In Depleted Economy, Smaller Deals Dominate M&A
While multi-billion dollar deals like AT&T’s planned T-Mobile acquisition dominate the headlines, most M&A action these days is actually elsewhere — in the middle market.
Mid-market companies — loosely defined as companies with annual revenues between $50 million and $1 billion — are attracting M&A activity because they’re small enough to grow and generally don’t present anti-trust issues. Plus, in the current credit environment, smaller deals are easier to finance.
“Whenever you see volatile markets and uncertainty, debt financing sources start to dry up, and its always large-cap deals that go away first. The middle market is less volatile,” says Leo Greenberg, M&A lawyer of Kirkland & Ellis, which specializes in middle market deals.
The numbers tell the story. According to data compiled by Dealogic, deals worth under $1 billion represent 96 percent of the total number of U.S. M&A deals this year.
Dealmakers have also seen mid-market M&A volume increase since the recession began. In 2007, 25 percent of deal value went to the mid-market. Last year, it grew to 36 percent of market share.
U.S. Targeted M&A
|by year||$1bn||deals||under $1bn||deals|
|Announced||Value $bn||#||Value $bn||#|
|2011 YTD *||559.12||112||244.37||3,110|
As volume rises, competition follows, with private equity investors and growth-hungry companies both hunting for the next hot acquisition.
“Mid-market private equity has been robust. But private equity faces competition from strategic buyers, who may not need any financing," adds Greenberg. "And they can offer higher purchase prices for [corporate] synergies based on the combination. So it's possible [for private equity bids] to get beat both on price and financing certainty.”
Most PE companies require loans to do deals, which adds to the cost, while corporate buyers may have cash on the balance sheet available for dealmaking. Furthermore, companies expecting to combine, and thus benefit from the higher profit/cost cutting that may emerge, can bid up the purchase price.
But not all hopeful acquirers are equally well-placed for the deal book. Corporate buyers say their most active peers are those with strong balance sheets, and earnings. Companies with high price-to-earnings ratios are able to acquire smaller companies with a lower valuation without diluting their own.
Ultimately, there are two main reasons companies buy other companies: combine to cost-cut, or combine to grow. Cost cutting usually means eliminating duplicate functions, which traditionally turns into worker layoffs. Yet combining companies is also a strategic, rapid way to expand business offerings and increase revenues.
Not surprisingly, the strength of a company’s balance sheet has a great deal to do with its M&A activity. The low interest rate environment doesn't hurt either.
“Buyers still see good deals because of the Great Recession. With decent prices in the middle market, it’s still a good time to be a buyer,” says Kirkland’s Greenberg.
And there’s no shortage of sellers. With a backdrop of volatile equity markets and a troubled economy, they see safety in numbers. Given the benefits of flying below the radar in terms of size and access to credit, the middle market may continue to attract dealmakers.
Below are six mid-market companies who have gotten in the game. The common theme between them is a combine-to-grow strategy. Their deals have helped these businesses expand from a product, service, and even geographic perspective. The bottom line is that these companies are flush with cash, investing in their businesses, planning to hire, and some are still looking to acquire — mainly because they have room to grow.
Blue Earth, Industry – Energy Efficiency
The Nevada-based Blue Earth acquired Castrovilla, Inc., which manufactures, sells, and installs commercial refrigeration, and Xnergy, Inc., a heating ventilation and air-condition, HVAC, provider — for $15.5 million. Blue Earth projects revenue resulting from the acquisitions to go from today’s $21 million to $35 million in 2012.
“Our business strategy is to grow through acquisitions and internal growth. We acquired both companies with Blue Earth shares rather than cash, since their desire is to grow shareholder value,” says Johnny Thomas, CEO of Blue Earth.
Medquist Holdings, Industry – Business Support Services
Merger with M*Modal, a clinical document technology provider, for $130 million. Following the merger, Medquist expects to increase revenue from 2010 levels of $417 million to $444 million by year end 2011. The company is headquartered in New Jersey.
“This was a strategic fit with our goal of delivering innovative solutions to fully capture and facilitate the flow of clinical information,” said Vern Davenport, CEO of MedQuist Holdings.
FundTech,Industry – Software
Headquartered in New Jersey, Fundtech was acquired by PE firm GTCR, which has orchestrated Fundtech's merger with BankServ. The merger combines BankServ's $60 million in revenue, and FundTech's $160 million.
“Its about getting into new markets, and bringing two different models together. We are a license model. Bankserv is a software service model. [The merger] is very valuable because our customers are looking for fewer vendors that have broader product lines,” says FundTech’s CEO, Reuven Ben Menachem.
Kindred Health,Industry – Healthcare Providers
Acquisition of Professional HealthCare Services and RehabCare Group. Kindred, headquartered in Kentucky, claims the acquisitions will create the biggest post-acute health care services company in the U.S., with operations in 46 states.
“We were about $700 million equity cap company prior to the acquisition of RehabCare. We were competitors in two major business lines: long-term acute care hospitals and contract/rehab therapy. The Professional Healthcare Services acquisition, acquired for $51 million, was about adding services,” says Kindred CFO Richard Lechliter.
IGate Corp,Industry – Computer Services
Headquartered in California, IGate acquired India’s Patni Computer Systems for $1.22 billion, bidding more than its own market value to boost sales in the world’s largest technology-outsourcing country.
“iGATE’s acquisition of Patni Computers was largely done for scale and growth. Clients were skeptical about our revenue and employee size as potential bottlenecks to deliver large projects. We hence did the acquisition to be able to get into larger engagements with Fortune 500 companies,” says CEO Phaneesh Murthy.
Terex Corp,Industry – Commercial Vehicles & Trucks
Headquartered in Connecticut, Terex acquired German company Demag Cranes for approximately $1.15 billion, expanding Terex's product offering into port equipment.
"The acquisition will be accretive to us, so it didn’t dilute our valuation. It was an all-cash deal. Half came from cash on balance sheet; the other half came from bank debt that we raised. It helped, the debt being cheap," says CEO Ron Defeo.