Is Industry 4.0 the New DotCom Boom?

Posted on April 3, 2017

Fear stalks the land.  The Robot Apocalypse is nigh, destined to steal our jobs and our future.  Worse yet the machines are made elsewhere (Germany, Japan, even China) and America is being left behind in the race for manufacturing prowess.

We’ve heard this story before.  In the late 1980s, the U. S. computer memory industry had been decimated by Japanese and Korean competition.  To the Cassandras, this meant that the U.S. had forever lost the global economic race and was destined to become a second-rate power.

Nothing could have been further from the truth.  The prerequisites for U.S. global dominance of the technology world were already in place.  Within a few years, U.S. prowess in personal computers, microprocessors, and digital networking would lead to a capital investment boom and a stock market bubble not experienced since the 1920s.  Stock market fluctuations notwithstanding, the global growth of the Internet has not abated since.

For all its impact, the Internet has touched only a relatively small portion of human existence, focused primarily on media, entertainment, telecom and more recently retailing and finance.  The larger world in which we live, the world of things and physical interactions has, until now, been only lightly touched.  But that is going to change – and change in a huge way.

Imagine Amazon on Steroids

The world of digital automation is at the same stage as the internet in 1993, when the Mosaic browser was introduced and we first discovered the wonders of the World Wide Web.  The technologies are in place for a boom that will transform the global economy and, in the process, create new opportunities for better jobs and better lives.  And once again the U.S. is asserting its leadership role in developing the critical technologies.

Today Amazon utilizes highly advanced predictive analytics and automation tools that plan … read the rest

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

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

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

Dell Deal: A Sign Of The Future?

Posted on February 9, 2013

Authored by John Mason

Things are changing in the financial markets. Financial institutions are starting to make money again in mortgages. Money market funds are “flush with cash.” Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs) are staging a comeback.

And, now there is the $24 billion deal by Michael Dell to take his company private. The interpretation of this transaction that I am most interested in is the one being mentioned in almost all the stories coming out in the press: “This is the largest corporate privatization since the financial crisis and the largest tech buyout ever.”

I am not interested so much in whether or not Dell, Inc. (DELL) is eventually saved. What I am interested in is what is happening in finance. It appears as if money is being mobilized again.

Goodness knows, the Federal Reserve has done just about everything it can to push money out into the economy. Comedians have gotten serious about QE1 and QE2 and QE3 … and QEfinity!

It has only been in the past six months or so that there has been any evidence of funds creeping out of the commercial banking system into other parts of the economy. But now, evidence seems to be growing of money flowing into other parts of the economy. This latest transaction, the creation of a large buyout deal, with the growing possibility that others are thinking about more deals, or even mergers and acquisitions, is very encouraging.

Over the past couple of years, myself and others have wondered about all the cash being built up in the coffers of large corporations. It seemed as if these large organizations were piling up cash hoards in preparation for moving in on less well-off institutions and making deals while the getting was good and while interest … read the rest

A Wonderful Life for Community Banks?

Posted on December 27, 2012

During the yearend holidays we reach out for the comfort of the familiar.  One of the best ways to do that is to revisit films with a seasonal focus such as White Christmas, Miracle on 34th Street and most particularly It’s a Wonderful Life.  Directed by Frank Capra and released December 20, 1946, the film, starring Jimmy Stewart and Donna Reed tells the story of a young man, George Bailey, who was plunged into a difficult and entirely unfair situation as a result of the actions of others beyond his control.  George is driven to a point of such deep despair that he is considering suicide.  He is saved by a guardian angel and the support of those for whom he has toiled unselfishly for years.  For decades the film has provided us with the assurance that, if we just do right by others, we will ultimately be redeemed.

Great film of course, but did you ever think about the underlying issues that forced George Bailey to consider jumping off a bridge?  Bailey begrudgingly inherited a community-oriented Building and Loan Association in the 1940’s when just before Christmas his Uncle lost over $8,000 on the way to make a deposit.  The regulators had just arrived at the Building and Loan and found the loss.  They promptly issued a warrant for George’s arrest.  Even though he was innocent George was so unwound by the actions of the regulators that he felt his life was at end.

Fast forward to 2012.  This time don’t look for a friendly angel to save a Jimmy Stewart style hero.  On December 4, 2009 the FDIC seized Buckhead Band and sold its assets to State Bank and Trust Company of Macon, Georgia which also assumed the liabilities of the Buckhead Bank.  On December 3, 2012, just one day … read the rest

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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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

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