Plante Moran and Benesch are pleased to share an overview of the topics discussed at our first Private Equity Forum held October 2, 2012 in New York City. Topic #2: "Maximizing Enterprise Value for Industrial Companies."
The panel focused on five primary topics.
1. State of the market
- Industrial companies remain active in the transactional landscape; many have a strong international component today that did not exist 10 years ago.
- The strongest manufacturing businesses maximized their value by not only having a wider geographic footprint, but by also continuing to upgrade their operations and products to show potential buyers that “blue sky” remained for future ownership.
- Companies with low EBITDA margins who are also more of a commodity business are not attractive to buyers and command much lower multiples of EBITDA in the buying community. Also, because of sellers’ sometimes overly optimistic expectations for such companies, it is not unusual for these companies to not gather any real momentum in an auction process, which leads to the selling company withdrawing from the auction.
- Ongoing need to focus on differentiation, including a strong management team that is not dependent on one or two executives.
2. Challenges of buying a privately owned business
- Quality of senior management, which often needs to be augmented over time.
- Less sophisticated internal reporting and cash management procedures.
- Consistency of its earnings and appropriate addbacks to EBITDA may not be confirmed by Quality of Earnings analysis by the business’s financial advisors.
- Companies meeting projections during the diligence and closing periods that may have been more than typically aggressive, because they were put together to support a sale process.
- Another impediment to purchasing an industrial company is that having an EBITDA in the $3 to $10 million range usually means a different set of potential lenders. An asset-based loan may be more achievable than a cash-based loan.
- Critical for a manufacturing company to have strong clarity on its cost of goods sold, have a lack of customer concentration and have multiple suppliers for any particular raw material. Often this is not the case with auctioned companies or even with companies where the buyer has a proprietary advantage.
3. Why/How M&A deals fall apart
- Environmental issues, while not uncommon, need to have a “prepackaged” solution for the buyer before the selling company goes to market (e.g., a well-thought-out remediation plan that is being implemented or environmental insurance that protects the buyer from liability).
- Even relatively basic matters, including ownership of the selling business, can become sticky in the middle of a transaction if the seller has not “cleaned up” all of the corporate documentation so there is no issue between the owners of the seller as to their right to sell.
- If a private company is selling to a financial buyer and the buyer wants the management owners to continue to run the business, a failure to “roll over” a part of that management’s equity into the “newco” can significantly hinder a sale.
4. Strategic vs. financial buyers
- Strategic buyers continue to dominate the transactional landscape.
- Seeing quite a bit more activity from foreign buyers than in the past.
- Strategic buyers can take longer to move the process along in a transaction; sometimes an investment banker needs a different approach (than when dealing with a financial buyer) in terms of getting the strategic focused on the target.
- Strategic buyers, while having the advantage of “certainty of close” in most cases, can be more process oriented, which can impair their ability to move quickly.
5. M&A activity outlook for 2013
- Cash held by both financial and strategic buyers will continue to put pressure on transactional activity—particularly with so little global organic growth over the past three years.
- The transactional process is taking much longer to complete—if at all—as earnings remain uncertain in the next 12–24 months regardless of the outcome of the November Presidential elections.\
- There continues to be a large backlog of companies that need to be sold soon—be they privately owned with intergenerational issues, private equity-owned businesses that need to show a return for the limited partners or a number of non-core businesses with corporate sellers in order to focus on where they have their best differentiation.
- 2013 not expected to be a “boom year” for M&A activity.
This is the second of a three-part series. Overviews ofPanel 1 and Panel 3 are available online.