.

Read the Entire Energy M&A 3rd Quarter Newsletter Here

The Buyout – For Business Owners to Exit Their Business

By David Sinyard | Aug 15, 2016

business owners to exit their businessThe buyout is an important route for small and medium size business owners to exit their business and could be particularly relevant for family firms who find no successor inside the family.  According to a recent survey, it is estimated that around 35 percent of businesses globally consider ownership succession through a buyout (PWC 2011). One of the primary sources of capital for such buy-outs comes from Private Equity (PE) firms.

An interesting academic article has recently been published in the Journal of Small Business Management 2016 by Ahlers, Hack, Kellermanns, and Wright that focuses on perceived bargaining power in buyout negotiations between PE firms and current owners who sell their business.  They looked at competition, expertise, and time pressure as key elements of PE firms’ perceived bargaining power.  Their research indicates that PE firms experience high perceived bargaining power in buyout negotiations, depending on factors such as competition, expertise advantage, and seller’s time pressure.  Higher competition between potential buyers lowers the PE firm’s perceived negotiating power.  Expertise as it relates in particular to valuation, synergies, and process-related aspects of buyout deals would seem to provide the PE firm with more perceived bargaining power, particularly as it relates to valuation.  If the seller in buyout deals suffers from time pressure, PE firms may gain higher levels of perceived bargaining power.

Clearly sellers need to be aware of these perceptions of stronger bargaining power.  The process must be run so as to balance the bargaining positions of both seller and buyer.

Posted by David Sinyard.

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Technology M&A News

By Dan Vermeire | Aug 11, 2016

technology M&AReports from various industry observers present a mixed outlook on IT employment growth, according to Computerworld. Analysts use terms ranging from “modest” to “pre-recession” to describe recent industry hiring trends. Trade association CompTIA noted steep declines of about 96,000 IT jobs across all industries in May 2016 compared to the month before. That figure includes the impact of the approximately 37,000 telecommunications jobs not on payrolls due to a recent strike of Verizon workers, which has since been settled. Analyst group Foote Partners and industry group TechServe Alliance both said that once the Verizon strike is adjusted for, tech employment actually gained some 13,500 jobs that month. Analyst group Janco Associates is less optimistic, forecasting only 40,300 IT jobs will be created in 2016, down from 112,500 new IT jobs that were created in 2015.

Leading technology vendors are using acquisitions to quickly build Internet of Things (IoT) expertise and service capabilities. With a growing number of devices being embedded with software and sensors and connected to the Internet, a trend commonly referred to as IoT, companies with IoT service platforms have become hot commodities. Recent deals include Microsoft’s May 2016 purchase of Solair, an Italian provider of IoT products and services; Cisco Systems’ acquisition of IoT service platform provider Jasper in March 2016; and IBM’s acquisition of The Weather Company’s product and technology business in January 2016. Microsoft plans to integrate Solair’s technology into its Azure IoT Suite, Jasper will become Cisco’s IoT Cloud Business Unit, and IBM is using The Weather Company’s technology to form its Watson IoT Cloud platform. The new offerings should help the companies capture revenue in the rapidly expanding market, which will grow from $157 billion in 2016 to $662 billion by 2021, according to MarketsandMarkets.

  • Total US consumer spending, a driver for the IT needs of consumers, rose 0.9%, primarily from service expenditures, in May 2016 compared to the same month in 2015.
  • Total US revenue for computer systems design and related services rose 3.8% in the first quarter of 2016 compared to the previous year.

Read the Entire Technology, Media and Telecom 3rd Quarter Newsletter Here

Another Banner Year for Manufacturing M&A

By Catherine Patience | 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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Healthcare M&A Activity

By Peter Heydenrych | Jul 28, 2016

healthcare M&A activityHealthcare M&A activity for North American based target companies in the Healthcare sector for Q2 2016 included 122 closed deals, according to data published by industry data tracker FactSet.  The average transaction value was $332 million.

A growing number of insurers and health providers are transitioning to value-based reimbursement methods, with the goal of containing costs and improving care. While fee-for-service reimbursements are still the primary mode of payment for US health care providers, insurers are making progress on goals to switch over to value-based contracts. Value-based payment systems include quality incentives, accountable care models, network management, and bundled payments. The US Department of Health and Human Services (HHS) is on track to meet its goal of tying 30% of traditional Medicare payments to value-based payments by the end of 2016, as well as higher targets over the next several years. Commercial insurers are also adopting new payment models; Aetna is aiming for 75% of spending through value-based contracts by 2020. According to a recent survey by McKesson reported by Healthcare Dive, hospitals are about 50% along the continuum towards full value-based reimbursement. However, challenges remain in areas including process automation and payer-provider collaboration. A majority of surveyed hospitals were not yet meeting value-based reimbursement goals including lower costs, better care coordination, and improved patient outcomes.

Industry Indicators

  • US consumer prices for medical care commodities, an indicator of healthcare costs, increased 3.2% in June 2016 compared to the same period in 2015.
  • US consumer prices for medical care services, an indicator of profitability for healthcare services, rose 3.8% in June 2016 compared to the same month in 2015.

Posted by Peter Heydenrych.

Read the Entire Healthcare 3rd Quarter Newsletter Here