Private Company M&A Transactions
This Market is Alive and Well!
By Dave Kennedy and Neil Blair
The market for private company mergers and acquisitions transactions in the mid-market* continues to show strength.
Transactions are proceeding at sound multiples, often with multiple bidders. For the successful entrepreneur facing succession questions, or public companies looking to trim non-core operations, the timing may be right to go-to-market.
What is Driving Deal Activity?
While the Canadian economy’s large commodity sector has recently been impacted by volatility in global commodity prices the core industrial and consumer sector remains comparatively stable. As the global recovery continues, companies in this sector are able to present a track record of revenue and profitability growth as well as an ability to manage costs to mitigate the impact of the strong U.S. dollar and manage profitability through the downturn. Many of these companies are private, and based on the strong transaction activity KPMG in Canada is seeing in its client base, many are considering a sale. Outlined below are a number of factors driving value.
Public Companies Seeking Growth
In a relatively stagnant Canadian economy, organic growth in traditional industries is hard to come by. Nobody is excited by a two per cent growth outlook, especially institutional investors and the analyst community. So, public company CEOs are aggressively looking for growth through acquisition. Finding a complementary private company to acquire, immediately boosting growth numbers, adding quality people and customers, and then looking for revenue and cost synergies to drive value can be a great story for the public company buyer. And if successful, add momentum to the stock price.
Additionally, corporations are sitting on significant cash piles. According to Moody’s Investor Service, U.S. non-financial companies held a record $1.45 trillion in cash at the end of 2012, which is up 10 per cent from 2011. This increase has been largely driven by modest growth, tight cost controls and positive credit markets. Investors are demanding a return on these cash balances which is driving demand for acquisitions.
Public company share valuations are trading in a respectable range with public markets in the U.S recently hitting new all time highs. This combination of factors is driving public companies to pay higher multiples – up to and sometimes even exceeding their own multiples, for quality private companies which will add to the growth story.
Private Equity Sitting on Funds
Successful private companies are attracting a lot of attention from private equity (PE) funds. Many PE funds have more capital than they can productively invest. Private equity has become a very meaningful component of the M&A landscape over the last decade with big pension funds , stepping up their direct investing activities alongside the long-time Canadian independent players. U.S.-based funds are also very active in Canada, as the operating environment is complementary, and they find our deal environment more attractive. The PE landscape is very broad, with funds interested in virtually every size of deal, industry sector or deal scenario, (majority, minority, full buyout, troubled company, etc.) There are funds which specialize in pure industrial and automotive manufacturers, and where they have existing businesses in the space, can add real value through customer connections, technical expertise and strong directors.
Many large companies have resulted from growth through numerous acquisitions. There is always a case for greater scale. The price of everything from raw inputs, such as steel and energy, through to the interest rate on a bank loan, can be driven down for the large-scale purchaser. This means the industry consolidator will likely expect to make more profit on a given revenue base than the stand-alone operator. They can be aggressive in the acquisition marketplace, but decrease their effective acquisition multiple by increasing profitability post-closing.
Tax Rules More User-Friendly
Tax rules have evolved so that in the right circumstances, an asset sale can be as attractive as a share sale to the vendor. Assets are generally much more attractive to the purchaser, and worth more from a tax viewpoint, allowing the buyer and seller to share the benefit – win-win.
Supply of Companies for Sale
The demographic drum continues to beat with the baby boomer generation moving into retirement years. Some business owners look to ‘keep it in the family’ by passing ownership down to the next generation. Many, however, prefer to monetize their investment and crystallize financial and estate plans all at once.
Corporate owners also add to the supply of businesses for sale by disposing of non-core operations in order to free up capital and management attention to focus on the core business.
But, while there are many companies which will be sold, many owners continue to hold back thinking ‘better times’ lie ahead. As a result, the market is actually fairly quiet with a lot of capital chasing too few deals. Many in the buyer community (public companies, lawyers and PE funds) are complaining about a lack of quality deals in the market.
So What Does All This Mean?
It could be a good time to sell. The bidding is brisk with public companies and PE funds providing multiple bids in most sale processes. Bank financing is available within reasonable limits to help the acquirer fund the purchase. Despite the positive factors, the supply of companies available for purchase is not meeting the demand. Economics 101 – high demand, low supply equals high pricing environment.
KPMG in Canada has recently been in the market with a highly specialized industrial company which provides instrumentation and measurement devices to large-scale global manufacturers. In this case, the strongest interest was from strategic parties, and the ultimate acquirer was a NYSE-listed company with a very complementary technical product range and global customer base. This buyer had all the right features – focus on growth, access to capital and ability to recognize synergies – to put them in the winning bid position. Our private company shareholders achieved their liquidity objectives at a very attractive price and the buyer picked up a highly complementary business, with an associated uptick in their own stock price.
For those waiting for “better times,” these may be the best of times.
Dave Kennedy and Neil Blair are Managing Directors with KPMG Corporate Finance Inc.
They focus on sell-side advisory services *Mid-market in Canada is defined by KPMG Corporate Finance as transactions with an enterprise value between $20 million and $250 million.