Larger Players Squeeze Mid Market PE Firms

As reported in the Wall Street Journal, it is a difficult time to be a mid-market private-equity firm. Larger competitors, a seller's market and high valuations are combining to create a difficult atmosphere for smaller firms. “We have been getting blown out of the water on bids. Everything is going to auction, that wasn’t the case 10, even five years ago.” said Stratton Heath, partner at Oak Hill Capital Partners, this past Friday. Traditionally, PE firms could come in and make a bid that was persuasive enough for a company to not need to consider an auction process, but sellers are becoming more and more selective.  This also could lead to buyer's remorse; if you're paying top dollar to win a bidding war for a middle market firm, you'd better be right. Read the entire article here.

Middle Market M&A: Ready to Increase?

Fox business reports that mid-sized businesses are poised to grow this year according to data compiled by the National Center for the Middle Market.  The middle market M&A conditions index climbed to 57.9. Any reading over 50 indicates an expansion in M&A business. As reported in CCCA's February Middle Market M&A Report, deal makers reported a spike in early stage deal flow, which also bodes well for mid-market M&A activity. Read the entire article here.

Buffett Hints at More Mega Deals, Admits Failures

Warren Buffett's annual letters to Berkshire shareholders are somewhat legendary in the investing world. He leverages quaint anecdotes to simplify an amazing wealth of knowledge about fundamental investing in a way that is easy to consume for the average investor. This year, Buffett covered a variety of topics, but two key points included hinting at additional mega deals and admitting a misstep in the energy sector. As reported in DealBook and stated by Buffett in the letter, in order to keep growing at a consistent pace, Berkshire will need to consistently make large, successful investments. Last year, Berkshire did just that with Heinz and NV Energy. Buffett said in the letter that, “with the Heinz purchase... we created a partnership template that may be used by Berkshire in future acquisitions of size.” This most likely referred to a structure where Mr. Buffett partnered on the massive acquisition with 3G Capital, an investment firm led by Mr. Buffett’s good friend Jorge Paulo Lemann.  Additionally, Berkshire’s energy subsidiary, MidAmerican Energy, bought NV Energy for $5.6 billion last year and most expect acquisitions for MidAmerican to continue. A strong stock market and improving earnings combined to help Berkshire reach record profits of $19.5 billion in 2013, which represents a 32% increase on 2012.  However, all was not rosy for the Omaha Oracle, as he admitted in the letter that Berkshire had taken an $873 million loss on the $2 billion in debt that had been provided to Texas energy company Energy Future Holdings. Mr. Buffett said in the letter that he anticipated the company would go bankrupt this year unless natural gas prices rose contrary to energy market expectations.  In typical Buffett fashion, he acknowledged that he had not consulted his longtime investment partner, Charles T. Munger, before taking on the debt and said in the letter, “Next time I’ll call Charlie." Read the Annual Letter to Berkshire Hathaway shareholders here.

Blackrock: Political Polarization Creating Lack of Consumer Confidence

Pretty regularly here at the CC Capital Advisors blog, we ask the question: "Why have the markets failed to rebound as fundamentals improve, equity markets rally and an abundance of capital sits idle in a low income environment?" As we wrote previously, healthcare had a tough time in 2013 due to the Affordable Care Act casting a shadow of uncertainty over the market. Russ Koesterich, Chief Investment Strategist at Blackrock recently released a paper that postulates that political uncertainty extends beyond healthcare to tax code, regulatory issues and more. Russ explains that the budget deal has removed the risk of another government shutdown, but continued uncertainty about the ACA and partisan gridlock are making consumers and businesses alike uneasy. According to the figure below, party polarization is at its worst point in fifty years. This graph measures the difference in voting patterns between the Democrat and Republican members of Congress. As you can see, the gap is widening, not narrowing.   So, what does this mean for the wider deal market? First, the uncertainty of the political situation is most likely impacting more than just the health care industry. When a government is unable to govern properly, there is a resulting lack of confidence in that market. This is generally seen in emerging markets, where a sovereign government may make investment difficult or risky, but can also take place in developed countries. Secondly, it will be interesting to see just how good the fundamentals and market opportunities need to be to overcome this lack of faith in the political system. At some point, one would expect deal makers to take advantage of opportunities even if they lack faith in the broader political situation; this will only happen when the reward outweighs the associated risk. Finally, Russ concludes that if there are any sort of "surprises" of the positive sort from Washington, we could see pent up deal demand released into the market place. Of course, that would require a miracle in the form of Congress getting their act together. Read the entire report from Blackrock here.

Actavis to Acquire Forest Laboratories for $25 Billion

Today, Actavis announced that they have entered into a definitive agreement to acquire Forest Laboratories. Forest is based in New York, NY, but has Midwest operations in Earth City, MO. The purchase price of $25 billion represents a 25% premium over Forest's stock price. The merger is expected to generate double digit accretion in 2015 and 2016, with approximately $1 billion in synergies to be realized within the first three years. If successfully completed, the merger would combine a generic juggernaut in Actavis with a leading name brand producer in Forest. If the transaction closes, the combined entity would have projected revenues of more than $15 billion in 2015, with strong free cash flows in excess of $4 billion. As 2014 rolls on, several interesting deals are coming to light. The Actavis-Forest merger announcement comes on the heels of a potential business combination of Comcast and Time Warner, which is estimated at ~$45 billion in value. Hopefully, these large deals will spur the lower middle and middle markets to follow suit, although the glut of megadeals in 2013 did not seem to have that impact. Read the full press release from Actavis here.

2013 PE Deal Flow Review

February 13, 2014 11:32 by Clayton Reeves in   //  Tags: , , , , , , ,   //   Comments (0)
McGladrey recently released reports on PE activity in four sectors: business products & services, healthcare, information technology and consumer products. Business Products & Services: The first half of 2013 represented one of the worst periods of the last several years for B2B deal making. The first two quarters suffered a hangover effect from the rush to close deals at the end of 2012, and took the first six months of 2013 to recover. While Q3 and Q4 were better, they couldn't make up for the lack of performance over the first half of the year. This is surprising, as 2012 had the most PE exits in B2B in the last ten years. Many expected those exits to spur additional investments, but instead PE mostly sat on their cash. 2014 is expected to be better. Healthcare: Once a rock in an uncertain sea of M&A, not even healthcare could escape unscathed from 2013. Deal flow in the healthcare industry contracted for the first time in 2013 since 2009. Although the number of deals consummated was still historically high at 280, capital invested declined for the second straight year. Industry experts blame a variety of factors on the hesitation to invest in healthcare, foremost amongst those reasons being the affordable care act. Once there is more certainty around the evolving regulations, investors are expected to have more confidence in evaluating acquisitions. Information Technology: PE deal makers broke a streak of three straight years of increased deal making in IT, but capital invested soared 55% to $86.5 billion. IT companies continue to perform well as technology continues to make its presence known in professional and personal applications. McGladrey expects 2014 to be slightly better. Consumer Products: M&A in the B2C industry followed general industry trends, declining 14 percent from 2012 to 2013. Capital invested was the highest it has been since 2008, but consumer products companies continue to struggle as confidence continues to improve gradually. Q4 was difficult for consumer products companies, as holiday sales increased revenues at the expense of margins. McGladrey believes the pipeline is stocked with deals compared to the same time last year, since Q4 2013 did not see the same rush to close as Q4 2012 did. Access the full reports here.

Merge or Die: Are Mergers the New Growth Catalyst in a Sluggish Economy?

As 2014 begins to take shape, many in the M&A industry are worried about a repeat of 2013, when conditions seemed ripe for deal making but those deals failed to execute.  Other than several mega deals, 2013 was largely disappointing. For context, world wide M&A was $4.27 trillion in 2007 on more than 40,000 transactions. Only a year later, 2008, we saw that amount fall to $1.9 trillion. Reuters estimates that private equity firms ended 2013 with $1.074 trillion in dry powder. Bain Capital has postulated that there is $300 trillion in capital laying dormant around the world that could be used for M&A. Capital is also still cheap, as interest rates remain relatively low. So, with all of these things pointing towards more deals being executed, when will it begin? In a recent article from Institutional Investor, Robert Teitelman postulates that there could be a "new normal" in terms of how companies grow. In a low growth global environment, he says, acquisitions are one of the only ways to increase the size of your business. US GDP was a healthy 3.2% in Q4 2013 after being 4.1% in Q3, but other parts of the world are not showing that same growth. Most expected M&A activity to be back to pre-crisis levels by now, considering the health of the overall stock market and US economy. However, it has only rebounded to mid 2000s levels. Chris Ruggeri is a principal in Deloitte’s financial advisory unit and leading manager of the firm’s M&A practice. She summed up the lack of deals by saying, “We’ve been sort of stuck. Confidence fuels growth. And growth fuels M&A. To get growth, you need confidence. It’s not there.”  Let's hope the confidence returns and deal makers start pulling the trigger, or 2014 could be a repeat of 2013.

KPMG: Deal Activity in 2014 Expected to Improve

KPMG recently released the results of a survey given to over 1,000 deal makers with regards to 2014 M&A prospects. In short, deal activity is expected to improve in 2014. However, 2013 was also heralded by many as the year that would see M&A really take off and it didn't quite come to fruition.  Several mega-deals notwithstanding, 2013 fell short of expectations. So what makes 2014 different?   According to the survey, deal makers felt relatively positive about the environment and 63% of respondents said they planned to be acquirers in 2014. Most of this optimism was the result of large cash reserves, favorable/available credit terms, improving equity markets and improved overall confidence. However, as one investment banker put it, deals should most likely increase "because next year can't possibly be as bad as this year." This is where the questions really start. Many of the economic drivers present at the beginning of 2014 were also present in 2013. Private equity has piles of dry powder, corporate balance sheets are stocked with cash and money is cheap to borrow. However, all of these factors were also present in 2013. Instead of an increase in overall activity, we saw an increase in PE exits. So why would activity suddenly increase? According to the results below, most respondents expected targets to "become available." From our experience in the market, there are plenty of motivated buyers, but quality companies wanting to sell have been scarce. If this situation changes in 2014, the activity will most likely be very high. Some companies that we've spoken to have been anxious to eclipse pre-recession levels before having a liquidity event. Others are optimistic about the market in general, and want to leverage their growth opportunities utilizing cheap borrowed capital. The latter of those reasons won't change in 2014, but if some companies reach their targeted EBITDA numbers, sales could increase.   Click here to read the full report from KPMG. Hopefully, the conclusions drawn from their survey will come to fruition and 2014 will be a "solid" year.

December 13th, 2013: Recent Bank & Thrift M&A Market

December 17, 2013 12:56 by Clayton Reeves in Banking, M&A  //  Tags: , , , , ,   //   Comments (0)
Click here to download the weekly report. CC Capital Advisors, a Kansas City-based investment banking group, provides a variety of advisory services to financial institutions including buyside and sellside mergers and acquisitions, branch acquisitions and divestitures, capital and strategic planning. CC Capital Advisors stands ready to deliver the expert advice you need with the personal attention and integrity you deserve. For more information, contact Shelley Reed, Managing Director, at (816) 968-1511 or sreed@cccapitaladvisors.com.

China & It's Deal Appetite

December 12, 2012 11:35 by Bill Conway in Capital Markets, Economy, Financing, M&A  //  Tags: , ,   //   Comments (0)
The combination of access to capital and global opportunities is going to be fun to watch as China companies, funds and investors target US entities. Many foreign companies are willing to consider Chinese partners, but the fact that four-fifths of the Chinese acquirers are state-owned enterprises, may prove challenging in getting deals done. Dealmakers suggest China companies pursue minority interests as a means of satisfying their buying urge. [More]

Past Posts