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Small (and Middle)
is Beautiful
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M&A deals
under $1 billion stay on pace.
By Kevin Kipp
Bigger is not always better. And smaller is not always quicker.
According to Mergerstat, a mergers and acquisitions industry research
and analysis clearinghouse, deals of $1 billion and up are down.
“Only 13 mega-deals,” stated their March report, “worth a combined
$33.9 billion, have been announced in the first three months of
2002, compared to 25 in the fourth quarter of 2001, which were worth
a combined $83.2 billion, and 33 in the first quarter of 2001, which
were worth a combined $94.9 billion.”
Recalling Abraham Lincoln’s assessment of Gen. George McClellan,
that’s a bad case of the slo-o-ows.
But Doug Reynolds, managing director and group head of the M&A practice
at A. G. Edwards, says, “Our activity is at or near record levels,
due to the increase in our penetration into both energy and health
care.”
His focus is “the middle market, companies between $50 million and
$500 million in total value, including debt and equity.”
He’s seen a shift rather than a slowdown. “Since the technology
boom went bust, we’ve generally been involved in more energy transactions
and fewer tech transactions,” Reynolds says.
Meanwhile, over at Enterprise Business Advisors LLC, principal Bob
Guest says EBA’s clientele are “usually family-owned or closely
held companies with sales under $50 million.
“We love to work with companies with $250,000 to $25 million in
sales,” he says.
In his segment, “Capital dried up a little last year. For private
company transactions, it dries up faster and returns faster, and
we’re seeing it return.”
Activity, however, did not slow—even absent capital—“because we
had a full pipeline and privately held companies have more flexibility
than publicly traded companies in structuring purchase price arrangements:
seller take-back financing, equity swapping, consulting fees.”
Fair enough, but publicly traded companies use shares as currency.
On the seller’s side, that’s when Reynolds goes to work “to evaluate
the stock’s future value. When it’s used in an acquisition, it has
to be regarded separately from the normal trading values, because
it’s very seldom that a seller can liquidate the stock on the next
trading day. It’s all paper until it turns to cash.”
When his clients are buyers, Reynolds says his job is to “evaluate
the property, negotiate the best price possible and help them understand
the value, good or bad.” Reynolds says A.G. Edwards recently helped
TALX Corporation, a leading human resources, benefits and payroll
services provider, to purchase the St. Louis-based James E. Frick
Company (also an HR application service provider) for $80 million.
“We’ve done approximately $10 billion in transaction value in the
last six years,” Reynolds adds.
At Centric Group, capital markets are of limited concern.
“We finance all our acquisitions internally,” says Doug Albrecht,
president and CEO of the holding company.
He’s busy. “We’re looking at more opportunities, more deals than
a year ago,” he says. “It probably has to do with the economy. People
are more realistic about their businesses than a year or two ago.
They are more open to discussions with realistic valuations.”
Centric, he says “is essentially an acquirer. We look for start-ups
and turn-around situations ... small companies with $5 million to
$20 million in sales. We own and operate businesses. Our intention
is not to sell, but to create opportunity for our people, and long-term
profitability.”
Centric started in 1975 as part of Enterprise Leasing, and spun
independent in 1999. “Our first business had annual sales of $250,000.
That was an in-room coffee business we still have.”
In combination with five other businesses—including Mylar balloons,
athletic shoes and products for the “correctional industry”—Centric
Group finished last year with $360 million in sales.
While capital waxes and wanes more rapidly in Enterprise Business
Advisors’ niche than in the public markets, the purchase or sale
of a client’s company may take longer.
“Getting to the point of representing a company in M&A activity
is often the result of a relationship begun well in advance of the
time the owners make the decision to actually acquire or sell,”
Guest says.
Guest explained that he, Ira Potter and Tom Benson, partners in
the five-attorney firm Benson & Guest, own “Scrivener Holdings;
Scrivener and Enterprise Financial are the only two members of Enterprise
Business Advisors LLC, although we’ve set equity aside for future
principals.”
“There are essential differences in the strategic five- and 10-year
planning,” he says, “versus the steps to prepare to sell a business
in the next one to three years.”
Strategic considerations might include decisions to expand a product
in a market OR seek new product to complement that product OR seek
application for that product in other markets.
Centric companies, for instance, sell clear plastic electronics—cassette
and CD players—and brand-name toiletries through catalogs to prison
inmates. No other way you want Close-Up in stir.
Besides generating capital internally, Centric has had the wherewithal
to make their strategic decisions internally, as well.
On the other hand, Guest says privately- held business owners “are
usually focused on the pragmatic, the fundamentals of running a
business. Consultants, like Enterprise Business Advisors, aren’t
burdened with day-to-day responsibility for making the payroll or
keeping the lights on. Our purpose is to assist in positioning a
business so that it can control the choice of whether to sell or
buy. Brokering the business is the last step.”
Kevin Kipp runs Bubble Communications, a creative services and
community relations firm in St. Charles. |
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