“Future wealth can take root in bear markets”
This quote, from a recent The Kiplinger Letter, can certainly be applied to today’s merger and acquisition environment. “Investors (buyers) with the courage to buy when others are paralyzed are usually rewarded down the road.” Business Week states it this way: “In times of turmoil, opportunities abound. But taking advantage requires fast reflexes, and an aggressive attitude …”
History has shown that crisis breeds opportunities. Carnegie Steel and Hewlett-Packard were both born at a time when people thought the world was falling apart. Business leaders may have to cut costs, but the smart ones are also looking for acquisition prospects.
In the past 50 years there have been few times when quality buyers of private companies were better positioned to make good deals. Notwithstanding current conditions, thousands of family companies will be changing hands in the next few years as baby boomers retire. Many of these owners have been stunned by the rapid recent declines in their business and are seeking financial security. Likely increases in capital gains taxes within a few years are a factor also. Many would like to sell today but are uncertain as how to proceed and whom to trust for assistance.
Valuation multiples for private companies have declined in the past 24 months as the public equity markets have collapsed, credit has become tight, and the economy has weakened. In some cases, valuation multiples of earnings before interest, taxes, and depreciation (EBITDA) have declined by 50%!
What industries are particularly attractive in today’s environment? The following is just a sample of industries that have seen multiples/earnings/values decline but are poised to recover quickly in an improving economy:
- Healthcare firms, particularly medical device and service firms
- Wellness and fitness clubs
- Rehab centers and medical laboratories
- Specialty publishers
- Oil field services and technology
- Construction suppliers, engineering firms, producers of steel and power generating systems
- Consumer products, food and beverage companies
- Technology, particularly biotech, nanotechnology, and communications
- Alternative energy and “Green” companies
- Telecommunications
- Software
- Logistics, warehousing and transportation
- Business outsourcing services
- Specialty manufacturers
- Government and defense contractors
Some industries are less attractive due to fundamental restructuring where it is impossible to know where the opportunities will be or where a tougher regulatory environment creates uncertainty.
- New car dealers and companies that service the auto industry
- Boat dealers and companies that supply the boating industry
- High-end restaurants
- Retailers
- Financial services
- Commercial banks
- Real estate development
- Pharmaceuticals
Buyers seeking opportunities need to be prepared to move quickly. They must assemble a team of experienced, trusted advisors including a good deal lawyer and an investment banker with a record of closing buy-side deals. They must have committed management and a plan as to how to integrate acquired targets. While credit for deals is likely to remain tight for a while, seeking relationships with potential senior and mezzanine lenders and/or equity partners should be a priority. Many banks have weathered the current storm well and will soon be aggressively seeking quality business loans.
Where to look for deals? Many buyers rely on “business brokers” and industry insiders. Most of these opportunities are “shopped” companies with problems. Suppliers, employees, consultants, customers, vendors, etc. often have “inside” information on sellers but rarely is the information accurate or timely.
As always, the best private businesses are seldom “listed” and in fact, many owners find the sale of their company through an “auction” process to be risky, distasteful and without regard to confidentiality. The more savvy buyers partner with a seasoned, licensed investment banker who has access to confidential and proprietary databases and industry specific knowledge. Many are former C-level executives themselves who can build “peer to peer” relationships and credibility with sellers.
An experienced banker has the ability to quickly study any situation and determine if the owner is indeed serious about selling, if the business has flaws, and if the asking price is reasonable. He also has access to hard-to-get details on other transactions, how they were structured, and can educate sellers on how to maximize the after-tax sale proceeds.
Investment bankers should be compensated primarily based upon their success, thus reducing the cost and risk to the buyer in pursuing acquisition opportunities. They should also provide references.