4 ways middle-market companies can make good deals

Hundreds of millions of dollars are sitting in the pockets of investment fund managers. Their favored targets: midsize companies that are big enough to be worth the effort, but small enough to buy (or buy into) without breaking the bank. As a result, deal valuations have never been higher.

It’s a seller’s market. That carries perils for buyers, particularly “strategic buyers,” where individual companies compete with deep-pocketed investment funds (financial buyers) for a limited number of opportunities. But there are also risks for sellers.

We track deal activity at the National Center for the Middle Market, and earlier this year, released an in-depth study of M&A best practices. Here are a few key facts:

The dealmaking pace is steady.

Every year, about 20 percent of middle-market companies buy all or part of another outfit and about 5 percent sell all or part of their company. That number hasn’t risen; we see more competition and higher prices, not more deals.

Most buyers and sellers are inexperienced.

Among companies with a transaction in the last three years, 70 percent of buyers and 90 percent of sellers either had never done a deal or don’t consider M&A integral to their strategy. Indeed, 45 percent weren’t expecting to sell — until an opportunity presented itself. Surprisingly, one out of five buyers didn’t expect to buy, either, but a deal came along that they couldn’t resist.

M&A is important for companies that do it.

Sixty percent of acquirers say that M&A is very or critically important to their growth strategy. They expect it to produce more than a quarter of their revenue growth.

So, 25 percent of companies, every year, make a deal, but most executives aren’t experts in dealmaking or post-merger integration. How can they raise their game?

1. Get clear about strategy. M&A should be a servant of strategy, not its master. Executives tell the NCMM that “getting the strategy right” is the most confusing part of M&A, perhaps because it can be a game changer, for good or ill.

2. Understand your options. Sellers, in particular, should recognize that transactions come in many varieties. Private equity firms used to insist, almost always, on a controlling interest; these days, more will take a smaller stake or invest at a younger stage.

3. Get your house in order. Leaders should do half a dozen things to get a better deal, whether buying or selling, which also will improve performance today. Clarify governance and decision rights, particularly in family businesses. Make sure your financials are shipshape. Beef up the management accounting, too (budgets, goals and the tracking of key performance indicators). Modernize IT and cybersecurity. Document all processes. Tighten your working capital management (payables, inventory and receivables). And, critically, take steps to secure key staff members.

4. Strengthen your network of CEOs in your industry and advisers. Your lawyer might not have M&A experience. You might not know any investment bankers. Have strategic conversations with your banker, auditor and tax adviser. Then, when opportunity knocks, you’re able to answer.

To read the report, visit http://bit.ly/MiddleMarketCenter_MAreport


Thomas A. Stewart is the executive director of National Center for the Middle Market, the leading source for knowledge, leadership and research on midsized companies, based at the Fisher College of Business at The Ohio State University. Thomas is an influential thought leader on global management issues and ideas — an internationally recognized editor and publisher, authority on intellectual capital and knowledge management, and a best-selling author.

Business Pulse — May 2018

As touched on in earlier articles, M&A activity for the month of April followed the downward trend that was expected to occur during 2018. Total deal volume decreased 13 percent as compared to April 2017, and decreased 9 percent from March 2018. Although total deal volume has dipped consistently since the start of 2018, overall deal value still remains historically high.

Al Melchiorre

Al Melchiorre

According to Antares Capital’s Compass report of middle market private equity groups, borrowers and investors remain optimistic. Companies are forecasting strong revenue and EBITDA growth, and are accelerating hiring, which can both be indicators of strong economic performance. Furthermore, employment remains steady at 95.9 percent and consumer confidence data lends support to an optimistic outlook.

Recently, the M&A universe experienced heavy deal activity in the form of add-on acquisitions. Nearly 30 percent of private equity-backed companies now undertake at least one add-on acquisition, which is a significant increase as compared to the less than 20 percent that did so in the early 2000s. This may not come as a surprise when taking into consideration the trend in private equity fundraising. U.S. middle market fundraising has held steady at elevated levels in recent years, and 2018 has continued on that same path. During the first quarter of 2018, PE firms closed on $29 billion across 36 funds, with 79 percent of that sum attributed to middle market firms, compared to just 52 percent for 2017, as a whole. This number is expected to retreat slightly as several bulge bracket firms are currently in the process of raising funds.

In addition to record amounts of capital yet to be invested, the S&P 500’s non-financial companies are accumulating record amounts of cash on their balance sheets, totaling over $1.72 trillion as of the end of March. This raises a question: “Why has deal volume been decreasing at a steady rate?” We believe that the answer is as follows: There is a supply and demand imbalance in M&A transactions. The unprecedented amount of liquidity in the marketplace, coupled with a less than stellar portfolio of quality deals available, has led to full valuations for buyout candidates. Although full valuations bode well for sellers, it also leads to increased due diligence by prospective buyers. In an effort to minimize hiccups that can occur in later stages of a transaction, it is as imperative as ever to consider taking initiatives, like a quality of earnings review, in order to be better prepared for success. These initial preparations can save both time and money.

Albert Melchiorre is president and founder and Anthony Melchiorre is an analyst with MelCap Partners LLC. MelCap Partners is a middle-market investment banking advisory firm. For more information, email Al at [email protected]. 

Chesapeake asset deals going as planned: CEO

OKLAHOMA CITY, Okla., Thu Sep 6, 2012 – Chesapeake Energy Corp. will sell up to $14 billion in assets by the end of the year as planned, with proceeds targeted to debt reduction, the company’s chief executive said on Thursday.

The Oklahoma City company also needs to sell some of its oil and gas interests to fill a funding gap that Barclays analysts estimate at $4 billion in 2013.

“About $13 to $14 billion in sales remains our goal for the year,” Chesapeake CEO Aubrey McClendon told investors at the Barclays energy conference in New York. “We should be a cash generator this year as a result of our asset sales.”

By the end of the third quarter, Chesapeake will have announced nearly $12 billion in assets so far this year. That figure includes the sale of most of the company’s 1.5 million acres in the Permian Basin and its midstream business, McClendon said.

But the Permian deals might not close in the third quarter as previously planned.

“There will probably be some spillover in the fourth quarter,” the executive said.

McClendon declined to provide more detailed status updates on its planned deals.

Shares of Chesapeake rose to $19.65 in premarket trading, up from Wednesday’s New York Stock Exchange close of $19.54.

Market enters fall with uncertainty

Albert D. Melchiorre, President, MelCap Partners, LLC

High domestic unemployment and low domestic consumer spending teamed with the heavy burden of a European economic debt crisis has tampered with potential merger and acquisition growth. With third-quarter deal volume down 16 percent and an uneventful month in October, the M&A markets are attentively watching to see what will evolve in the overall marketplace.

Confidence has weakened from international debt policies and recent increased regulations. At the same time, there is some optimism out there as a result of certain positive market data. Gross domestic product is one definitive indication of a growing market, and current third-quarter estimates for the U.S. economy are at 2.5 percent growth, double the previous quarter. Another encouraging sign for M&A markets is the amount of debt and equity available for transactions. 

S&P nonfinancial companies have accumulated more than $1 trillion of cash and short-term investments on their balance sheets. This is 58 percent higher than during the market slowdown in 2008. Private equity “overhang” (funds available from private equity groups for acquisitions) combined with S&P 500 cash balances, totals more than $1.5 trillion of capital available for acquisitions.  

With mixed market data, some companies are playing it very conservative while others are seeing the market as an advantageous time to pursue other companies. The market appears uncertain as August posted the highest activity of the year and September the slowest activity of the year. The value of companies, or rather the multiples on companies, remains high as buyers compete for healthy companies and banks compete vehemently to provide lending for those transactions.

In Northeast Ohio, there was some activity but not at the level seen in previous months.  The Riverside Co., nevertheless, remained by far the most aggressive group in Cleveland, completing three separate transactions. Riverside completed two acquisitions including ECN Inc., an emergency communication group that issues messages on behalf of government and education entities, and PPS AB, a private school operator in Sweden.  

Albert D. Melchiorre is the president of MelCap Partners LLC, a middle-market investment banking firm. He is also a director on the ACG Cleveland board. For more information on MelCap Partners, please visit www.melcap.co. For more information about the Association for Corporate Growth, please visit www.acg.org/cleveland.

Deal of the Month

The deal of the month goes to a transaction between two local companies. On Oct. 3, Cleveland’s PolyOne Corp. announced it would acquire Berea’s ColorMatrix for $486 million. ColorMatrix, a leading manufacturer of specialty additives, liquid colorants and dosing technologies globally, had sales of $196.8 million and EBITDA of $43.6 million for its fiscal year ending June 30. For the past decade, ColorMatrix has increased EBITDA by 16 percent annually.

PolyOne, a provider of specialized polymer materials, services and solutions, will add additional support to its specialty business through the acquisition. The company’s specialty business will now be greater than 50 percent of operating income compared to 2 percent of operating income in 2005. PolyOne also adds an additional 162 patents and another 107 pending patents with the acquisition. PolyOne expects to increase its global reach through the acquisition and build on revenue of $2.6 billion in 2010.

Weak freight rates spur more global shipping deals in coming future

NEW YORK ― The global shipping industry could see robust dealmaking activity in coming years as weak freight rates caused by vessel overcapacity spur firms to consolidate to cut costs and get better access to capital, according to senior industry bankers.

Most shipping companies have suffered from distressed freight rates in the past several years as demand to transport commodities has lagged supply of vessels. This has been compounded by a slowdown in the global economy that has made access to funds difficult.

The weak rate environment is expected to continue through 2012 and beyond. While 2013 could see some recovery in rates, the prospect of continued capacity expansion in China presents a longer-term challenge, said Mark Friedman, a senior managing director at investment bank Evercore Partners Inc.

“There’s a lot more shipyard capacity than there’s ever been in the industry before, with a lot of the incremental capacity being in China,” Friedman said. “And that capacity just doesn’t go away. The increased supply of ships could pressure rates over the long term.”

“There ought to be more consolidation as some companies do not have adequate capital market access or liquidity.”

Friedman and George Ackert, who together run Evercore’s transportation and infrastructure advisory practice, say that shipping assets have become an attractive investment for financial firms and private equity investors looking to take advantage of the overcapacity-induced downturn.

In a recent industry transaction, investors including private equity firm First Reserve, billionaire investor Wilbur Ross’ investment shop WL Ross & Co and sovereign wealth fund China Investment Corpannounced a $1 billion equity investment in U.S. shipping company Diamond S Shipping, which will use the funds to acquire 30 tankers.

In March, private equity firm Carlyle Group formed a joint venture with maritime investment firm Tiger Group and other investors to buy more than $5 billion worth of containers, tanker vessels and other shipping assets.

Evercore also worked on several shipping deals over the past two years, including advising Capital Product Partners on its acquisition of Crude Carriers Corp and representing Overseas Shipholding Group Inc in its purchase of OSG America L.P.

Ackert, who joined Evercore in early 2009 to build transportation practice for Evercore — the first for an boutique advisory — said shipping and transportation leasing have been two of the most active sectors in transportation in terms of deal activity over the past year.

Business Pulse

As summer ends and the cold, gloomy winter draws closer, Ohio companies remain on fire. Eighty percent of the selected August transactions listed on this page included Ohio companies as buyers. The Northeast Ohio region remains acquisitive in the face of high market volatility. The uncertainty of a global economic recovery and unstable equity markets has shaken some confidence in the M&A market. However, companies continue to pay high dollar for strategic fits that will add market share and build long-term value.

OM Group Inc. completed its strategic acquisition of Vacuumschmelze GmbH & Co. KG for $950.9 million on Aug. 2. The acquisition will give OM Group greater presence in emerging markets and further mitigate raw material pricing volatility through economies of scale.

RPM International Inc. also made an international acquisition with the purchase of API S.p.A. The $28 million company, located in Genoa, Italy, is a producer and installer of polyurethane and urethane-based flooring for the marine industry, primarily luxury boats. The company will complement the commercial polymer flooring businesses already owned by RPM and will give RPM a greater presence in the decorative flooring space.

Private-equity groups remained somewhat quiet this month, yet some were still very busy acquiring Northeast Ohio companies. The Riverside Co. continued its great year with its 13th acquisition of the year, Sunless Inc. The Macedonia company manufactures spray tanning booths, airbrush equipment and retail products in the sunless tanning segment. Finally, Weinberg & Bell Group acquired Cleveland-based Channel Products Inc., a manufacturer of ignition systems and safety controls for gas appliances.

Albert D. Melchiorre is the president of MelCap Partners LLC, a middle-market investment banking firm. He is also a director on the ACG Cleveland board. For more information on MelCap Partners, please visit www.melcap.co. For more information about the Association for Corporate Growth, please visit www.acg.org/cleveland.


Deal of the Month

August’s deal of the month goes to TransDigm Group Inc., for the acquisition of Kent-based Schneller Holdings LLC. TransDigm acquired Schneller on Aug. 31 from Graham Partners for $288.5 million in cash. Schneller manufactures a variety of laminates, thermoplastic sheets, utility flooring and custom applications for the aviation and rail industries. Schneller’s decorative materials are found on most Boeing platforms, all active Airbus platforms and most regional jets. Two-thirds of Schneller’s revenues come from the commercial aftermarket with most of the company’s products being used for aircraft side walls, lavatories, galleys, bulkheads and cabin floors.  It is anticipated that Schneller’s revenues will reach $84 million in 2011.

TransDigm’s acquisition comes just a week after the board of directors authorized a repurchase program of up to $100 million of common stock. This move should add flexibility and strengthen the company’s position through various uses of cash, including both acquisitions and the repurchasing of stock. The acquisition of Schneller is expected to build value as both companies’ products and markets align, increasing Transdigm’s aerospace market share.

Deals surge in April

Private equity groups appear to be on a mission through the first four months of 2011. This surge has been inspired by an improving economy, increasing volume of quality acquisition opportunities and, lastly, the growing availability of debt as banks have conservatively returned to lending.

This has led private equity groups to deploy capital in order to raise new funds while continuing to mend portfolio companies in order to attract limited partners to invest in those new funds.

In an effort to provide much anticipated returns to investors and further support fundraising efforts, private equity groups will look to divest portfolio companies throughout 2011. Considering the improving merger and acquisition market and the re-entry of strategic players to the buyout world, many private equity groups are positioned for divestitures in the very near future. In fact, there are several Cleveland-based private equity groups that have exited investments during the month of April.

Linsalata Capital Partners Inc. and Resilience Capital Partners announced the sale of Lund International Holding Co. on April 28 to an affiliate of Highlander Partners LP. It was 2007 when the two private equity groups acquired the assets of Lund International, a designer, manufacturer and marketer of branded accessories for the automotive market.

Resilience Capital Partners also divested Steel Parts Manufacturing Inc. as it was purchased by Monomoy Capital Partners. Steel Parts is a manufacturer and supplier of close-tolerance precision metal stampings and components in automatic transmission systems. The acquisition of Steel Parts by Resilience in 2006 provided a 51 percent gross internal rate of return.

 Morgenthaler Partners also participated in the divestiture of one of its portfolio companies. Ryan Herco Flow Solutions, a distributor of products used in the flow of purified water, was acquired by Greenbriar Equity Group LLC from Morgenthaler’s Venture Partners Fund VII LP. Ryan Herco sells more than 70,000 products that are used in a variety of industries.

Albert D. Melchiorre is the president of MelCap Partners LLC, a middle-market investment banking firm. He is also a director on the ACG Cleveland board. For more information on MelCap Partners, please visit www.melcappartners.com. For more information about the Association for Corporate Growth, please visit www.acg.org/cleveland.

Deals of the Month

The first recognition goes to The Riverside Co. with its acquisition of The Ostomy Center. The add-on acquisition to its platform company, ActivStyle, will be Riverside’s 54th health care transaction over its history and the sixth transaction for Riverside already in 2011. The Ostomy Center services mostly Illinois patients with incontinence, enteral, urology, ostomy and wound care products for conditions such as ostomy status, autism, spina bifida, cerebral palsy and Down syndrome. The acquisition will allow ActivStyle to diversify its demographics with products targeted toward younger patients.

Garfield Heights-based Chart Industries Inc.’s acquisition of CFIC also receives recognition this month. CFIC manufactures thermoacoustic technology, which converts acoustic sound waves into energy to heat or cool products. The acquisition should help enhance the global portfolio of Chart Industries’ biomedical segment. In December, Chart Industries also spent $40 million to acquire SeQual Technologies for its biomedical segment. Chart Industries has been performing very well as of late, with its stock price increasing more than 1,000 percent from $5.26 in March 2009 to $55.04 in March 2011.