Monday, October 25, 2010

Merger and acquisition activity stirs among Northeast Ohio companies

By DAN SHINGLER, Crains's Cleveland Business, 4:30 am, October 25, 2010
A look around Northeast Ohio's industrial landscape makes one thing quickly apparent: It's a great time to sell a company. And if local investment bankers, private equity managers and manufacturers themselves are any indication, the pace of mergers and acquisitions is only going to continue, if not accelerate, at least through the end of this year. Driving the deals is a combination of coming tax changes, newly available cash, rising company valuations and a group of sellers that's been kept out of the market for two years. “There are some really fine companies out there for sale,” said investment banker Ralph Della Ratta, managing director of Western Reserve Partners in Cleveland. A few of them already have been bought. Fairmount Minerals of Chardon is cited by some in the M&A arena as the first large local company to take advantage of the new environment. In August, its owners sold a controlling stake to a New York private equity firm, American Securities Capital Partners. The sum was not disclosed, but the deal involved at least $775 million in debt that observers said probably could not have been raised in 2009. Since then, the deals have come with increasing frequency and, as was the case with Fairmount, they've involved big names in the region's industrial economy. Solon-based Keithley Instruments, which employs 550, announced Sept. 29 that Danaher Corp. was buying the maker of test and measurement instruments for $300 million. Cleveland-based Hawk Corp. announced Oct. 15 that Carlisle Cos. planned to purchase the maker of friction products for brakes and clutches for $413 million. And just last week, Hexpol AB of Sweden said it would buy Solon-based Excel Polymers for $212.5 million. Proving their mettle
These companies might be attractive to buyers not in spite of the recession, but because of it. Any company doing well and earning a decent profit today has been stress-tested, said Hawk president Chris DiSantis, and that's an attractive quality to potential buyers. “Look at Hawk,” he said. “It doesn't get much worse for us than 2009.” In 2009, Hawk's revenues were down 35% from 2008, Mr. DeSantis said, but it still managed a profit before rebounding this year. Aside from the large companies being bought here, other local entities are involved in acquisitions, though the deals they're cutting are often in far-flung lands and do not garner much local attention. Private equity firms such as Linsalata Capital Partners in Mayfield Heights and Riverside Co. in Cleveland busily have added companies to their portfolios. Meanwhile, manufacturers such as specialty chemical producer Omnova Solutions in Fairlawn and Akron-based plastics resins supplier A. Schulman Inc. have made strategic acquisitions of other companies in their industries to expand their offerings and markets. As for when the blizzard of activity will end, there's some disagreement. But most think the pace will keep up through the end of this year and some think it will continue even thereafter. “I think you'll see more activity in 2011 than you are seeing even now in 2010,” said Steve Rosen, co-chief executive officer of Resilience Capital Partners in Beachwood. Confluence of influences
There are several factors making the deal flurry possible. For one, companies are profitable again after the downturn of 2008-2009. The rebound in their bottom lines means when companies are priced for sale, generally using some multiple of their earnings, the price once again is high enough that sellers are interested. Also, sellers are trying to avoid an increase in the federal capital gains tax rate, set to rise next year to 20% from 15% and widely expected to increase down the line. And then there's the impact of private equity firms, such as Mr. Rosen's Resilience Capital. Typically, these firms raise money from investors with a plan to invest the money by buying private companies, holding and improving them for five to seven years, and then selling them at a profit. During the financial crisis and recession, those sales could not be made, even though the investments had matured. So private equity firms have a pent-up need to divest some of their holdings, Mr. Rosen said. Finally, would-be buyers again are able to buy. Funds and financial buyers have access to credit again and many companies that survived the downturn amassed large war chests of cash in the process. “What you've got going on in the market right now is a combination of higher supply and higher demand,” Mr. DiSantis said. A rush to year end
It's all keeping Western Reserve Partners' Mr. Della Ratta busy. “We're involved in 22 deals right now, but not all of them are in Ohio,” he said. “I think we've got two or three more that we're about to sign up.” Mr. Della Ratta said he thinks local companies are the buyer in deals as often as they are the seller, and that international deals and strategic acquisitions of similar companies are the prevailing trends among company mergers. Among sellers, private equity firms are the most active right now, he said. That jibes with what Mr. Rosen said he's experiencing. “We're in the process of selling three companies now,” Mr. Rosen said during a telephone interview from the airport last Tuesday, Oct. 19, before he left for his next deal. But some think the spate of sales will last only through the end of this year, before tapering off or even declining in 2011. Sellers know the capital gains tax is going to increase on Jan. 1, which could have the same accelerating effect on corporate acquisitions that the expiration of the homebuyers tax credit had last spring on residential real estate sales, predicts Eric Bacon, senior managing director of Linsalata Capital. Deal flow won't die, but ...
Mr. Bacon declined comment on a recent Reuters report that Linsalata is preparing to sell Transtar Industries, a distributor of transmission parts based in Walton Hills. Reuters said Transtar is on the block for about $700 million. Generally, though, Mr. Bacon said sellers are rushing to get their deals done before the end of this year and, after that, there will not be as much urgency to sell. “I'm working on some deals now and they were saying, "If you want to be a player, you have to close by year end,'” Mr. Bacon said. Mr. Bacon said his firm's deal flow picked up in July and August and since has slowed a bit. He's one who thinks the wheeling and dealing will slow soon, but not come to a virtual stop as it did during the financial crisis and recession. Deal flow, he said, is significantly greater than it has been in the last two years. That's a trend Mr. Bacon said will continue through 2011, even if the pace does slow from its current rapidity. Mr. DiSantis agrees, saying, “I wouldn't be surprised to see a weak January and February in the deal market. Anyone who could compress their schedule pulled everything they could into December.”

Friday, October 22, 2010

The Buyout Gospel According to Rubenstein

Tom Fairless, of Financial News, reports:
David Rubenstein, co-founder and traveling salesman for Carlyle Group, is fond of firing off lists of emerging trends at industry conferences. His latest predictions were made at a speech at the SuperReturn Middle East conference in Abu Dhabi this week.
1) The private-equity industry is shrinking. Deal and fund sizes will be smaller, leverage will remain below its peak and there will be fewer club deals. Large investors will give money to fewer firms. The jury is still out on whether the megadeals and funds from the boom years will yield strong returns.
2) But investor interest is returning. They have concluded that private equity withstood the downturn better than almost any asset class, partly because of its illiquidity, which protected investors from panic sales.
3) Return expectations have fallen. Investors have become more realistic.
4) Investors also have more clout and will demand and receive greater transparency from buyout firms and a better alignment of interests, particularly on management fees. Guidelines issued by the Institutional Limited Partners Association, a trade body for investors in private equity, will have a considerable impact.
5) Big investors will demand preferential treatment. They will seek lower fees and higher hurdle rates.
6) Governments want to get more involved. They will seek to protect stakeholders with new regulations such as the US Volcker Rule, which will deter big banks from sponsoring private equity funds.
7) The industry has gone mainstream. Buyout firms and their investors have deepened relations with government, media, consumer and environmental groups, rather than focusing exclusively on returns.
8) Brand value is increasing. Firms will start to advertise to build their brand names and aid fund-raising.
9) Global reach is increasingly important….
10) …particularly exposure to emerging markets. China is in a league of its own among emerging markets and will attract enormous amount of private-equity capital, while India and Brazil are not far behind. The Middle East and Africa will become increasingly attractive.

Megadeals Go Missing From M&A Rebound as Companies Avoid Risk

By Alex Sherman and Zachary R. Mider -
Oct 22, 2010 12:01 AM ET
This year’s rebound in mergers and acquisitions has one conspicuously large absence: the megadeal.
Announced takeovers of more than $25 billion are set to make up the smallest percentage of total deal volume in any year since 2002, according to data compiled by Bloomberg. BHP Billiton Ltd.’s offer for Potash Corp. of Saskatchewan Inc. is the only bid this year valued at more than $30 billion, and there have been only two others valued at more than $25 billion, including net debt.
Companies are spending stockpiled cash on smaller competitors that complement their business rather than pursuing transformational takeovers. While 73 percent of transactions this year have been less than $5 billion, the purchases have put dealmaking on pace to surpass last year’s $1.78 trillion in volume and may portend the return of more sizeable acquisitions.
“The drop-off in the very large transactions is masking a significant pickup in $1 billion to $5 billion deals,” said Gary Posternack, head of M&A for the Americas at Barclays Plc, in an interview. “Companies are looking at transactions that are lower risk, closer to the core business of the acquirer, and perceived as being synergistic.”
The biggest deals so far this year account for just 5.8 percent of total volume, while acquisitions from $1 billion to $5 billion have risen to 34 percent, the highest in at least a decade, according to Bloomberg data. Transactions less than $1 billion account for 39 percent of the total, a six-year high, the data show.
Cash Available
Many conditions for a comeback in bigger deals are in place. The 1,000 largest non-financial companies have almost $3 trillion on their balance sheets, and financing rates are near record lows. The Federal Reserve’s October Beige Book, released Oct. 20, noted that M&A lending picked up in some areas.
There is pent-up demand for smaller deals even if banks are unwilling to commit tens of billions of dollars in financing, according to Hiter Harris, managing director and co-founder of Harris Williams Co. in Richmond, Virginia, whose firm specializes in advising on transactions valued at less than $1 billion.
“The middle-market deal flow is a six- to nine-month leading indicator for the rest of the market and the economy,” said Harris, who expects more deals will top $25 billion in 2011.
Banks are willing to lend to creditworthy buyers, as evidenced by the $45 billion of loans Melbourne-based BHP Billiton obtained for its Potash bid. Potash rejected the $40 billion offer, excluding debt, as too low.
‘Story of Ego’
Other potential targets may also be balking at offers because they anticipate their valuations will rise, according to Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York.
“This is a story of ego,” said Shah. “Boards are saying, ’I’m a $25 billion company, I’m not the prey, I’m a survivor, I’m the predator.’”
Buyers don’t appear to be looking for transformational opportunities, according to Richard Hurowitz, chairman and chief executive officer at Octavian Advisors LP, who invests in risk arbitrage. Instead, they are actively seeking strategic deals with more “reasonable” valuations, he said.
International Business Machines Corp.’s pending takeover of Netezza Corp. for $1.67 billion and Unilever’s agreement to buy Alberto-Culver Co. for $3.7 billion are two examples of same- industry, all-cash deals announced since the beginning of September.
Biggest Deals
While deals between $5 billion and $25 billion have increased from last year, both in total number and in overall value, they are still below levels from 2005 to 2008, data show.
None of the three biggest deals this year have involved a U.S. company. The country’s unemployment rate is hovering at 9.6 percent and consumer confidence unexpectedly fell in October.
Aside from BHP, the other announced offers topping $25 billion this year are GDF Suez SA’s $25.8 billion bid for London-based International Power Plc and America Movil SAB’s $25.7 billion proposed purchase of Carso Global Telecom SAB. Both of those companies are controlled by billionaire Carlos Slim.
The compiled data include net debt and exclude terminated deals, such as this year’s $35.5 billion bid by London-based Prudential Plc to buy Hong Kong-based AIA Group Ltd.
A potential change in capital gains tax rates has also fueled smaller acquisitions, said Harris. President Barack Obama has proposed raising long-term capital-gain rates to 20 percent from 15 percent for individuals who earn more than $200,000 and couples that earn more than $250,000.
“The possible change in rates is a significant event for middle-market companies, but if you’re a $25 billion company, you’re probably not as focused on the changes,” Harris said.
To contact the reporter on this story: Alex Sherman in New York at; Zachary R. Mider in New York at

Tuesday, October 19, 2010

What Recent Deals May Say About M.&A.’s Future

NYT DealBook, October 18, 2010, The Deal Professor, Steven M. Davidoff:
Where is the market for mergers and acquisitions going? After a summer of prominent deal announcements and increased M.&A. activity, investment bankers are speculating that the market will grow 15 percent to 30 percent in the next year. Bankers tend to talk their book, but this time it looks like the market is likely to support a modest upswing, albeit one not as big as the bankers hope for.
While many chief executives continue to remain wary of M.&A. transactions and the risk they entail, credit today is relatively easy and cheap, providing real incentives to make asset purchases. But whether or not the upturn is coming, the more interesting question is what this market will look like over the next year.
Go to the Deal Professor from DealBook »

Monday, October 18, 2010

Headaches Can Crop Up After Private Deals Close, M&A Study Finds

Amy Miller, The Recorder, 10-18-2010:
It's not easy to sell a privately held tech company these days. But the real headaches sometimes begin after the deal closes, according to a new study by Shareholder Representative Service, which manages the post-closing process in M&A transactions for its clients.
The post-closing period can be "long, risky, and complex," the study found. Claims related to deals can be filed over an extended period of time, even after closing. Meanwhile, shareholders are increasingly demanding that certain conditions, such as performance goals, be met before the privately held company can cash out.
The study looked at more than 100 transactions that Shareholder Representative Services handled recently in which the terms were not publicly reported. The value of the deals, which involved primarily software, electronics, and telecommunications companies, ranged from about $25 million to $200 million.
According to the study, nearly two thirds of the deals allowed for possible changes to the final purchase price after closing.
Two thirds of the deals also set aside a portion of the merger consideration in escrow for more than a year, and more than half of the transactions had escrows that exceeded 10 percent of the deal value.
Even when the escrow period closes, consideration is still at risk. About 95 percent of the deals also had "carve outs," or exceptions, built into their terms that allowed claims against the transaction to be brought well after the deal closed.
And a quarter of the deals had "earnout," or performance hurdles, attached to them before shareholders could fully reap the full value of a sale. Such agreements are most common in life science or pharmaceutical deals, said SRS managing director Paul Koenig.
For example, the full value of deal to buy a pharmaceutical company might not be realized unless a particular drug gets approved by the Food and Drug Administration.
"Sometimes those are extremely complicated," Koenig said.
But in general, buyers across all industries have more leverage than in the past because the IPO window has closed for a lot of start-up companies. In the Silicon Valley tech world, it means that big companies like Google, Hewlett-Packard and Oracle can dictate the terms of a deal, and the target companies have little choice but to accept them.
Even if the economy improves and it becomes easier for start ups to go public, the trend isn't likely to change, Koenig said.
"My guess is these complicated structures are here to stay," he said. "Deals are going to remain more complicated than they were 10 to 15 years ago."

Friday, October 15, 2010

V.C. Funding Drops in 3Q, Mainly in Clean-Tech

October 15, 2010, 7:15 am — Updated: 7:15 am -->
Venture capitalists poured less money into U.S. start-ups in the third quarter and split this among more companies, signaling that investors are trying to be more economical with their funds, Reuters reported.
According to a study set to be released Friday, start-up investments declined 7 percent to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009. A total of 780 start-ups received funding during the quarter — 9 percent more than the 716 companies that took slices of the investment pie last year.
The study, which was conducted by PriceWaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters, said that much of the decline stemmed from a drop in large investments in clean technology. Funding in clean-tech start-ups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately. It fell every quarter last year compared with the previous year, but has been climbing this year — until the third quarter.
Despite the third-quarter funding drop, though, funding for the full year still looks to be higher than it was in 2009. So far this year, venture capitalists have invested $16.7 billion in 2,497 start-ups; in all of 2009, $18.3 billion was funneled into 2,916 start-ups.
Go to Article from The Associated Press via The New York Times »

Tuesday, October 12, 2010

Is Deal Making Back in a Groove?

WSJ Deal Journal, Oct. 12, 2010:
By Shira Ovide
That at least is one takeaway from the prognosticators at Standard & Poor’s.
S&P Valuation and Risk Strategies said since 1998, fourth-quarter deal volume has risen an average of nearly 15% from the prior three months. Capital IQ reported $185 billion of deals announced in the third quarter. S&P said that assuming the average historical trend for October to December, the deal volume for the fourth quarter could “reasonably exceed” $211 billion.
Already the fourth quarter has seen a string of solid, if not blockbuster, deals. GE made a $3 billion bid for energy infrastructure firm Dresser, Gymboree is slated to be bought for $1.8 billion by Bain Capital, and today Pfizer announced a $3.6 billion offer, or $14.25 a share, for King Pharmaceuticals.
At $211 billion, the fourth quarter would be the most active period for deal making this year. Of course, that could be said to be damning with faint praise, as that would be down about 11% from the fourth quarter of 2009 and well below the $447 billion of deals announced in the fourth quarter of 2006, the year with the most active fourth quarter for deals, according to S&P’s analysis of Capital IQ data.
To be sure, past performance isn’t predictive of future results. “A shock to the system could put this forecast on hold,” S&P director Richard Peterson cautioned. But please forgive battered investment houses for hoping S&P is right.