Category Archives: M&A

Experts discuss “Extraordinary Acquirers” for consistently great M&A


What makes for an “extraordinary” acquirer? What explains the inconsistent returns of private equity funds? Four dealmakers weigh in on the results of M&A research.

Vintage question > A study in the Journal of Financial Economics titles “Extraordinary Acquirers” indicated that certain companies have consistently great M&A outcomes, whereas it is more difficult to identify specific aspects of deals that make them great. The study argues that qualities of these companies, such as organizational knowledge and integration practices, account for these exceptional M&A returns. What do you think, are there more “extraordinary acquirers” than there are “extraordinary deals”?

Rob Goldstein > My general view is there are more extraordinary acquirers than there are extraordinary deals. I do both public M&A and private equity, and my experience over the last 21 years is that the best-prepared acquirers in both arenas are the most likely to have success. I’ve been very impressed by certain clients who are extraordinarily diligent when it comes to learning about and understanding an industry, a product line, and a geographic sector before they even start zeroing in on specific targets.

At the same time, I don’t think there are hard and fast rules to this. I have seen plenty of acquirers who were not “extraordinary” or who weren’t the most prepared but got fortunate with finding a terrific asset and made a great return. There are also plenty of great acquirers out there who have bought lemons. Nobody bats 1.000. And it’s the same for the best private equity firms – I’ve represented some very smart private equity clients, and even they don’t bat 1.000.

As far as what makes an “extraordinary acquirer,” I think there can be overwhelming advantages to having a large organization in which you can draw upon the resources of industry experts and financial experts who bring a wealth of knowledge and experience to the table. When you are better prepared, know the market better, know what your objectives are, and in most cases adhere to rigid pricing characteristics, these acquirers are more likely to be successful than those who aren’t as disciplined and diligent. I have one client I worked with that had an incredible stable of talent to analyze all angles of a deal, and if they didn’t have some capability in-house, they would not hesitate to go to a market leader in the industry and get further information to validate their investment thesis.

One other thing I’ll mention is that success can depend on an acquirer’s ability to learn about complex industries – or stay out of them altogether. Healthcare is a major focus for us at McDermott Will & Emery, as well as a very active market generally for both strategics and private equity. And healthcare is a sector where you really have to know what you’re doing to succeed in M&A. I’ve had clients who were not experienced in the space who I think have been hesitant to get into it because it requires a tremendous amount of industry knowledge. On the flip side, I’ve seen a number of instances where people who are heavily into the healthcare market and understand the industry, the trends, and the regulatory side of things may well be willing to pay a higher multiple than they otherwise would because of their specialized knowledge.

Jim Rosener > As a legal advisor, my role pretty much ends at the closing of a deal, but I think the differentiator between a good transaction and a bad transaction starts the day after it closes. So in that way, I would say that post-closing execution is crucial. At private equity funds, that means having clear integration plans, cost control strategies, and a great understanding of what the next steps are on both standalone and tuck-in acquisitions. They need to have a really good understanding of all of the things that make a particular company run well.

That said, you have to buy something with reasonably good bones, such that you know you can do the work afterwards to make it great. And that’s why you need strong evaluation of a transaction, good modeling, and to some degree a negotiation of the allocation of risks that is done in creating the purchase agreement. These elements determine in part whether the deal you’ve done has the potential to be extraordinary. So there’s obviously a lot of work that goes into the evaluation of a target and the due diligence regarding a target. But ultimately, I think the ability to turn a target into a great acquisition depends most on the post-closing execution.

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Michael Meyers > Truly extraordinary transactions are ultimately created by extraordinary acquirers in the post-transaction, and are further enhanced through cross-selling synergies of a product, process or service. I believe that the combination of proactive and visionary leadership in the C-suite, merged with the experience and expertise from different functional areas within a company, creates potent opportunities and successful transaction results. I’d also say that while financial metrics and process are important, I believe that highly skilled BD professionals can match these variables with gap analysis with respect to their process and integration skills. Experienced and thoughtful business development leadership considers organizational variables as a key component of their due diligence process, which increases the probability that integration will result in the anticipated accretion or exceed it.

One confounding variable relates to the legal limitations that are often present with respect to integration activities. As a result of this factor, the potential for integration needs to be well understood in advance. Ultimately, the vital integration drivers need to be identified and considered by the acquirer’s senior leadership and business development team. And carrying out integration in a multi-disciplinary way – across various functional areas of an organization — is critical. It entails a great deal more than a visionary CEO with a mandate from the top down.

Academic research into M&A can reveal some useful insights — along with a few surprises

The nuts and bolts of M&A can get lost amid discussions of hot sectors and trending regions. But academic researchers are increasingly digging into what it means to be an effective acquirer. What are they finding?

In 2016, deal activity fell from the all-time peak of 2015, when low interest rates and stable economic growth combined to cause an M&A bonanza. And yet, if you ask dealmakers, they will tell you that competition for assets continues to rise. In June 2016, the average price-to-EBITDA multiple had grown to 11.07x according to Bloomberg, the highest level since at least 2007, indicating that acquirers have had to pay more for their purchases.

In this hyper-competitive environment, insights into M&A strategy can be more valuable than ever. And such insights can be found in some unusual places. One potential fount of knowledge is the academic research community, which has become increasingly interested in the world of M&A as transaction activity has mushroomed in recent decades.

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Researchers have been probing areas such as “performance persistence” of acquirers (both corporate and private equity); how to evaluate the payoff of using different kinds of M&A advisors; and the relative advantages of buying early or late in an economic cycle. The Cass Business School’s M&A Research Centre at City, University of London and other academic institutions are making deals a popular subject of study.

The findings obtained by these researchers can provide valuable insights to M&A professionals. But do they match up with the real-world experience of deal advisors? What do dealmakers think about the academics’ results? In order to find out, we spoke with four industry veterans about three specific research results, as well as with a professor who co-wrote one of the papers. We hope that you enjoy the conversation, and find a few useful insights along the way.

2016 deals v. dollars for M&A

As reported in Mergermarket’s Global and Regional M&A: H1 2016 report, US dealmaking within the first half of 2016 has rebalanced with history – juxtaposed to 2015’s record-breaking values. M&A activity totaled US$ 562.7bn across 2,242 transactions, a 31.5% drop in value and decrease in volume by 342 transactions from H1 2015.

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For Vintage, a deal’s dollar value is a moot point: we treat all deals at par, as the services we supply are agnostic. To be exact, a 50 million dollar acquisition demands the same level of virtual data room security as a one billion dollar acquisition. Likewise with the S-4 creation and filing. Accuracy is de rigueur.

Top dealmakers dollars v. deal count

Each week, we track that week’s underwriters (view here). It’s interesting to compare the top twenty dealmakers total (H1) dollar volume with the number of individual deals. As you see, the numbers don’t necessarily align.

Firm Deal volume ranking Dollar volume ranking
Goldman Sachs 1 1
JP Morgan 2 7
Morgan Stanley 3 2
Barclays 4 5
Evercore Partners 5 6
Bank of America Merrill Lynch 6 3
Jefferies 7 17
Citi 8 4
Lazard 9 9
Credit Suisse 10 13
RBC Capital Markets 11 10
Rothschild 12 20
Deutsche Bank 13 8
UBS Investment Bank 14 14
Wells Fargo Securities 15 11
Centerview Partners 16 16
Guggenheim Partners 17 12
Qatalyst Group 18 15
China International Capital 19 19
Allen & Company 20 18

Regardless of deal or dollar size, all M&A follow the same diligence guidelines. Directional in scope, the 5 Stages of M&A Quick Sheet (Foundation, Preparation, Examination, Negotiation and Completion) offer guideposts for the working groups on both sides of the deal.

Download the quick sheet here. 

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Experts for corporate exit execution

As of last week, in 2016, only 55 companies have rung the IPO bell on Wall Street (or in Times Square). This is 45%, YOY, of 2015 and 30%, YOY, of 2014. The money raised is the same percentages.

So, with such dramatic reductions in S-1 filings, what has kept our Capital Markets Operations Team so busy? Mergers.

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2016’s domestic M&A, although down one-fourth from last years’ tremendous activity, has kept our transactions pros working all three shifts.** SEC form S-4 can be as complicated as an IPO’s S-1 and, absolutely, the production precision needed is equal.

Prior the S-4, our team is onboarding and training the appropriate working groups to manage their virtual data room (VIEW DEMO VIDEO) – assuring the right content gets into the right folders and that the wrongs eyes don’t have access. Security and administrative permissioning is paramount.

Why are companies exiting via M&A rather than an IPO? The Wall Street Journal states several factors, including the soft market performance of many IPOs, buyers’ appetite for great targets and, notably, the underlying patience of Private Equity.

From the WSJ:

“Trader Corp., an online automotive marketplace owned by private-equity firm Apax Partners, was days away from publicly unveiling its IPO plans in early July when it announced a deal to sell itself to Thoma Bravo LLC for about $1.2 billion, according to several people close to the deal. The move surprised many of the company’s IPO bankers, who expected the company to fetch a higher valuation in a public offering, according to people familiar with the matter.”

Regardless of a company’s individual exit strategy, we’re pleased so many are allowing us to help them execute their plan.


**NOTE: By operating three shifts – typesetting, EDGARizing, production – we mitigate rush charges to clients. We KNOW filings are always on deadline. It’s the nature of the business. Charging “rush” charges rarely makes sense.

Dealmakers and executives are optimistic for quality (over quantity) growth, says Vintage M&A panel

Sorry. I cannot type quickly enough to document all of the economic solutions to save the planet reveled during our expert panel at the Mergermarket Life Sciences and Healthcare Forum 2016.

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Economic solutions to save the planet? Yes, our panel was THAT smart.

  • Jeffrey Schwartz, Principal, Bain Capital
  • Peter van der Goes, Managing Director, Goldman Sachs
  • Arek Kurkciyan, Managing Director, Morgan Stanley
  • Fred Hassan, Partner and Managing Director, Warburg Pincus
  • Trevor Loe, Vice President, Vintage

Overall, the panel is optimistic for QUALITY (ie well vetted) deals in the biotech and biopharma sectors as we propel into Q2.

Some of my notes:

  • Dealmakers will benefit from the reassuring factors that helped drive 2015 M&A to its highest levels, although smaller transactions and new sectors may see the most advancement in 2016
  • Acquirers will remain steadfast on their to target for positive market reactions, but now with better discipline regarding deal terms and judgement in reaction to investors demonstrating more diligence when countering deal announcements
  • There is an tangible boardroom confidence that is helping to drive acquisitions
  • Deals will be driven by competitive factors as corporations look for opportunities to strengthen their growth profile
  • Five years of stable growth has proven to chief executives that the post-recession recovery isn’t fleeting, and armed with a massive cash reserve, corporate leaders have the means and confidence to pursue acquisitions or to optimize their portfolio through corporate clarity actions
  • $6 trillion in cash “leftover” from 2015 provides dealmakers the ammunition to make acquisitions for improving earnings
  • CEOS need to “spend the cash” on deals before they feel pressure to return it to shareholders
  • Private equity funds may play a more significant role in the year as capital available for investment purposes is at a new peak
  • Cross-border transactions will continue to provide a significant source of value creation
  • Activist investors will continue to seek expansion

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We brought the power!

Significance, materiality and the newly monikered “non-deal 8-K”

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Wednesday’s blog post on 8-Ks for M&A brought up an interesting discussion about materiality. Unlike IR’s “non-deal 8-k,” an 8-K for M&A can be determined by quantitative math-based triggers called significance tests.

M&A 8-Ks can be defined by the significance testing described in Rule 3-05 of Regulation S-X. Rather than “being material,” the results are referred to as “significant” and the end math affects the pro forma 8-K.

Investment test = purchase price ÷ acquirer total assets

Asset test = target total assets ÷ acquirer total assets

Income test = target pre-tax income ÷ acquirer pre=tax income

When the significance results of any of these tests is greater than 20%, pro forma financial statements will generally be required to be filed via an 8-K/A mentioned yesterday. For a deep dive on this, Sherman & Sterling is recommended reading.

“Non-deal 8-K” material triggered events include:

  • Entering into amending or terminating a material contract
  • Material dispositions
  • The disclosure of quarterly or annual financial results
  • Material financing arrangements
  • The acceleration of material financing obligations
  • Material exit or disposal activities (bankruptcy or receivership)
  • Delisting or noncompliance with a listing rule
  • Unregistered sales of the company’s equity securities
  • A change in accountants
  • A change in auditors
  • A change in compensation of certain officers
  • A determination that the company’s previously issued financial statements should no longer be relied upon (restatement)
  • Changes in the board of directors
  • The appointment, retirement, resignation or termination of certain executive officers, or the entry into or amendment of a material compensatory arrangement with such officers
  • Charter and bylaw amendments
  • Amendments to or waivers of the company’s code of ethics
  • Voting results of shareholders’ meetings
  • Material debt incurred
  • Changes in control of the company

With some exceptions, 8-K are generally required to be filed with or furnished to the SEC within four business days after the occurrence of the event to be disclosed. RegFD defines the outer boundary for “prompt disclosure” to mean as soon as reasonably practical, but within 24 hours or by the start of the next day’s trading on the NYSE, regardless of where or whether the company’s stock is traded.

PS: a “non-deal 8-K” is not really a thing. It simply sounded more IR-ish than saying a “normal 8-K” in this blog post. 

 

How many 8-Ks are needed for the (average) M&A?

First off, not all acquisitions require an 8-K. That’s a different discussion on event materiality and their triggers. That advice is wisely served by securities lawyers who have a solid background in understanding the SEC rules and defining market-practice materiality. Firms like EY can advise on the intricacies of pro forma and Reg S-X.  Phew.

Below is a chart of the physical 8-K requirements an acquiring issuer needs to calendar. This is what we do.

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All this would follow the S-4 filing, which also has caveats to materiality as well as if shares are actually exchanged. An S-4 is only required when the equity shares of the acquirer is being used as the “currency” (i.e. exchange offer) and only then if the target company’s shares are also publicly held. S-4s are not required for cash deals or most deals with privately held targets.

Global influences may redefine “testing the waters” for 2016

testing
Storm clouds in overseas markets are dampening a heightened optimism for IPO pipelines in developed markets, and “testing the waters” bring different imagery to mind that THIS blog illustrated.  While investor confidence will ultimately determine the pace and growth of IPO activity in 2016, a recent EY report –  Global IPO Trends – points to some key factors:

  • Low interest rates and quantitative easing by the European Central Bank and Japan mean that liquidity remains abundant
  • Lower oil prices are a boost to economic growth
  • The lower gold price suggests market confidence despite the increased volatility

Certain sectors may experience rougher conditions in the near term, as PwC capital markets partner Howard Friedman and Bloomberg’s Alex Barinka warn of a U.S. market selloff affecting biotech IPOs, for instance. Overall, however, an uptick in U.S. high-frequency indicators such as employment, retail sales and exports, paired with low oil prices, an expanding GDP, and healthy consumer spending all provide a positive backdrop for IPO confidence. As 2015 drew to an end, the Fed finally provided insight into its plans for interest rates, raising rates in December for the first time in nearly a decade.

Although the liftoff has begun, its rate hike path is expected to be slow and gradual, which should remove some level of uncertainty from markets. Additionally, analysis by law firm Morrison Foerster points to the JOBS Act, and its “test the waters” provisions, as a further incentive for U.S. companies to explore an IPO option, especially those with smaller revenues.

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Support from Vintage no matter the path

Companies themselves are investigating financing options beyond an IPO — like M&As – and exploring all potential exchanges in an effort to optimize strategic options, which is a prevalent trend among tech companies. A continuation of the market volatility seen during the fall of 2015 would impact the length of time an IPO window is open, requiring that companies looking to float have a compelling equity story in place – one well-suited to their regional presence and their industry – and the ability to jump into the market swiftly if necessary.

Overall, there is a level of optimism for the 2016 IPO market, driven by increased confidence among investors and market players and the ability for companies to file confidentially under the JOBS Act.

The 5 Stages of M&A looks at both sides of the deal

Having just five stages is a bit oversimplified, however working with young, inexperienced organizations – many Emerging Growth Companies –  we’ve found that having a 30,000 foot view of a deal has proved useful.

The five stages:

  1. Foundation
  2. Preparation
  3. Examination
  4. Negotiation
  5. Completion

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Certainly, the law firms have the street-level “to-do” list however this guides their corporate working group to think in five deadlined-structured buckets.

As you read on the one-page guide (CLICK HERE) both sides of the M&A transaction have tasks at each stage.

 

M&A: the blend of negotiation and due diligence

The negotiation and due diligence processes provide acquirers with one of the first times they can really get to know a company — both across the boardroom table and via its financials. How should they ensure they make the most of this opportunity?

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Digging deeper

Meeting a potential target for the first time offers acquirers their first real glimpse into the heart of the company. On top of that, taking the first steps down the due diligence road provides the chance to see what a potential acquisition is really made of. Preparing for these steps is crucial.

Marshall McKissack, head of M&A at investment bank Stephens Inc., points out that both negotiation and due diligence are intertwined. “I really think [a negotiation] starts with the due diligence process and determining where companies see risk”, he says. “After you figure out where clients see issues, you can negotiate to protect their interests in the various transaction documents. Secondly, the market constantly evolves around terms and other conditions — having a sense of where the market is can be very beneficial in order to move a deal forward.”

Prepping a deal

Away from this, preparation for a deal can consist of several things, including forward planning, prioritizing, thinking from the other side and calmness.

For Brian Moriarty, former vice president at Hewlett- Packard, thinking about what the businesses would be like combined is necessary even at this early stage, given that reaching a negotiation implies an interest on both sides.

“You need to create a business integration plan, even at this stage, that is approved and supported,” he says. “There is no point negotiating unless you know you want to buy the target. This all comes before you even talk about price.”

On top of this, buyers also need to center negotiation efforts around what interested them enough to get around the negotiating table in the first place. “You need to crystallize what the key drivers of the transaction are,” says Matthew Gemello, partner at Baker & McKenzie. “The majority of your negotiating efforts and resources should focus strategically on getting to an optimal result on those particular drivers.”

One often overlooked point is putting yourself in the shoes of the target, and indeed the other stakeholders in the deal. “In our last deal we learned about the behavior of the bankers, as well as the seller’s behavior in prior deals,” says Jeff Drazan, managing partner at Bertram Capital. “You also need to make sure that you’re asking a lot of questions.”

“You also need to bear in mind the target’s mind frame,” adds Moriarty. “If they are private, for instance, why are they selling? What are their price expectations? This can help to structure an offer that you make.”

Finally, adds Karim Motani, corporate development and strategy director for 1800flowers.com, it is important to be measured in your reactions. “Our last deal was an auction, and as a strategic, we’re not involved in as many auction processes as private equity firms, so we hired a banker to negotiate on our behalf,” he says. “Using an intermediary created space between ourselves and the target; it gave us time to be considered in our responses. I believe this helped us to secure the deal at the right price.”

Smooth things over

Yet even with the best preparation in the world, acquiring negotiators need to accept that there will be some issues that both parties will wrangle over. “There are always sticking points,” says McKissack. “That’s why they call it a negotiation.”

Indeed, just because an opposing party isn’t keen on some parts of an acquisition does not mean they don’t want to complete the transaction. It is more important to understand their concerns about the proposal. “If you’re open to more creative solutions, the best thing to ask is why they are taking that position,” says Moriarty. “Often times, it’s not that they are dead against the deal, it is just that they have concerns about certain aspects. If there is a problem, you have to be able to identify a creative solution around it, and asking is the first step to that.”

Creativity is something that is particularly acute the technology industry, and is much more noticeable since the sector’s rise in recent years. “The thorny negotiating points are not really surprising, given there’s such a narrow playing field of issues that come up. What has changed, however – particularly evident in Silicon Valley and with technology-based plays — is a greater desire to be flexible to solve problems,” says Gemello. “With M&A players in the more traditional industries, there is a greater tendency to have two sides entrenched on their issues and wedded to their ‘standard’ way of dealing.”

For Drazan, it’s also important that acquirers reiterate a solid business case for the deal. “You have to hit them straight with the facts,” he says. “Your behavior should be consistent as well. And your case must have a really solid rationale.”

On top of this, acquiring negotiators shouldn’t forget that identifying potential trade-offs could help to bring the two sides closer together. “We first try to weigh up both sides’ sticking points and then look at the deal terms,” says Motani. “From that, we can look at possible trade-offs. In a recent deal, one of the sticking points we had surrounded break-up fees, escrow accounts and warranties. And if you’re pushed, you have to be willing to make concessions.”

Credit where it’s due

Away from the boardroom, the due diligence process has become another avenue for companies, as well as thoroughly investigating their counterparts, to become more trusting of each other.

“These days, sellers often have conventions in place in order to expedite the due diligence process. Bigger companies, for instance, will put forth a quality of earnings report,” says Motani. “It helps to get the parties more comfortable with each other while speeding up the process as well.”

In terms of the process, due diligence has already been sped up exponentially over the last few decades. “It’s certainly moved — on a detail basis — almost exclusively online,” says McKissack. “A lot of it is done in online data rooms in conjunction with lots of phone calls, compared with 10 to 15 years ago when a lot of it was done with paper on site, which was quite laborious.”

It isn’t just the process that has changed, however. For Moriarty, due diligence has become a much more forward-thinking exercise. “When I started, due diligence was about identifying liabilities you did not know about. This, of course, still happens,” he says. Now, however, the process is much more focused on the future, on things such as integration plans, business plans and confirming assumptions.”

Gemello agrees, adding that companies are becoming increasingly practical, especially in the midst of a crossborder M&A boom. “One big shift has been having buyers who are increasingly comfortable enough with their risk management profile, and aren’t afraid to do business as the locals do – not across the board, but there is a big commercial willingness to do that,” he says. “It is that it’s a very interesting overlay of commercial and strategic practicality.”

Diligent value

While what consists of due diligence may have changed, what takes precedence in the process hasn’t. “It’s biased to whatever drives value,” says Moriarty. “It’s also biased towards finding liabilities as well, of course, and both are critical. However, unless you do diligence and understand the former, there’s no need for the latter.”

McKissack agrees. “Financial due diligence, accounting due diligence and quality of earnings — these are the basis of the foundation of value. Legal, risk and contract reviews are also important. But they all drive value at the end of the day, whether it’s in dollars and cents or by protecting yourself from unnecessary risk.”

From other perspectives, however, certain issues are more important than others at the moment. “The hottest button in the world right now is compliance,” Gemello says. “Unknowingly buying your way into a compliance problem can destroy the underlying value of the acquisition, putting aside the commercial and reputational impact on a buyer and its own business. We are spending more time with clients at earlier stages of their deals, as they strive to better understand the local regulatory climate(s) in which their targets are operating. It’s been far and away the primary focus.”

For Drazan, focusing on the product and the seller’s customers takes precedent. “Customer references are the single most important component of our diligence,” he says. “What choices did the customer have before buying, did the product or service live up to the expectation, and how has the company behaved in the aftermath of the sale? Getting the answers to those questions is crucial. Management references come next after that hurdle.”

Motani adds that, as well as ensuring that the lawful side of things are taken care of, due diligence is also vital to understanding the competitive landscape. “The legal and contract side takes precedent. We don’t want to have any legal liabilities postpurchase,” he says. “We also want to adjust our competitive positioning. This means looking at the competitive nature of the market, as well as other macro-level issues we’re up against.”

Download the full interviews here.

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