Strategies & Analysis
This month’s
Business Corner
is the final
installment of
our three-part
series discussing
topics related
to mergers and
acquisitions. In
this column we
will revisit some
of the highlights
from parts one
and two and tie
them together
with additional
commentary
and suggested
strategic
and tactical
considerations.
by Patrick Jones, VP M&A,
CHEMARK Consulting
(Part 3 of a 3 Part Series)
The Current Investment
Environment
Following the Great Recession, interest rates have
remained at or near historical lows while private
investors and publicly traded multinationals have
amassed unprecedented levels of investable cash.
The private owners of these $trillions need to
deploy their reserves into higher risk, alternative
investments such as Private Equity to meet their
yield requirements. Similarly, cash-rich publicly
held corporations are under pressure to deliver
acceptable levels of return on capital in the face
of an uneven global economy where GDP growth
rates struggle to sustain 3% in the best economies.
Yes, China’s GDP is reportedly in the 6% to 7%
range, but the trajectory is downward and many
of its basic industries are plagued with overcapacity. So, with organic growth increasingly difficult
to attain, many publicly traded corporations are
looking at stock buy-back programs and/or acquisitions to drive higher shareholder returns.
The net results of the convergence of these
needs are reflected in the following trends:
•Increased competition for M&A
transactions;
• Cheap debt lowers the overall cost of capital
for companies with strong balance sheets;
• Resulting transaction values and EBITDA multiples have increased, creating a seller’s market;
•Convergence of buyer behavior among
Strategic Buyers, Private Equity and
Family Offices is evident in the market.
Similar Fundamental Need;
Different Value Drivers
In part two of this series, we used some basic
comparative financial analysis to demonstrate
that, although Strategic Buyers and Private
Equity have similar needs to deliver the returns expected by investors, these two classes
of buyer must treat potential deals differently
and they, therefore, have different value drivers.
Strategic Buyers, generally speaking, acquire companies with either a cost-driven or a
market-driven thought process. These companies tend to have strong senses of identity and
understand how to create value by leveraging
their approach to business. They typically are
seeking to solidify an existing market position, improve access to customers / distribution
channels, round out a strategic product line, increase plant loading, and/or add margin at little
incremental variable cost. Buying market share
(consolidation) grows the buyer’s business even
if the underlying market is stagnant.
When establishing a new business platform,
Private Equity is typically looking for companies that have a niche position and/or some sort
of product or manufacturing uniqueness with
the potential for broader application/utiliza-tion. The target might be a family-owned company with no clear succession plan, or it could
be an orphan product line or “carve out” from
a larger corporation seeking to prune its portfolio. The PE buyer wants to invest to capture the
upside growth potential that can be unlocked
by adding resources (human and capital) and
modifying the fundamental way in which the
company sees and sets overall business strategy. And, if all goes according to plan, after a
M&A – Bringing Buyers and Sellers Together
