Strategic buyers currently have the upper hand in competitive auctions
By Anthony Noto
themiddlemarket.com
The stage is set for strategic buyers. Uncertainty over macroeconomic issues may have dimmed the corporate lights on M&A plans in previous years, but 2014 is providing a more promising script. Debt financing is readily available; many corporations boast significant cash on their balance sheets; shareholders are clamoring for more than just share buybacks; and companies are scouring for targets at home and abroad with more immediacy than before. CEOs are viewing the M&A scene with more confidence than they have in a long time.
Ametek (NYSE: AME) provides a good showcase for the trend. The Berwyn, Pennsylvania-based maker of electronic instruments and electromechanical devices has inked five acquisitions in 2014 and expects to do more, says William Eginton, senior vice president of corporate development.
“There is a greater depth of deals that are available now,” Eginton says, adding that 2014 has been especially right for well-positioned companies to scoop up targets.
The numbers back him up. Strategic buyers closed 1,251 middle-market deals valued at $144.4 billion in the first eight months of 2014, up from 1,157 valued at $129.3 billion during the same period in 2013, according to Thomson Reuters.
Across all sectors, strategic buyers are making their way back to the negotiating table. General Mills Inc. (NYSE: GIS), for example, recently acquired Annie’s Inc. for $820 million. The deal marks the latest venture into the organic food space for the Minneapolis-based buyer. The last deal of this type for the company was in 2012, when General Mills purchased Food Should Taste Good, a natural snack- foods company based in Needham Heights, Massachusetts. That year, General Mills also focused overseas. It bought a majority stake of the international business of Yoplait SAS for about $1.2 billion, as well as the Brazilian food company Yoki Alimentos SA, which make snacks, side dishes and other products, for $940 million.
The 2012 acquisition spree helped General Mills get greater access to fast-growing international markets, but like other corporate acquirers, General Mills chose to remain quiet on the M&A front during 2013 – a year many dealmakers predicted would be a boon but turned out to be a bust.
When domestic sales jumped for many companies in 2014, Annie’s became an attractive target. The company, backed by Solera Capital, achieved $204 million in food sales over the last fiscal year.
Berkeley, California-based Annie’s exemplifies the huge shift in consumer demand for healthier foods. Annie’s is known for not using any artificial flavors, synthetic colors or preservatives – the same additives that General Mills is known for using in popular cereal brands and traditional bagged snacks.
The private equity industry has pounced on the good-for-you trend. Now, strategic buyers are more willing to take risks and put money to work.
Strategic buyers are spending more, too. Deal value for transactions helmed by corporations amounted to $144.4 billion for the first eight months of 2014. That’s 11 percent more than the first eight months of 2013, propelling the first half of 2014 to be the best for overall M&A in three years, according to Thomson Reuters.
“The deal flow is higher than it has been in the past several years,” says Eginton, who stepped into his current post in 2004. Before that, he had been overseeing Ametek’s corporate development efforts since 1998.
In 2014, Ametek teed off with the $91.7 million purchase of Luterbach, Switzerland-based Teseq Holding AG. The company, which included 13 affiliates, manufactures test and measurement equipment. Ametek hired Swiss law firm CMS von Erlach Poncet Ltd. to advise on the acquisition process.
A month later, Ametek paid $74 million for VTI Instruments Corp., an Irvine, California-based company that makes testing and measurement instruments for the aerospace and defense sectors.
And in June, Ametek bought Zygo Corp. (Nasdaq: ZIGO) for $372.8 million. The Middlefield, Connecticut, company provides optical metrology services and products for the defense, semiconductor and life-sciences markets.
August also proved to be busy. Ametek acquired two companies: Luphos GmbH in Mainz, Germany, and Amptek Inc. in Bedford, Massachusetts. Luphos was a technology play that Ametek expects will expand the company’s access to innovations in measuring optical surfaces. Amptek is a provider of sensor and detector technology used in the metal, environmental monitoring, petrochemical and semiconductor markets. Terms of each deal remain undisclosed, but Eginton reports that the price tags on companies that are up for sale are rising.
“Bankers are busier,” Eginton adds. “Also, we have a tremendous team that’s able to recognize trends.”
One trend propelling the company forward is the fact that companies with a manufacturing component are more in demand.
As companies work to meet development needs, and get products to local markets at a quicker pace, they are opting to grow via M&A as opposed to bolstering in-house research and development departments, says Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, a research organization in Arlington, Virginia.
Merck KGaA (ETR: MRK), based in Darmstadt, Germany, provides a good example. In September,Merck agreed to buy Sigma-Aldrich Corp. (Nasdaq: SIAL) for $17 billion in cash to expand in chemicals used in research labs and pharmaceutical manufacturing. The purchase, announced just months after the May close of Merck’s $2.5 billion acquisition of chemical supplier AZ Electronic Materials SA, serves as a way to boost Merck’s growth and reduce dependence on researching biotechnology developments within its own subsidiary, Serono. Before AZ, the Germany-based company last announced a major acquisition in 2010, when it acquired Millipore Corp., a U.S. maker of lab equipment and chemicals, for about $6 billion.
“Corporations have the cash to do deals and spend,” Meckstroth says. “They don’t have to borrow it; they can finance it internally and they’re much more willing to take risks.”
With the general economic outlook relatively stable, executives are more willing to pursue acquisitions they have long considered.
“How do you achieve superior growth? You get it through mergers and acquisitions, because you’re essentially buying sales,” Meckstroth says.
Fueling these deals is the fact that companies are more willing to sell at the valuations they are at today.
That has helped foster a different tone in 2014, says Ulderico Conte, former chief executive of self-serve yogurt franchiser U-Swirl Inc. Conte, who led three acquisitions in 2014 for Henderson, Nevada-based U-Swirl, explained that strategic transactions are now coming to fruition based on prior plans. From 14 stores in 2011 when it was founded, the company wielded M&A to expand to roughly 298 self-serve frozen yogurt cafés in 37 states and four non-U.S. countries.
U-Swirl is majority-owned by Rocky Mountain Chocolate Factory Inc. (Nasdaq: RMCF), which acquired a 60 percent equity interest in the company in January 2013. At the time, the company set out to scoop up rival self-serve yogurt franchises and made good on its plan.
In 2014, U-Swirl has spent a total of $10 million on three rival companies: CherryBerry Enterprises LLC, Yogli Mogli Franchise LLC and Fuzzy Peach Franchising LLC. Tulsa, Oklahoma-based CherryBerry and Atlanta-based Yogli Mogli were both bought in January, followed by Wilmington, North Carolina-based Fuzzy Peach in February.
“Market conditions have played a factor,” Conte says on the trio of purchases. “We were finally able to get strategic.”
Investment bankers agree.
“Deals are getting completed this year even though a strategy was set last year,” says Gregg Blake, managing partner of advisory firm Brocair Partners. “Valuations are also substantially higher than they were before.”
The high prices aren’t intimidating strategic buyers, who are able to write bigger checks. As a result, targets now find themselves in a position to be pickier with suitors, or hike up already-high terms.
Take the competition for Family Dollar Stores Inc. Dollar General Corp. was spurned twice in its attempts to buy Family Dollar. Then the company tried a hostile bid, bringing a whopping $9.1 billion offer directly to shareholders. But Family Dollar has accepted a lower bid from DollarTree Inc. instead, saying that deal is more likely to gain regulatory clearance with antitrust authorities. A merger with Dollar General would create a massive retail chain with almost 20,000 locations, putting it in direct competition with Wal-Mart Stores Inc., the largest retail chain, which has been pushing deeper into the market for neighborhood discount stores.
In other cases, strategic buyers are competing with private equity firms, which have been fairly consistent when it comes to deal flow, just as much as they have been in previous years. In fact, in 2009, private equity firms disbursed more capital to U.S. firms than the previous year, and they’ve done the same in every year since, according to Thomson Reuters. From the looks of it, 2014 is on track to surpass previous years. That was not the case with strategic buyers-until now.
While corporate acquirers take the field, some private equity firms may feel benched as strategic capital tends to be cheaper than private equity capital, leaving sponsors at a competitive disadvantage. This is evident in many auction situations, says Brocair’s Blake, who advised UDG Healthcare plc, a Dublin-based provider of health care services, on its successful bid for the health care communications business of KnowledgePoint 360 LLC. UDG beat several PE firms to acquire the Lyndhurst, New Jersey-based target, which was sold by PE firm Abry Partners LLC.
“Borrowing costs are low and financing is so cheap that it makes strategic buyers able to outbid PE funds for the same assets,” Blake adds. “Sometimes strategic companies are outbid by PE funds, but right now it’s the other way around. If you’re a big enough company, you can theoretically finance an acquisition entirely with debt. PE funds can’t do that. If they’re doing an add-on acquisition they might be able to, but they traditionally have to use a certain amount of equity, especially for a new platform.”
As the crucial fourth quarter rolls out, the strategic hits are likely to keep on coming. Don’t be surprised to see some big deals before the year is over. Megamergers, deals of more than $20 billion, have hit a record $788 billion in 2014. The tech sector seems especially ripe. In September, China’s Alibaba Group Holding Ltd. (NYSE: BABA) raised $21.8 billion in the largest tech initial public offering ever. Led by CEO Jack Ma, now the richest person in China, Alibaba has already spent $4.6 billion in acquisitions in 2014. Some speculate that the e-commerce giant may try to buy Yahoo Inc. (Nasdaq: YHOO), which holds 16 percent of Alibaba. Another potential bidder for Yahoo is Japanese telecommunications company SoftBank. Led by CEO Masayoshi Son, the second-richest person in Japan, SoftBank retains 32 percent of Alibaba.
Strategic buyers may make hay only when the sun shines, but the sun doesn’t seem likely to set any time soon.
