David Sulaski

Wednesday, 28 April 2004 06:41

The middle market goes global

While the concepts of cross-border M&A, foreign sourcing and offshore production are certainly not new to U.S. business owners, their importance and viability have been magnified in recent years as attractive domestic exit opportunities have thinned and cost pressures have risen.

For owners of middle-market businesses, those with enterprise values ranging from $25 million to $500 million, a global outlook has become vital to a successful business strategy. The message is clear -- think globally, because your competitors are.

Offshore production, in the least, provides viable cost savings, significant capacity and growth potential, and a whole new world of opportunity. Domestic business owners wisely contemplate the classic "make vs. buy" debate, but now do so with eyes turned abroad -- notably to Europe, India and China, and even as far afield as the EU candidate countries, Hungary, Poland, Slovenia and the Czech Republic among them.

While the U.S. dollar has made foreign acquisitions into Europe expensive, now is the time to consider good foreign targets and develop intelligent acquisition strategies. Moreover, for sellers of middle-market businesses or divisions, a global auction may yield valuations unattainable domestically. Given exchange rates, foreign bidders have been increasingly aggressive in their pursuit of U.S. businesses.

Cross-border M&A activity continues to increase, rebounding from a downturn that plagued all transaction markets. The total dollar value of disclosed middle-market transatlantic acquisitions in February was $2.9 billion, an increase of 44.4 percent from the prior February. Year-to-date, the total dollar value of middle-market transatlantic transactions is $5.5 billion, an increase of 19.1 percent over last year.

February also witnessed a rise in middle-market multiples, as median purchase price EV/EBITDA multiples for European acquisition of U.S. targets spiked to 10.7x from 5.9x in the prior February.

Optimism for global strategies is not confined to theory and statistics. Anecdotally, Brown Gibbons Lang & Co. has participated in several successful cross-border sales in recent quarters, with several more in the pipeline. In each case, global bidders have pushed valuations upward, exceeding the likely value attained in a domestic auction. Moreover, domestic sales of companies with global sourcing strategies have received premiums in the marketplace, as acquirers clearly recognize and reward this competitive advantage.

Just as U.S.-based businesses are thinking globally, so are the professional service providers -- lawyers, consultants, lenders and investment bankers -- advising them.

Brown Gibbons Lang & Co., for example, has formed Global M&A, an active network of 20 middle-market investment banking boutiques representing 23 countries in Europe, the Americas, Asia and Australia, with plans to grow by 12 more nations in the next two years. The firm's Global M&A affiliation gives clients both broad reach and local expertise, invaluable when identifying attractive acquisition targets, selling to premium-bidders or helping navigate or finance a transaction in a foreign jurisdiction.

Law firms and financial institutions are rapidly mobilizing to create global capabilities, merging with firms abroad or building partner-networks akin to Global M&A.

Whatever your business' strategies, now is the time to think globally. Soon, we will conduct business and complete transactions in one, global middle market.

Editor's note: Brown Gibbons Lang & Co. will host the 1st Annual Global M&A Cross Border Conference in Chicago May 26-27. Entitled "The Middle Market Goes Global," it is an unprecedented forum for global deal-making and idea-sharing for principals involved in closing middle market deals throughout the world. For more information visit "www.bglco.com/GlobalMAConfer ence.asp.

Thursday, 29 April 2004 06:43

The middle market goes global

While the concepts of cross-border M&A, foreign sourcing and offshore production are certainly not new to U.S. business owners, their importance and viability have been magnified in recent years as attractive domestic exit opportunities have thinned and cost pressures have risen.

For owners of middle-market businesses, those with enterprise values ranging from $25 million to $500 million, a global outlook has become vital to a successful business strategy. The message is clear -- think globally, because your competitors are.

Offshore production, in the least, provides viable cost savings, significant capacity and growth potential, and a whole new world of opportunity. Domestic business owners wisely contemplate the classic "make vs. buy" debate, but now do so with eyes turned abroad -- to Europe, India and China, notably, and even as far afield as the EU candidate countries, Hungary, Poland, Slovenia and the Czech Republic among them.

While the U.S. dollar has made foreign acquisitions into Europe expensive, now is the time to consider good foreign targets and develop intelligent acquisition strategies. Moreover, for sellers of middle-market businesses or divisions, a global auction may yield valuations unattainable domestically. Given exchange rates, foreign bidders have been increasingly aggressive in their pursuit of U.S. businesses.

Cross-border M&A activity continues to increase, rebounding from a downturn that plagued all transaction markets. The total dollar value of disclosed middle-market transatlantic acquisitions in February was $2.9 billion, an increase of 44.4 percent from the prior February. Year-to-date, the total dollar value of middle-market transatlantic transactions is $5.5 billion, an increase of 19.1 percent over last year.

February also witnessed a rise in middle-market multiples, as median purchase price EV/EBITDA multiples for European acquisition of U.S. targets spiked to 10.7x from 5.9x in the prior February.

Optimism for global strategies is not confined to theory and statistics. Anecdotally, Brown Gibbons Lang & Co. has participated in several successful cross-border sales in recent quarters, with several more in the pipeline. In each case, global bidders have pushed valuations upward, exceeding the likely value attained in a domestic auction. Moreover, domestic sales of companies with global sourcing strategies have received premiums in the marketplace, as acquirers clearly recognize and reward this competitive advantage.

Just as U.S.-based businesses are thinking globally, so are the professional service providers -- lawyers, consultants, lenders and investment bankers -- advising them.

Brown Gibbons Lang & Co., for example, has formed Global M&A, an active network of 20 middle-market investment banking boutiques representing 23 countries in Europe, the Americas, Asia and Australia, with plans to grow by 12 more nations in the next two years. The firm's Global M&A affiliation gives its clients both broad reach and local expertise, invaluable when identifying attractive acquisition targets, selling to premium-bidders or helping navigate or finance a transaction in a foreign jurisdiction.

Law firms and financial institutions are rapidly mobilizing to create global capabilities, merging with firms abroad or building partner-networks akin to Global M&A.

Whatever your business' strategies, now is the time to think globally. Soon, we will conduct business and complete transactions in one, global middle market.

Editor's note: Brown Gibbons Lang & Co. will host the 1st Annual Global M&A Cross Border Conference in Chicago May 26-27. Entitled "The Middle Market Goes Global," it is an unprecedented forum for global deal-making and idea-sharing for principals involved in closing middle market deals throughout the world. For more information visit www.bglco.com/GlobalMAConference.asp.

David Sulaski (dsulaski@bglco.com) is the leader of Brown Gibbons Lang & Co.'s Private Equity group and a U.S. and cross-border new business development specialist. Reach him at (312) 658-1600.

Friday, 16 July 2004 09:26

Behind door No. 2

Many business owners operate under the misconception that the best time to sell their business is when the strategic buyers' market is hot, or that the pool of potential acquirers is limited to competitors, industry consolidators or others up or down the supply chain.

But it is increasingly common for private equity firms (a.k.a. "financial sponsors") to be active in M&A and be willing to pay premium prices for middle market companies. Indeed, with more than 900 domestic private equity funds that that have collectively raised more than $325 billion in the last decade, private equity firms are a real M&A force.

Understanding LBOs
A leveraged buyout (LBO) is a transaction in which a significant portion of the purchase price is funded with junior capital, including senior and subordinated "mezzanine" debt. It enables financial buyers to "leverage" returns on their equity investment and use the cash flows generated during the investment period to pay down debt and fund the company's growth.

Private equity firms typically look to harvest their investment within three to seven years by selling the acquired company to another buyer, taking it public or releveraging the company and pocketing a large cash dividend.

Factors affecting private equity fund activity
Several factors contribute to the increased appetite of financial buyers and the notable spike of their recent activity. Most significant is the sheer volume of capital available, both equity and debt.

As credit markets have improved, more lenders have returned to the middle market and are under pressure to deploy capital. Second, high-yield bond activity has been on the upswing. In 2003, there was a dramatic increase in high-yield issuances as compared to the previous three years. Moreover, while 2003 was a good year for high-yield issuances, the volume of high-yield issuances in Q1 2004 nearly doubled from their level in Q1 2003.

Third, there is a disparity between the amount of private equity capital raised and private equity capital deployed over the past several years. While the level of fund-raising declined substantially over the past three years, much of the private equity capital raised between 2000 and 2002 has gone uninvested, and many of the investors in private equity funds are pressuring for more rapid deployment.

Several private equity funds are faced with the prospect of either spending the money or having to give it back to their investors.

Quasi-strategic buyers
An additional factor that has enabled financial buyers to compete and win auctions has been their ability to act as a pseudo-strategic buyer in certain situations.

With the recent downturn in the initial public offering market, private equity funds own an increasing percentage of U.S. businesses. If a private equity fund already owns a portfolio company that is similar to the business for sale, opportunities for cost-reduction synergies exist, which can further drive a private equity investor's returns on invested capital (both for the company it already owns and the company it is seeking to acquire), and ultimately, justify a premium purchase price.

The partial sale -- two bites at the apple
Most private equity funds will consider purchasing less than 100 percent of a business to allow existing owners to co-invest with them in the company. In fact, most prefer to partner with successful managers and will set aside additional equity capital to support a corporate growth and/or acquisition plan. In other words, private equity investors are often willing to purchase a partial yet controlling interest in a business, allowing the owners to diversify their holdings, "take chips off the table," and yet remain motivated toward continued growth of the company and capitalize on such upside when the equity fund sells or recapitalizes the business in the future.

An investment banker will help familiarize the company owner with the private equity market and sale or partial sale to private equity funds as a logical alternative to the typical exit strategy of selling their businesses to strategic buyers.

David Sulaski (dsulaski@bglco.com) is the leader of Brown Gibbons Lang & Co.'s Private Equity group and a U.S. and cross-border new business development specialist. Reach him at (312) 658-1600.