| Publications
|
Vol. 8, No. 1, January 2010
EXCLUSIVE: 2010 M&A MIDDLE MARKET FORECAST
In the article below, “Positive Indicators Point to an Upbeat 2010 M&A Middle Market Forecast,” Douglas E. Rodgers FOCUS CEO describes a number of solid, objective reasons why the outlook for middle market merger, acquisition, and corporate sale activity for 2010 has promise.
Please feel free to forward this newsletter to friends, colleagues and networking contacts. (Go to www.focusbankers.com for newsletter archives.)
Active FOCUS Deals
Operating nationally and internationally, FOCUS currently is working with buy- and sell-side corporate clients, private equity groups, holding companies and late stage venture capital firms in the following areas:
- Advertising & Marketing
- Building Materials
- Business Consulting Services
- Business Process Outsourcing
- Call Center Services
- Distribution
- Education and Human Capital
- Electronics
- Energy
- Engineering
- Financial Services
- Government, Aerospace & Defense
- Healthcare & Life Sciences
- Information Technology
- Internet & Digital Information
- Manufacturing
- Media
- Parking Services
- Retail Franchising
- Semiconductor Equipment
- Telemarketing
- Warehouse Distribution
We have executed dozens of transactions in a range of market segments, but the same fundamentals apply across all of them. Our on-going transaction process provides us with up-to-the-minute market knowledge in these sectors that may be of corporate development interest to you.
Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-470-1973 or by fax to 202-785-9413.FOCUS Represents Verify Solutions in Acquisition by HMS Holdings
Acquisition of Healthcare Audit Company Marked 12th Deal for FOCUS in 2009
On December 31, 2009, substantially all of the assets of Verify Solutions were acquired by HMS Holdings Corp., a leader in coordination of benefits and program integrity services for government healthcare programs. FOCUS represented Verify Solutions in this transaction. Verify Solutions, an Atlanta-based firm, specializes in audits for large and midmarket employers seeking to better manage their healthcare costs by verifying the eligibility of their employees' dependents.
According to Jonathan Wilfong, FOCUS Regional Managing Partner and healthcare and life sciences team co-leader, “The acquisition allows HMS to provide services in the employer-based market with valuable new services that fit well with their mission to help control healthcare costs.” Read more...
Positive Indicators Point to an Upbeat 2010 M&A Middle Market Forecast
By Doug Rodgers, Chief Executive Officer and Managing Partner, FOCUS
Despite an unprecedented worldwide economic meltdown, FOCUS’ middle market merger, acquisition, divestiture and corporate finance business remained active in 2009. On average, the firm served over 40 clients in any given month, and closed 12 transactions during the year.
At the beginning of a new year, it is useful to look back and assess what happened in 2009, and then to look forward to define the trends we believe will make a difference in the middle market M&A industry in the coming year.
Learning from the Challenges of the Past
The period from the third quarter of 2008 through the first quarter of 2009 was reminiscent of the late 1980s when the US experienced “unthinkable” business failures that surprised and, to some extent, frightened everyone:
- Major financial institutions failed: Continental Illinois Bank, Seattle First, and Drexel Burnham Lambert, along with many regional banks and large savings and loan banks.
- The entire US steel industry collapsed, creating the “rustbelt” economy as a whole.
- Oil and oilfield services industries cratered as oil fell from $32 to $6 in 18 months.
In a similar pattern, the period from late 2008 through 2009 produced a new phrase—“too big to fail”—along with a surge of “improbable” business failures and serious setbacks:
- Major financial institutions failed (or required government bailouts)—Bear Stearns, Lehman Bros, AIG, Wachovia, and National City Bank plus 137 local and regional banks, according to Bankrate.com.
- The entire US automotive industry was at risk—General Motors and Chrysler visited bankruptcy court, along with dozens of auto parts suppliers.
Generally, throughout 2009, there was a widespread loss of confidence in our economic system and its regulators. Unemployment kept rising with virtually no end in sight, and consumers, business owners, and business leaders exhibited a general inability to place any bets on the future due to fear, uncertainty, and doubt. In the media, pundits gained recognition by selling bad news and a long, slow recovery.
The Good News—Prosperity Usually Follows Pain
The late 1980’s were both painful and scary. However, the time was followed by a long period of prosperity. Booms and economic blips generally are more fragile and fleeting than we perceive at the time, and recovery may be more likely and earlier than we expect. In my opinion, in 2010, the US economy and regulatory system will continue to recover from the events of 2008/9, recovering gradually, with a few speed bumps along the way, but faster than the pundits predict.
We do expect the coming economic expansion phase to be industry selective. Just as the recovery of the 1980s did not bring back lost jobs in the steel industry, this expansion will not bring back the lower skill jobs lost in our lower tech manufacturing sector. These jobs have been, and will continue to be going offshore, leaving a significant population of long term unemployed who may be destined for “under employment” unless they retrain for the world of the 20-teens.
| Unemployment Rates by Educational Achievement | |||
| Education (25 years & older) | Dec-07 | Nov-09 | Change Dec-07 vs. Nov-09 |
| Less Than High School | 7.5% | 15.0% | 7.5% |
| High School Graduate | 4.6% | 10.4% | 5.8% |
| Some College / Assoc. Degree | 3.7% | 9.0% | 5.3% |
| College Graduate & Above | 2.1% | 4.9% | 2.8% |
| Overall Unemployment Rate | 4.9% | 10.0% | 5.1% |
SOURCE: Tim Duy’s Fed Watch based on U.S. Department of Labor data.
The graph above shows the unemployment rates based off of educational achievement (for those over 25 years and older) at December 2007 (the start of the current recession) and November 2009. The lower the educational achievement, the higher the unemployment rate and the greater the increase in unemployment rates since December
Looking Back to Move Forward
In early 2009, FOCUS published a summary of middle market M&A trends for the coming year, believing that the middle market would remain a steady generator of transactions. We concluded that:
- Foreign investment was down but not completely out—with all of its issues, the US is still a compelling place to invest.
- Availability of financing would be key, and as companies became more realistic about their price and value expectations, it would create opportunities.
- Deals were out there if you know where to look with offerings from sectors perceived as less risky presenting the most M&A opportunities, including information technology; government, aerospace and defense; and business services.
- Retiring baby boomers would be selling out—seven million US companies are owned by individuals 44 to 62 years of age.
For the most part, these trends held true, but a number of other things impacted the 2009 M&A climate. The lack of available debt drove many financial buyers out of the market. However, strategic buyers (especially public companies) remained cautiously active, and surprisingly still paid strong prices for solid companies, particularly for targets that filled a strategic void in their offerings.
At FOCUS, each successive quarter of 2009 saw gradual improvement over the prior quarter, and new client intake returned to 2007 levels, as shown by graph below of "FOCUS New Client Intake (Trailing Six Months) | Calendar Year 2009"
Signs of 2010 M&A Middle Market Improvement
After waiting on the sidelines since the summer of 2008, sellers are returning to the market, as they accept reality and get on with life and business, providing a “pent up supply” of sellers.
Continued pressure on the US dollar and exchange rate encourages activity in the US M&A sector from offshore buyers as demonstrated by FOCUS’ recent engagement by European and Indian firms to source acquisitions in the US market.
Gradual improvement of debt markets will bring more buyers into the market in 2010. Financial buyers are beginning to return, but in smaller numbers. In addition, strategic buyers are becoming more active as the economic forecast continues to improve, according to a variety of objective sources:
Indicators point to improving economy: The Leading Economic Index has been on an uptrend for more than half a year and it is now slightly higher than its latest peak in July 2007. Improving financial conditions, labor market indicators, and housing permits have helped the LEI continue its gains…The indicators point to improvement in the new year. The US LEI increased for the eighth consecutive month. -- December 17, 2009 | The Conference Board Leading Economic Index™
More robust funding and planning: For the first time this year, a majority of executives expect consumer demand for their goods to rise in the near term. Respondents offer relatively positive views of the economy and say they can now make longer-term strategic plans. However, many expect investment decisions over the next two years to be affected by heightened exchange rate volatility. -- McKinsey Global Survey December 2009
Early forecasts of reduced DoD spending may have been exaggerated: According to insidedefense.com, the White House will increase the defense budget (not including overseas operations) by as much as $14 billion more than was originally slated for the 2011 budget, up to $556 billion. Significant opportunities for contractors will be available--total defense funding requested will be above $700 billion for the first time in history.
US Consumer Confidence Edges Higher in December 09: Consumer confidence rose for the second straight month as more Americans expect the U.S. economy to improve in 2010, The Conference Board reported on December 29, 2009. The index climbed to 52.9 in December from a revised 50.6 in November. According to Lynn Franco, research director at The Conference Board, "A more optimistic outlook for business and labor market conditions was the driving force behind the increase in the expectations index."
2010 Availability of Bank Credit for M&A Transactions
Currently, a limited number of banks are making loans for M&A. When available, senior debt is one to two times earnings before interest, taxes, depreciation, and amortization (EBITDA), and generally in the form of asset-based lending. Mezzanine debt providing total debt of two to three times EBITDA is generally available, and sometimes more available than senior debt. When debt is available, the due diligence process and the length of time required to get to closing may be very painful.
2010 Market Influence of Private Equity for M&A
During 2009, most private equity focused on resolving portfolio company issues. The M&A deals they did pursue tended to be add-ons to existing portfolio companies, and generally were done at bargain prices. In 2010, we expect private equity buyers to become more active as debt becomes more available, but at lower pricing multiples than the prior business cycle. Many private equity firms will develop new models that will work in the lower leverage market environment.
2010 M&A Business with Public Companies
In 2010, companies defined as “small cap” (valued from $300 million to $2 billion) will be sellers and “go private” candidates as the cost of being public continues to punish them. Many small caps may have problems with access to debt, from both public and private sources. However, perceived risk associated with their small size may keep their stock prices low, creating attractive targets for “mid-cap” ($2 to $10 billion) companies. Mid-cap companies will be least affected by the debt crunch, becoming more active M&A buyers, taking advantage of attractive pricing, and getting ready for the next expansion.
Best Business Sectors in 2010
Going forward in 2010, businesses with predictable and/or recurring revenues will be most active in M&A, including the following sectors:
- Energy: especially alternative energy, oil, gas, and related energy services
- Food and food service
- Government, aerospace, and defence
- Healthcare and life sciences
- Information technology
- Rail transportation and related products and services
- Security: physical and electronic
- Telecom and wireless
Looking Forward to a Robust 2010
As the economy continues to improve in 2010, we expect increased middle market merger, acquisition, and corporate sale activity, driven by acquirers utilizing M&A strategies both for growth and for strategic capability/customer acquisition. We also expect to see deals driven by lenders who are forcing borrowers to move their credit somewhere else or reduce the level of leverage on their balance sheets. In part, the continuing success of FOCUS reflects a special brand of client service that delivers a unique blend of investment banking and corporate development consulting services. We look forward to expanding opportunities and a prosperous new year.
Steve Grotewold Joins FOCUS’ Chicago Office as a Senior Advisor
Brings Experience in Telecommunications, Retail, and Information Technology
Steve Grotewold has joined FOCUS as a Senior Advisor in its Chicago, IL, office. According to Fred Floberg, Regional Managing Partner of FOCUS, “Steve has participated in numerous IPOs; venture capital and private equity led investments; fixed income offerings; and M&A transactions. He will bring tremendous experience to our client base.”
About Steve Grotewold
Mr. Grotewold has over 15 years of investment banking and institutional equity sales experience and demonstrated success in developing innovative solutions to complex needs by creating and delivering compelling value propositions for clients in the telecommunications, retail and information technology industries. He graduated from the University of Colorado with a degree in Finance.
FOCUS Industry Practice Groups
► Education & Human Capital -- www.focusbankers.com/education
► Energy -- www.focusbankers.com/energy
► General Middle Market Businesses
► Government, Aerospace & Defense - www.focusbankers.com/gad
► Healthcare & Life Sciences - www.focusbankers.com/health
► Information Technology -- www.focusbankers.com/technology
► Internet & Digital Information Group -- www.focusbankers.com/idi
- Active FOCUS Deals
- FOCUS Represents Verify Solutions in Acquisition by HMS Holdings
- Positive Indicators Point to an Upbeat 2010 M&A Middle Market Forecast by Doug Rodgers, Chief Executive Officer and Managing Partner, FOCUS
- Steve Grotewold Joins FOCUS’ Chicago Office as a Senior Advisor
- FOCUS Industry Practice Groups