Corporate Development M&A Activity Update

Transcription

1 M&A Fall 2012

2 Introduction AxialMarket is the network for qualified deal professionals. Professionals join AxialMarket to source opportunities, manage active deal processes, and build smarter relationships. This report examines the current M&A environment for corporations looking to make acquisitions. Based on the AxialMarket Members in the corporate development space, some of the most active spaces include the Industrials, Information Technology, Healthcare, and Consumer industries. Data & Methodology This report analyzes 3 primary data sets: In-depth 1:1 interviews with a carefully screened subset of corporate development Members from across a variety of industry verticals AxialMarket Network activity data A survey sent to 4,000 corporate development professionals 2

3 Thanks to Participating Members Stenning Schueppert, SVP Corporate Development at Total Safety About: Total Safety is the world s premier integrated industrial safety services provider. We provide an integrated suite of safety and compliance solutions primarily for the oil and gas market (including petrochemical, chemical, and other key industrial markets like power, steel, mining, etc.) While some of our business is outside of that market, our core is focused on industrial markets. Jim Young, Director, Corporate Development at Legrand North America About: Legrand is the world specialist in products and systems for electrical installations and information networks, offering solutions for use in residential, commercial and industrial buildings. In North America, Legrand is building upon a legacy of providing smart solutions to customer needs. Michael Chang, Director of Corporate Development at Pulmuone Foods USA About: Pulmuone is an international healthy foods manufacturer based out of South Korea. It is the fourth largest food company in South Korea and the world s largest tofu manufacturer, with over $1.3 billion in annual revenues. Pulmuone is focused on providing simple healthy foods and wellness products. Our mantra is food you can feed your children. Jen Neill, Corporate Finance Manager at Alliance Bus Group About: Alliance Bus Group is an effort to merge the collective knowledge and resources of the best companies in the bus dealership space. The strategy is to merge these dealerships to both move the industry forward and to provide an exit strategy for current owners. Since no single dealership is large enough to command the attention of a strategic or financial acquirer, we wanted to come together to build critical mass. 3

4 The State of Corporate Development Although the current M&A environment is an improvement from the deepest years of the crisis, uncertainty still clouds the deal landscape. With a potential fiscal cliff just a few months away and regulation changes accompanying the Dodd-Frank Act, the JOBS Act, and developing SEC rulings, the current M&A environment feels like a transition period between the 2008-crisis days and the uncertain future. Our survey respondents described it mostly as moderate -- neither good nor bad. Survey: Description of Current M&A Climate Strong 7% Moderate 72% Slow 21% Member Stenning Schueppert of Total Safety explained that moderate is the most appropriate descriptor because deals are still happening, but in fewer numbers. Most of the proactive and proprietary deals we were considering last year are still available today. The fact that we could execute the same deal today that we could have done a year ago would suggest the market is not very active. Schueppert added that intermediaries have been affected as well. I have noticed that deal flow through intermediaries has slowed in the past 6-9 months. Since we are the largest and most active player in the industrial safety services space, I presume we see most of the deals put forth by intermediaries. In the past 9 months or so, we have seen fewer deals from intermediaries. For many companies, industry-specific problems have added unique challenges to the difficult M&A environment. For example, food-related businesses have been wrangling with commodity price increases in the wake of the summer drought in the United States. Member Michael Chang, Director of Corporate Development and Strategic Planning at Pulmuone Foods USA, got into the specifics of how the drought has affected Pulmuone. With prices on the rise across the board, food companies -- including ours -- have been experiencing 4

5 margin impact. As an organization, we have had to be more mindful and strategic, and have developed a tighter control on costs including forward purchases. I think this type of shift has happened for many corporations, across many industries, not just in food. Despite the economy, we are seeing a lot of M&A activity in the healthy food space and record-setting valuations at which deals are being done. While Pulmuone has been able to weather the increase in commodity prices through proper hedging and scale advantages, some of their acquisition targets suffered. In terms of M&A, we have seen a number of businesses become unprofitable after their key commodity prices increased. Unfortunately, there is only so much an organization can do in terms of hedging or other protections in these times, especially when they do not have the scale to take advantage of these protections. - Michael Chang, Pulmuone Foods USA Still, activity has not entirely dissolved. Chang told us, Despite the economy, we are seeing a lot of M&A activity in the healthy food space and record-setting valuations at which deals are being done. Evaluating Deals: Successfully pursuing the right opportunity can serve as a major source of growth and development for a business, but evaluating the fit can often be extremely difficult. By analyzing the Transaction Profiles of strategic buyers and financial buyers on AxialMarket, it became clear that both need critical mass in sales, but they analyze integrations differently. Strategics value qualitative factors -- like growth potential and market share -- in lieu of earnings, a popular criteria for financial buyers. AxialMarket Data: Percent of Transaction Profiles with Financial Criteria Revenue (Min) Revenue (Max) EBITDA (Min) EBITDA (Max) Corp Dev/Strategics 49% 20% 12% 5% Financials 43% 31% 66% 47% These findings did not surprise Jen Neill, of Alliance Bus Group, who explained the challenges of evaluating a deal. I think many people forget about the importance of culture in deals. Every deal is different. Every company is different. Merging two companies always creates integration risks that should not be overlooked. When I consider an acquisition target, I look beyond a financial perspective. It is important to consider the integration risks. 5

6 This emphasis on culture resonated with many of our Members. Pulmuone, for example, relies heavily on its health and wellness strategy in identifying valuable acquisitions. Chang explained, We generally look for rapidly growing companies that fit into our broader wellness strategy. Strategically, we look for companies that focus on health. It does not mean they need to be organic, but they must abide by our philosophy of wellness and LOHAS (lifestyle of health and sustainability). We have a long list of ingredients -- obvious ones include MSG, GMO, preservatives, etc. -- that cannot be included in our products. If these ingredients are used in their products, it is not a great strategic fit. Products have to be in larger or fast growing categories within the grocery channel, such as snacks. He added, There are only so many companies that fit both our financial and strategic criteria, but we have great pride in our Pulmuone family of brands and must adhere to its principles and overall mission. We are searching for passionate entrepreneurs/owners that are seeking more than a financial exit. They can leverage our current organizational infrastructure to take their business to a new level. As a food manufacturer, we can provide the strategic know-how, as well as the capital needed, in a partnership with them, to grow their valuable brands and their legacies. This is ultimately our benefit to them. Once we find a company we are interested in, we start a dialogue as early as possible. Schueppert also echoed the value of qualitative evaluation of a deal. He explained that, Culture and integration are the primary focus for us in every deal. Since we are a service business, maintaining the existing management and their team is paramount to any deal. If we cannot keep the people -- or we fear keeping the people motivated -- no price is worth it. He continued, As a strategic buyer, we need to look beyond basic assets. If we were to close a deal and only gain assets, we have definitely overpaid. The true value of a business is the people, supported by some assets. If we lose the people, we lose our opportunity to generate revenue, EBITDA, and any return on my investment. As a strategic acquirer, it is about integrating these companies and creating valuve. We spend a lot of time with management teams in both proprietary and intermediary deals trying to get a sense of the leadership and the management If we cannot keep the people -- or fear keeping the people motivated -- no price is worth it. - Stenning Schueppert, Total Safety team s commitment post-transaction. As an integrated strategic buyer, it is essential to make sure that the current leadership team will remain involved as a part of Total Safety, and not just collect checks. 6

7 According to Schueppert, bypassing critical qualitative criteria can be costly for your company in the long-term. He explained, If you buy a company that doesn t fit into your strategy, you -- as a company -- may suffer from reverse multiple arbitrage since investors will no longer be able to identify your true brand or mission. If Total Safety buys companies that do not fit our strategy, it will become increasingly difficult to explain what and/or who we are to future investors. That s why fit, culture, and real integration are fundamental to our strategy. The Future: As a whole, it seems like many corporate development professionals are optimistic about the future of the M&A environment. In response to our survey, 62% of corporate development professionals indicated that they believe deal activity will pick up in the next 12 months. Neill explained why she believed the activity would likely pick up. I think the environment is gradually improving as debt resources become more accessible and as PE firms look to use their dry powder. When I worked in Investment Banking -- back in the mid-2000s -- the ready availability of debt dramatically helped push deal flow. In the wake of the 2008 crisis, the pendulum swung so far back in the other direction that debt facilities practically froze, significantly hurting both strategic and financial buyers. Survey: Expected Deal Activity in the Next 12 Months Plateau 26% Slowing 12% Increasing 62% She continued, Recently, however, I have seen the debt market coming back into its own. With the combination of more accessible debt and the use-it-or-lose-it mentality surrounding dry powder, activity has been better than in the past few years. Although strategic buyers are traditionally less dependent on external debt resources and dry powder, the general upsurge in activity could help stimulate greater deal flow and activity across the board. Optimism was reiterated when respondents were asked about their acquisition strategies over the next year -- 83% of respondents indicated that they planned to make at least one acquisition, with 84% of that group planning to make between 1-3, 8% planning to make 7

8 between 3-5, and another 8% planning to make over five. Survey: Planned Acquisitions in the Next 12 Months 1-3 acquisitions % are planning acquisitions 17% are not planning acquisitions Dry Powder: Although the environment may improve in the next year, there are still serious concerns for strategic acquirers. One of the biggest threats to corporate development offices is the accumulating dry powder within PE shops. According to our survey, 88% of respondents believed that dry powder would be an immediate source of competition for strategic acquirers. 45% believe that PE shops will threaten all deals, where another 43% believe the competition will stay confined only to the larger deals. Either way, there is clear concern about the extra capital. Schueppert and Total Safety have unique insight into the importance of dry powder since Total Safety is owned by Warburg Pincus. Schueppert explained, The fact that we are a strategic corporate acquirer backed by PE offers us the best of both worlds. If we want to pursue a larger deal where we need additional equity, Warburg has the dry powder required. But Schueppert is threatened by dry powder. He continued, If we are pursuing a smaller deal, we are competing with the smaller-cap, mid-market PE funds with excess dry powder themselves. 8

9 Given the whole use-it-or-lose-it issue, we feel they need to put that powder to work. And, as a result, they may possibly be overpaying for opportunities. 88% of survey respondents believe that PE dry powder will be a source of competition for corp dev professionals - AxialMarket survey results Member Jim Young, at Legrand North America, commented that the increase in dry powder might increase the number of deals available since -- with dry powder readily available -- PE shops might look to exit on some of their holdings, knowing that there is a likely buyer on the other side. For Young, this increased deal flow is not that valuable. Since we source the majority of our deals through long-term relationships in the market, opportunities originating from private equity are usually less beneficial. While they may create a larger deal pipeline, the quality may not improve. The Election: For many companies, the outcome of the election will be a major component in defining their strategy for the next year(s). However, the outcome of the election may not be as significant as some think. According to the results of our survey, 62% of respondents believe that the election will have no impact on M&A, another 31% believe that the election will help M&A, and only 7% believe the election could harm M&A activity. These findings suggest that most corp dev professionals are relatively confident that the election will not dramatically change the M&A environment. Survey: Expected Impact of the Election on M&A Hurt 7% Still, that does not mean there are not general concerns. Neill explained to us that if there is no change, smaller businesses will have trouble growing through M&A. I think many small businesses have been hindered by the imposition of some of the recent social programs. Although the expenses might be acceptable burdens for larger organizations, the costs are a Help 31% No Impact 62% 9

10 disproportionate burden for smaller businesses. Having someone in the White House who understands the specifics of small businesses and that growth often requires M&A would be helpful. Until the election is decided, another one of the biggest concerns for sellers is the sunset of the Bush-era tax cuts and the imminent fiscal cliff on January 1, Schueppert to us, I was recently involved in a discussion where the seller was trying to close prior to December 31, 2012 because of the anticipated taxes hikes. Between the end of the Bush tax cuts, the Obamacare taxes, and the unknowns, you are looking into at least an 8.6% increase in capital gains taxes, which sellers may be trying to monetize today. Key Takeaways: 72% of survey respondents described the current M&A environment as moderate. Proper opportunity evaluation requires analysis of both financial and strategic/cultural criteria. 83% of survey respondents are planning to make an acquisition in the next 12 months. It is expected that PE dry powder will be a noticeable source of competition for corp dev offices. 62% of survey respondents believe that the election will have no impact on M&A. 10

11 AxialMarket is the largest network of qualified deal professionals in the world with more than 8,500 Members. Our primary tools enable deal professionals to source opportunities, manage deal processes and manage relationships all in one place. To request an invitation visit For more information contact: Jaime Raczka Director of Marketing AxialMarket