Knowing When to Fold ‘Em

Posted on August 26, 2014

You’ve got to know when to hold ’em
Know when to fold ’em
Know when to walk away
Know when to run
You never count your money
When you’re sittin’ at the table
There’ll be time enough for countin’
When the dealin’s done

If you’re a Baby Boomer, you remember well hearing Kenny Rogers’ iconic hit, The Gambler.  If you’re like me, you’ve often wondered how Kenny’s advice might be applied to important business and investment decisions.  If you’re a business owner who has survived our generation’s version of the Great Depression, you need good counsel more than ever.

Perhaps you’re feeling pretty good about your prospects – business is improving and profits are as high as you’ve ever enjoyed.  Is now the time to go all in? Or is it time to cash your chips and leave the table for new faces?  The story below presents a dilemma faced by many business owners.  Names, industry identifiers and other client specific facts have been changed to protect confidentiality, but the dilemma described below is all too real and immediate for many business owners.

Our friend Frank Mayfield (not his real name) recently approached us with a dilemma.  Frank founded Limbtronics, a medical device manufacturer, thirty years ago to provide leading orthopedic doctors with specialized tools for performing innovative surgeries on damaged joints and ligaments.  Over time, he expanded into manufacturing surgical implants for complete joint replacements.  The business has been good to Frank and in 2013 Limbtronics had a record year with revenue of $28 million and pretax profits of more than $5 million.

Over the past fifteen years, Frank has seen several of his competitors acquired by global orthopedic giants such as Medtronic, Stryker, Smith and Nephew, and others.  He’s been approached a number of times, but never felt the time was … 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

Investing In An Age Of Transient Competitive Advantages

Posted on August 24, 2013

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

In this article I will review the book “The End of Competitive Advantage,” by Rita Gunther McGrath, published by the Harvard Business Review Press in 2013.

I like to think of myself as a “value investor.” That is, I believe that I invest in quality companies that are underpriced. In terms of the quality of the organizations I like to invest in, I look for firms that have established a competitive advantage in their industries and are earning at least a 15% return on equity, after taxes. To judge the quality of management and its staying power, I look for those organizations that have a sustainable competitive advantage, defined as earning a 15% return on equity, after taxes, for a period of five to eight years. And, to capture the fact that a stock may be underpriced, I look for a low price/earnings ratio.

Other factors that have been important in my analysis are the industry share the company achieves and protects and the stability of this share over time. Of course, these are the quantitative factors and must be supplemented by other factors, such as an examination of management, industry make-up, and governmental factors that might contribute to firm performance.

Well, starting right here, Dr. McGrath starts to eat away at this picture. For one, she argues that industry boundaries are no longer that important. She argues that “arenas” are more crucial in the modern environment. The important thing in today’s world is that there are connections between “the outcomes that particular customers want (the jobs to be done)” and “the alternative ways those outcomes might be met” (page 10). Industry lines are not the determinants of what products one should be producing and what markets they should be sold … read the rest

Winds of Change: Energy

Posted on May 6, 2013

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

In my last post I wrote about all the economic re-structuring that is taking place. Even though economic growth remains relatively tepid, changes are taking place in the economy that are going to dominate the future when the economy fully adjusts.

Maybe one of the reasons that the economy is growing so slowly is that the economy is going through a transition phase, like in the 1930s, where resources have to be re-allocated and re-structured in order for the economy to take off once again.

That is, resources are mis-located now relative to what is happening in the economy. For the economy to pick up its full head of steam, resources have to be re-aligned to fit what the economy is evolving into…not what it was. Economic policies that attempt to put resources…especially labor…back into the jobs they historically held…just doesn’t work!

Therefore, as I mentioned in the previous post, this re-structuring is creating tremendous opportunities for investment. But, one has to change ones perspective…and not focus on what was. This is why I found the recent article on the future of energy by Clifford Krauss in the New York Times so refreshing. The title to the article, to me, says it all, “By 2023, A Changed World in Energy.”

“If you could close your eyes for just a moment like Rip Van Winkle, and blink them open in 2023, you might see a very different energy world.

Electric cars may be popular. Solar energy could be cheap enough that millions of households and businesses deploy solar panels to generate their power needs. Fossil fuels will probably still dominate, but most trucks and many trains could run on natural gas rather than more polluting diesel. And the United States could be … read the rest

The Winds of Change Are Blowing

Posted on May 5, 2013

John Mason – Originally Published at Seeking Alpha – Reprinted with Author’s Permission

The world is changing. The world is changing because it must change. When the unemployment rate hits 27 percent, as it now stands in Spain, something more is going on than just a business cycle.

Unemployment is also above 27 percent in Greece. In Italy, the unemployment rate is close to 12 percent. In France, the unemployment rate is above 10 percent. The employment problems in these countries are not just cyclical, they are structural.

The same for the United States. Although the unemployment rate in the United States is under 8 percent, the startling figure concerning the U.S. labor market is that the labor participation rate has dropped below 64 percent, a figure not reached since the latter part of the 1970s when women were not as big a part of the workforce as they are now.

These structural forces are causing divisions between countries as the world tries to recover from the Great Recession and more. Angela Merkel, German Chancellor, “highlights eurozone divisions.” The unemployment rate in Germany is 5.4 percent.

But, as we know, the utilization of capital in the western world tends to be lower now, for this stage in the business cycle, that at any other time in the past fifty years. Western countries are not only not using the human capital that is available; it is not using the physical capital it possesses. The competitiveness of the eurozone is an issue that comes up over and over again.

Phillip Stephens writes in the Financial Times about The New Deal for Europe: More Reform, Less Austerity. “High unemployment in Europe is not just a reflection of recession. It often mirrors ossified labor markets that lock out young people and discourage investment and innovation.”

But … 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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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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New Data Drives M&A Valuations to Cyclically High Levels

Posted on October 2, 2012

 

Recently the Wall Street Journal published an article entitled “The Economy Stole My Retirement”. The subcaption reads “Nest Eggs In Peril For Millions Of Entreprenuers in Their 60s And 70s Who Can’t Sell Their Companies”.

Over the years we have met many business owners who just assumed that if they waited long enough a perfect buyer would come along, offer them a great price for their business and pave the way for a timely and comfortable retirement. According to the Wall Street Journal article “Boomer entrepreneurs grew up believing in the American dream that you start a business and eventually sell it for a good return or pass it on to your kids.”

With stagnant revenues and declining profits the norm for many small businesses since the financial crisis, the sad fact is that for many business owners there just won’t be a buyer.  Even worse far too many business owners who receive a serious offer for their firms will make the fatal mistake of assuming that, if they received one good offer, they will receive more and have the luxury of waiting until sale is more convenient or the price is higher.  Many of those owners will regret that decision dearly.

After three+ years of economic recovery, we are at a point in the financial cycle that may soon provide many Baby Boomer business owners with the best opportunity they may see for selling their businesses at a good valuation. For good companies in many industries, earnings have in fact recovered significantly. In favored sectors such as aerospace manufacturing and various technology disciplines, buyers are willing to pay multiples for top performers that compare favorably with those of the mid 2000s when large middle market firms routinely saw offers in high single-digit or even double digit multiples of EBITDA.

Memories … read the rest

August 2012 – The Future of Small Business Financing

Posted on August 23, 2012

Everyone loves small business.

At least that’s what the politicians want you to believe.

The reality is different. Small business is under attack from every quarter. Government policies favor large banks and large multinational businesses. Credit is tight and the banks favor the larger borrowers. Increased regulations stifle innovation and protect large incumbents that can afford teams of lawyers and lobbyists.

What’s the little guy to do? Waiting for the politicians to change the system is wishful thinking. Smart business people find ways to prosper in every environment.


And the current environment is not great for small firms. The Federal Reserve Senior Loan Officer survey has recently confirmed what we have suspected for some time: banks have been more generous in easing underwriting requirements for larger companies than they have been for smaller companies. Paynet, which maintains data on 17 million small business loans, reports that lending conditions for small firms have deteriorated in recent months after two years of bounce back from the 2009 bottom.  For additional details go to the full article on Capital Matters.


Financial Market Risk
And there’s a risk that things could get a lot worse for businesses that don’t tie down their financing soon.  We just published an article on Seeking Alpha that has received a great deal of attention with more than 14,400 page views so far. Our thesis is that the Fed’s zero interest rate policy has led to a situation where longer term treasury bonds are trading at yield levels that provide a spread to inflation far below the historical norms. Markets eventually return to their mean and often overshoot it so there is growing risk in the longer term debt market. Our concern is two-fold. First, that individual investors need to be aware of the potential impact of this return to the mean … read the rest

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