M&A Without Buying the Company

By Mike Myatt, Chief Strategy Officer, N2growth

Most people tend to look at acquisitions from a rather myopic and traditional M&A perspective: making a strategic or synergistic purchase of an operating entity on an accretive basis. However restricting your view of acquisitions to operating companies is like playing a football game with only one play in your playbook. The truth is that acquisitions aren’t just about buying companies, they’re about value creation. In the text that follows I’ll share 8 ways to acquire value without having to also buy the brain damage that comes along with purchasing the entire enterprise.  

Understand the Play
With the right perspective, combined with knowing where to look, acquisitions can be extremely profitable while not being all that complicated.  There’s an old saying that “one man’s garbage is another man’s treasure” and nowhere is this more applicable than in the world of acquisitions. Here’s the thing – the best acquisitions are made when the buyer sees value where the seller doesn’t. If your value-added acquisition targets can be found in things the seller has little interest in, there is a spectacular acquisition in the making. Want to see a transaction come together quickly? Allow someone to monetize on something they either view as an asset of little value, or better yet, something they view as a liability.

Acquiring Value Not Companies
I want you to think about acquisitions from this perspective – anything that has been well engineered or properly developed has also been heavily invested in. This often creates both tangible & intangible worth, even if someone else doesn’t currently recognize it or benefit from it. The simple truth is that it’s often much easier to acquire an asset than create one from scratch. This can occur because you’re leveraging the investments of time, money and efforts made by someone else who now doesn’t value them in the same fashion they once did. By stripping the target out as a stand alone asset you acquire the leverage of sunk investments which will often include significant good will, mindshare, marketshare and any number of other benefits in a much less complicated transaction. 

While the text above discusses acquisition from the buy-side perspective, the logic should not be lost upon potential sell-side players. Those companies that have developed assets that they no longer value, or companies who are maintain unwanted liabilities should look into a valuation and consider a possible divestiture of said assets and liabilities that don’t fit into the company’s operating strategy going forward (where it makes economic sense to do so).

The following list contains eight representative examples of acquisitions that can be made without having to purchase the entire enterprise: 

  1. Talent: It is not at all uncommon for a company to undervalue, under compensate, or otherwise take its people for granted. An “at risk” employee for the current employer is an opportunity for the prospective employer. Even when a company highly values its talent there is no assurance that said talent feels the same way about its employer. The right talent acquisition can have a rather substantial and immediate impact on things like revenue, culture, positioning, brand, etc. Smart employers are always on the lookout for great talent. They also go to great lengths to guard against the unnecessary loss of their own talent. There is also a great opportunity for adding talent leverage via outsourcing, crowdsourcing, and other contract opportunities that provide cost savings and scale.
  2. Intellectual Property: Whether it be formal IP such as patents, trademarks, copyrights, etc., or informal efforts produced via someone else’s R&D or innovation efforts, companies often start projects that they don’t finish. This can create an opportunity for the astute buyer. I have personally witnessed companies who have hundreds of pieces of intellectual property just sitting around collecting dust. I have also observed numerous transactions over the years that have been good for both buyer and seller. This occurred in instances where the seller was able to monetize on theoretical value, and the buyer was able to convert the acquired IP into real value.  
  3. Cash Flow: Many companies are in need of generating cash and simply cannot afford to wait for payments over time, and are therefore willing to sell contracts, notes, deeds, loans, leases, etc. In today’s market you can buy anything from a single note to an entire portfolio of debt (both performing and non-performing) at deep discounts. While this is not a market that everyone should dive into, there is substantial opportunity for exceptional returns for the right buyer.   
  4. Markets: Whether you purchase distribution, licensing, or other contractual rights, you can enter into market segments, verticals, or geographies via intelligent acquisitions. Often times these acquisitions can provide you some form of exclusivity or other form of competitive advantage.
  5. Customers: Some of the most interesting acquisitions I’ve been a part of have resulted in the purchase of customer contracts. A contract is a commodity that has both tangible and intangible value (for the right buyer). Contracts can often times be purchased, assigned or otherwise transferred. All companies have contracts they don’t value at the level they once did. Many companies face changes in circumstances that make it difficult for them to continue to fulfill on their contractual obligations. Other companies are in need of cash and are willing to sell certain contracts as a financing vehicle. In other circumstances, you’ll find business that you can fulfill better, faster, and more cost effectively than the current provider creating an opportunity for arbitrage or even subcontracting.
  6. Equipment: An unwanted piece of equipment owned by someone else can result in allowing you to enter a new market, increase your production capacity, or provide you the ability to win business from a potential customer whom you could not previously serve. Whether you purchase equipment directly from the owner, via auction, from a bank, receiver, trustee or other custodian, you can add significant value to your business through the intelligent purchase of equipment.
  7. Brands: Real brands have real value…in fact recent studies confirm what many of us have known for quite some time, which is that brand equity can become one of the largest assets on a companies balance sheet and ultimately lead to increased valuations. That said, many companies have made substantial investments into brands that no longer fit into their operating strategy, or that for other reasons they no longer value to the extent they once did. It’s much easier to enter a market, or expand marketshare by acquiring a brand than creating one from scratch. Just because the current brand owner doesn’t value their brand equity, doesn’t mean that you shouldn’t.
  8. Real Estate:  While there are certainly exceptions to every rule, we are in the midst of the worst global real estate market in recent history. Valuations are down worldwide, so if you’re looking to expand manufacturing or distribution facilities now is the right time to acquire real estate. If you want to expand sales operations, but don’t want to acquire a building, fantastic sub-lease opportunities are available in virtually every market at deep discounts. Many companies are upside-down in their real estate holdings and are looking for someone to stop the bleeding for them. Likewise, the special assets and real estate owned groups within banks and financial institutions have a dearth of property that they are trying to liquidate. It is not uncommon to be able to purchase a property for less than the face value of the current debt owed.  

Bottom line - you don’t have to buy an entire operating entity to incorporate an acquistions plan into your overarching business strategy. While the value of a component may not be as great as the overall value of the entity, this doesn’t mean that a component still doesn’t have significant value.

Thoughts?

Deal Transparency

By Mike Myatt, Chief Strategy Officer, N2growth

The Power of AuctionsIf deal transparency isn’t at the forefront of your M&A strategy, you might want to stop and do a bit of thinking. In some ways the world of corporate M&A is much the same as it was 20 years ago, and in other ways the events of the last few weeks have changed the landscape dramatically. The Bailout, the current capital and credit crunch, and the outcome of recent litigation have taken and already inefficient market and made it even more so. In today’s post I’ll share my observations as to what might be the single biggest trend that will influence how transactions will be closed in today’s changing marketplace…deal transparency.

Over the years I have participated in the M&A process from virtually every angle possible. I have been a principal of a company being acquired, as well as a principal of a company conducting acquisitions. I have also served as an executive working on both acquisitions and dispositions teams, and as a professional advisor representing both the buy-side and the sell-side. I’ve been around long enough to remember the days when proprietary transactions (deals that didn’t get shopped) were the norm. However with recent events, exclusive transactions will be all but dead unless you’re very comfortable painting a bulls-eye on your chest.

In a recent decision in Delaware, the court found independent directors of a target company personally liable for what the court called a breech of fiduciary obligations by holding a “passive” sale. If officers and directors on the sell-side cannot entertain exclusive deals without incurring personal risk, guess what…they won’t do it. Combine this with what will most certainly be an environment of increased regulatory oversight, and enhanced investor scrutiny, and you’ll quickly arrive at the same conclusion that I have…Most deals will have to become very transparent in order for the sell-side to be comfortable in moving forward.  

Moving forward it is my opinion that virtually all deals will get shopped (advantage sell-side). The environment today simply reflects a bias toward auctions when looking to sell or finance your firm. The spoils simply go to the highest bidder on a price basis, or the highest bidder on a value add basis, but in either case (preferably a combination of the two) it usually boils to the most aggressive bid winning the transaction. As an advisor who often represents the sell-side, I am particularly fond of this proliferating trend.

This frenzied world of deal auctions is a function of supply and demand, but as I mentioned above, it is also a function of fiduciary obligation in maximizing shareholder value. In fact, “Go-Shop” provisions are included in most of today’s agreements with potential suitors. “Stand-Still” provisions are becoming a thing of the past as they set-up the seller for third party allegations that the seller failed to fulfill their fiduciary responsibilities by agreeing to sell the company at a “low-ball’ price, and/or by signing off on measures designed to dissuade competing bidders. The offset for buyers to induce them into agreeing to a go-shop provision is the inclusion of a provision to pay a break-up fee should the seller unwind the deal due to a better competing offer.

Let me point out that savvy sellers know the difference between cattle-calls or shot-gunning a deal vs. inviting a small group of the right buyers to the table in a controlled bid process. The fastest way to taint your deal in the market is to not be discerning or discriminating in selecting who should be invited to participate in your transaction. Sellers that fail to recognize the subtlety of what I’m describing in this paragraph will soon find themselves receiving a very costly education from the buy-side when few if any suitors express an interest in your deal.

As I mentioned above, pricing is only part of the deal. Since I discussed non-financial value adds in a previous post entitled “Capital vs. Influence” I won’t go into a deep discussion here other than to state that sophisticated sellers look for more than just price when selecting their buyer.

The most critical factor in running your transaction is the selection of the right sell-side advisor. Your advisor should be able to guide you in defining your benchmark valuation metrics, understanding your negotiating leverage points, helping you prepare your offering documents, advising you on which buyers to solicit, how to manage the deal auction, and ultimately how to close the deal with the right partner at the right price.

Bottom line…The auction environment, properly managed by the right advisor can be your best friend by proving transparency and maximizing valuation. Conversely, attempting to auction your company for sale with the wrong advisor will end-up in massive amounts of unnecessary brain damage being incurred, and an increased risk profile. Good Luck and Good Selling….

Positioning Your Business for Sale

By Mike Myatt, Chief Strategy Officer, N2growth

While the M&A space is very frothy with transactional volumes at record levels and premium valuations abounding, the risk associated with getting deals done might just also be at an all time high. Ideally selling a business should really be about taking what the CEO believes is the best deal, however lately it has become more about doing the deal that the CEO perceives as the most defensible transaction when evaluating the impact of the sale on a variety of constituencies. In today’s post I’ll share my thoughts on getting the right deal done with the least amount of litigation risk

Okay, so you’ve received board approval to put your company it play, but now what? How do you cover all your bases in an attempt to mitigate the risk of regulatory scrutiny and shareholder litigation? Taking the following steps will not only help you maximize transaction value, but will likely insure that the transaction sticks with the least amount of post transaction risk:

  1. Pre-sell the deal internally: State your case early on by clearly articulating the business logic for the disposition. Make it known why selling benefits various constituencies and lay-out your game plan to the board, key executives, major shareholders, etc. If you are pursuing a strategic deal that you believe may be in the best long-term interests of shareholders, but may not maximize current valuation you should definitely trial balloon your thinking very early on and build key support for such a decision. By assuaging potential concerns prior to going to market you will minimize the potential for trouble down the road. 
  2. Hire the right sell-side advisors: Retain reputable legal, tax and transactional counsel to insure all the “T’s” are crossed and the “I’s” are dotted. Your investment banker should conduct a comprehensive search for potential suitors that reaches across all genres including strategic buyers, private equity firms, hedge funds etc. A comprehensive marketing approach shows a good faith effort in attempting to solicit the best offer. Good legal and tax counsel can make sure that the appropriate concerns and proper protections/disclosures (i.e. indemnifications, legal and tax opinions, full disclosure provisions, Revlon concerns, SOA provisions etc.) are addressed and included in the documentation.
  3. Shop the deal: Make sure that a “Go-Shop” provision is included in any agreement with a potential suitor. Stand-Still provisions are becoming a thing of the past as they set-up the seller for third party allegations that the seller failed to fulfill their fiduciary responsibilities by agreeing to sell the company at a “low-ball’ price, and/or by signing off on measures designed to dissuade competing bidders. The offset for buyers to induce them into agreeing to a go-shop provision is the provision to pay a break-up fee should the seller unwind the deal due to a better competing offer. Just last Thursday, Peter Huntsman, president and CEO of chemical company Huntsman, terminated a $5.6 billion deal with Basell AF, paying almost $200 million to break the deal with the Dutch manufacturer. Instead, Apollo Management LP will pay $6.51 billion to purchase the company. Apollo agreed to reimburse Huntsman for half the breakup fee resulting in a substantial net gain to Huntsman.
  4. Seek a third-party valuation: In addition to being a good management tool, by having your company valued on a regular basis you establish a third party baseline for what your company is worth and have something to benchmark any potential offers against. For many companies having your valuation updated annually is standard operating procedure. I suggest that when you order your valuation and subsequent updates that the transaction be ordered by your law firm such that it becomes privileged information and therefore mitigating the risk of a bad valuation surfacing to haunt you at an inopportune time.