A Whiff of Inflation – M&A Valuations Lead the Way

Posted on July 17, 2014

(Originally Published on Axial Forum)

Since the 1970s, many of us have feared the threat of inflation looming just around the corner. Within the past year, economists and central bankers have led us to believe the inflation dragon has been permanently relegated to a dark hole, never to rain fire on the kingdom of men. We’re told that deflation is the real threat and that governments can continually run large deficits without reawakening the dragon. Recently, reality has intervened, however, to remind us that economists and central bankers aren’t infallible. U. S. Core CPI and global consumer prices have taken a sharp turn upward.

While this rate of price increase will have profound implications for business owners if it continues, that’s a story for another day.

Our story here affects these entrepreneurs more directly. Inflation comes as no surprise to those of us in the M&A business. We have watched for some time as the M&A market reheated and deal valuations reached levels not seen since 2007 – the peak of the financial bubble. We now have strong confirmation that this trend is not reserved solely for the megadeals on CNBC.

 

For larger deals that confirmation comes from Pitchbook which reported last week that, for the first half of 2014, average deal valuations reached an all time high of 11.5 times EBITDA.

 

 Median EBITDA Multiples for Buyouts (H1 2014)
For smaller buyouts, the story is the same. Andy Greenberg, CEO of GF DATA®, is in a unique position to understand middle market M&A pricing trends. His company maintains a very comprehensive database of actual transaction values in the sub $250 million marketplace. In our recent interview, Andy shared his perspective confirming our belief that lower middle market M&A purchase multiples have reached historically high levels over the past 12 to 18
read the rest

2013 Deal Valuations Reach All Time Highs; What’s in Store for 2014?

Posted on February 3, 2014

  Last March we predicted that middle market business sale values in 2013 could reach all-time high levels. Recent data from Pitchbook confirms that was in fact the case.

Source: Pitchbook

Not only were prices in relation to earnings before interest and taxes (EBITDA) at an all-time high, leverage used in the transactions reached record levels as well. To some extent this reflects a skewing toward larger transactions, but unquestionably we are now back to levels not seen since the run-up to the 2008 financial crisis. History tells us that such heady price levels will not last forever.

So what is in store for 2014? Does weakness in global stock markets mean that the game is over? Or can we look forward to a sustained period of high valuations? Is the past is to be our guide, the current favorable trends in the M&A market have some time to run. We previously indicated that we felt market strength could run through 2014. Recently we have received confirmation of that through a uniquely qualified source.

IntraLinks is the global leader in virtual data rooms with a 30% worldwide market share. For the uninitiated a virtual data room is an online space in which due diligence documents can be securely placed during an M&A process to facilitate due diligence and other deal related activities. As a result IntraLinks has a unique perspective on the merger and acquisition marketplace. They see deals that are moving toward closing as much as six months before any public announcement of the transaction is made. IntraLinks has aggregated this proprietary business intelligence to read the rest

Mid-Year 2013 Middle Market M&A Review

Posted on August 26, 2013

Q4-2012 was a heady time for the M&A business and almost every observer of the industry expected 2013 to be the year the deals business broke out of its five year post financial crisis funk. Best laid plans and all that — the low level of deal activity that has occurred to date in 2013 has both surprised and disappointed most industry participants.  Yet there are signs that this could change.

During H1-2013, deal volume fell off significantly, reflecting a cleared pipeline after the year end burst.  Fortune reported that global M&A announcements for Q2-2013 were the slowest since Q3-2009.  The U. S. market fared comparatively better, with the dollar value of announced deals up 34% year to year in H1 2013.  European activity on the other hand collapsed 43% with the Euro crisis and continental recession still in full swing at the time.  Even the relatively high level of U. S. activity depended in great part on the announcement of two large deals (Heinz and Dell) at the beginning of the year.  Without those announcements the U. S. market would have appeared lackluster at best.

The middle market companies we represent depend on both strategic and private equity buyers for business exits.  Most M&A industry observers believe that bulging corporate coffers and slow, organic growth will eventually dictate a strong increase in strategic M&A activity.  With the exception of a few target sectors, particularly IT related businesses, this corporate gold rush has yet to materialize.  As a result, private equity will be a more important source of buyside demand, at least for the near future.

PitchBook publishes a comprehensive analysis of U. S. private equity activity. Their first-half summary tells the story:

“Dealmakers were optimistic heading into 2013, anticipating one of the most active years for private equity (PE) investment since the financial … read the rest

Winds of Change: Banking

Posted on May 8, 2013

John Mason – Originally Published at Seeking Alpha – Reprinted with Authors Permission

Another Executive Leaves JPMorgan…” reads the headline of the business section in the New York Times. The question is, what is going on at JPMorgan Chase (JPM)?

The timing of this last leaving is raising questions. The latest major departure is Frank Bisignano, the co-chief operating officer. The questions are about the status of Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan, the “persistent executive turnover,” and the up-coming board meeting where a debate is raging about whether or not Mr. Dimon should hold both top positions.

To me, there are two reasons for the recent departure events. First, Mr. Dimon is in control and he does not like what has happened inside JPMorgan over the past two years or so, with “the London Whale” and other events that have tarnished the “bravo” image of Mr. Dimon and his bank. The activity going on inside the bank remind me of a “turnaround” operation!’

But, there is a second reason for the things that are going on. Mr. Dimon is moving JPMorgan into the future.

If this is true, then this whole effort is to move JPMorgan into the future in the face of the “hostile” regulatory environment that exists, in the face of the changes that information technology are forcing on the banking industry, and the changing nature of the financial industry.

If I were Mr. Dimon, my feeling would be that the current regulatory environment “sucks”!

Being John Mason, my feeing is that the current regulatory environment “sucks”!

In either case, the basic feeling is that I really don’t want to run a bank. I want to run something different.

Second, whatever is being done in the financial industry, the future of commercial banking…of finance … read the rest

Will 2013 See Record Valuations for Middle Market Business Sales?

Posted on March 7, 2013

Business owners time their exits for many reasons: health, retirement planning, availability or lack of family successors, competition, technology change, and many more. Yet, overwhelmingly, the question we are most often asked as a financial advisor to entrepreneurial companies is: “What’s my business worth?”

All things being equal, a rational business owner will presumably choose to sell at a point of optimal value for his or her interest in the firm. For the reasons outlined below, we believe that the next eighteen months may see the highest pricing for good middle market companies in the thirty years I have been in the M&A advisory business.

Historically, the market for mergers and acquisitions is one of the most volatile on the globe. In our experience, the market is very cyclical with three to four years separating peaks and troughs and six or seven years to cover a full cycle. The last bull cycle for M&A peaked in 2006-2007 and the market trough was witnessed in 2009-2010. Moderate improvement was witnessed in 2011 and 2012, with Q4 2012 being particularly strong. 2012 was FOCUS’s best year since 2007.

Source: Barclays and Business Insider

2013 started with a bang with large announced deals for Dell, Heinz, and Virgin Media just to name a few. Many observers predict these are not isolated deals and 2013 will witness a resurgence in M&A activity. While the M&A market could be derailed by a major decline in the equity markets or further chaos in Washington, we believe the odds favor a strong market for sales of middle market companies through sometime in 2014. By then a correction will be overdue and the likelihood of a cyclical bear market in equities may become increasingly high. Generally, a serious decline in the stock markets leads to a precipitous fall in M&A activity.

The … read the rest

Categories: Business Acquisition, Business Sale, Entrepreneur, Focus Investment Banking, Focus LLC, Investment Banking, M&A, Mergers, Mergers and Acquisitions, Middle Market, Private Equity, Small Business

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Coming M&A Boom Will Not Cure Real Economy’s Ills

Posted on March 3, 2013

Authored by John Mason – Originally Published at Seeking Alpha – Reprinted with Authors Permission

Behind almost all of the economic problems we are now facing is the need for economic restructuring. The world needs to move on and politicians and others are fighting to keep things as they are.

To me, this is one of the reasons why the common liberal/Keynesian solution to our current difficulties is more government spending, more stimulus. The common refrain is to push things right back into where they were. Push people back into construction jobs; push workers back into the auto plants; and push the untrained into information technology. Unfortunately, the world has changed. We cannot keep trying to push people back into the jobs they once held, or, push people into jobs they have not been trained for.

Everyone is excited about the boom in mergers and acquisitions. I have been among those, like James Less, Vice Chairman of JPMorgan Chase & Co. who said, “The Goldilocks era of post-crisis M&A has never been an if, but a when.”

For two years or more, I have been writing that the larger, better off companies, the larger money managers, are just waiting for the right environment to begin the acquisition binge. In terms of high profile the Dell (DELL) deal kind of kicked things off.

In the past two weeks, there have been at least four major deals announced. These have included the Dell buyout; the Comcast (CMCSA)(CMCSK) acquisition of GE’s (GE) stake in NBC Universal; the acquisition of American Airlines (AAMRQ.PK) by US Air (LCC); the Berkshire (BRK.A)(BRK.B)/3G Capital acquisition of H. J. Heinz Co. (HNZ); and the Liberty Global (LBTYA)(LBTYK)(LBTYB) … read the rest

Microcap Risk – Finders Fee Payment To Unregistered Broker Leads To Chapter XI

Posted on December 2, 2012

Click on Image Below to Watch Video

Entrepreneurial companies must now consider a new regulatory risk when raising money for their businesses or negotiating an M&A transaction.  Payment of finder’s fees to unregistered brokers could lead to corporate bankruptcy.  It did so recently for a small biotech firm, Neogenix Oncology, Inc.

Federal and state laws mandate that professionals who arrange/negotiate capital investment or merger and acquisition transactions for a fee based on the success of their efforts must be registered as securities professionals.  I decided when I got into the investment banking business in 1982 that, as expensive and time consuming as regulatory compliance might be, I would have to be registered.  Our firm has chosen to incorporate its own broker dealer, but there are other options open to investment banking professionals.

It’s long been an open secret that some or perhaps even many business advisors have chosen a different path and raise money or negotiate M&A deals without registration.  For many smaller intermediary firms, this has not posed a problem.  Either their activities have not been noticed by the regulators or they are too small for anyone to care.

It now appears that the SEC may be using another approach to assure compliance – turn the accountants and lawyers into its policemen.  In October 2011 Neogenix received a letter from the SEC requesting that the company “provide certain information relating to payments made to third parties (referred to as “finders’ fees”) in connection with the sales of the Company’s common stock”.  Following up on the SEC inquiry Neogenix pursued an internal investigation and reported in its 10-K filed July 12, 2012.

“….. finders’ fees were paid to individuals and entities whom the Company has not been able to confirm were registered as broker-dealers or otherwise properly licensed under applicable state law to participate … read the rest

Categories: Bankruptcy, Distress, Entrepreneur, Investment Banking, JOBS Act, Middle Market, SEC Regulation, Small Business, Uncategorized, Venture Capital

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November 2012 Capital Matters Newsletter

Posted on November 21, 2012

 Will 2013 Witness a Mergers and Acquisitions Boom?

The market for mergers and acquisitions is highly cyclical. After more than 25 years in the business we have seen a lot of ups and downs. Certainly the last 5 years witnessed one of the sharpest declines we’ve witnessed.

Source: Pitchbook

However, recent developments lead us to believe that we could be quickly moving into a period of very rapid recovery that will take the M&A market to new highs both in terms of deal volume and valuations.

In our last newsletter we presented evidence that valuations for good middle-market companies have approached the heady levels seen in the mid 2000s.  Since then we have seen tangible evidence that transaction volume is increasing as well:

•    Axial Market is the leading transaction listing service for middle market M&A transactions.  Axial recently reported a very strong rise in new deal listings in for October 2012

Source: Axialmarket

•    Andrew Ross Sorkin recently publish an article in the New York Times entitled More Money Than They Know What To Do With indicating that the largest private equity firms are expected to become much more aggressive in bidding for mega deals to use their “dry powder” of committed, but unexpended investment funds.  Sorkin indicates that $200 billion of committed capital must be spent over the next twelve months or returned to investors.  As a result he reports that private equity deal volume jumped from $17.1 billion in Q2 2012 to $45 billion in Q3 and that purchase price multiples have jumped in 2012 to 10.6 times EBITDA from 10.3 times EBITDA in 2011.

•    In our own practice we have recently experienced a competitive aggressiveness reminiscent of 2005-2007 between private equity firms competing to buy a large building products distributor that suffered tremendously during the crash, but has recently … read the rest

Categories: Banking, Investment Banking, Mergers and Acquisitions, Middle Market, Monthly Newsletters, Private Equity

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The JOBS Act and the Future of Commercial Banking

Posted on June 12, 2012

America needs jobs!   That’s a point where there is universal agreement among the political parties.  So much so that Congress overwhelmingly passed the Jumpstart Our Business Startups (JOBS) Act; 390 to 23 in the House and 73 to 26 in the Senate.  My suspicion is the most of those voting for the Act had little idea of how far-reaching the effects of the JOBS Act might be.

The JOBS Act may represent the most radical change in how securities can be privately sold and business capital can be raised from private investors since the securities laws were passed in the 1930s.  Under the JOBS Act most of the restrictions with regard to solicitation that have impeded the growth of a vibrant private placement capital market among accredited investors (i.e. those with liquid net worth over $1 million or incomes over $200,000) have now been removed.

The devil is always in the details and SEC regulations promulgated under the Act could potentially curtail some of its impact.  As written, the JOBS Act has the potential to democratize the financing of business growth in a very dramatic and potentially unintended manner.  By removing many, if not most, of the restrictions on accredited investors seeking to invest in small companies, the JOBS Act provides a basis for many innovative new vehicles for small business financing to blossom.

While most of the commentary around the JOBS Act focuses on funding of startups, the real financing need is to support the expansion of the rapidly growing mid-sized companies that, according to the National Bureau of Economic Research, provide the engine for new jobs in America.  These companies typically have progressed past the startup stage.  They may have 20-50 employees and several million dollars of revenue, with the potential to grow to hundreds if not thousands of employees as … read the rest

Are We Measuring the Wrong Money Supply … Again?

Posted on June 12, 2012

Back in 2008 we wrote that the U. S. was facing a serious credit squeeze in part because we had failed to take into account some important structural changes in the credit markets: i.e. the rapid growth and subsequent collapse of the Shadow Banking system. Since then the Fed and the Treasury have spent enormous resources addressing the impact of that collapse through the purchase of assets from financial institutions, the nationalization of Fannie and Freddie and numerous other actions to prop up the housing market in hopes of repairing shrunken balance sheets throughout the economy.

We may be suffering from a different, but equally portentous, issue today arising from another misreading of what the term money really means. In response to our recent article on Fed tightening since the fall of 2011, John Lounsbury, Managing Editor of econintersect.com, made a very astute observation:

You do not mention it in your article but is it possible that the Fed has not been taking a sufficiently global view and has insufficiently reacted to a recessing Europe and a rapidly slowing Asia? India just dropped to a GDP growth rate below anything seen during the Great Financial Crisis. The manufacturing numbers in China have been flirting with contraction for several months. If the Fed reacts to these factors after they have gained a solid foothold, doesn’t that likely increase the magnitude of the yo-yo swings?

The U.S. dollar is without question the world’s reserve currency and the current problems of the Euro have only served to cement that position. Given the global demand for $100 bills, in many parts of the globe the dollar is not only the reserve currency, but the defacto physical currency as well. Yet we continue to look at money as a national, or in the case of the Euro, regional … read the rest

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