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Who's Buying Companies Now?
by Michael Sipe

The latter part of 2001 and the beginning of 2002 have been challenging times for San Francisco Bay area companies in many industries. Overall, mergers and acquisitions activity is down from the blistering pace experienced in 1999 and 2000. However, in good times and in difficult periods, companies are bought and sold. So, who’s buying now?

Individual Investors. After a marked absence of quality individual buyers in 1999 and 2000, the current economic slowdown is bringing out-placed executive level buyers back into the lower middle market looking to acquire a company of their own. These buyers are in much better financial shape than in years past, have good credit and demonstrate relevant management, marketing and organizational skills. Some combination of buyer cash, SBA financing, conventional bank financing, mezzanine debt and a portion of seller financing is used to put deals together with these buyers. Although the qualification standards for SBA guaranteed business acquisition financing have tightened, this program is still a very valuable financing tool for the small middle market transaction.

Private Investment Groups. Local and national private equity groups (“PEGs”) remain the most active buyers in the middle market, and can be very viable buyers. There are literally thousands of them across the country. A PEG is formed in a somewhat similar fashion to the old real estate limited partnerships, but with the objective to acquire privately held middle market companies using investor funds. The investors might include institutions, pension funds, family trusts, and individuals. Investment objectives of PEGs are varied. Some want to buy, manage and hold. Some want to buy, build and sell. Others want to buy a platform company, make add-on acquisitions and then sell or go public in the future. Some want to manage their acquisitions internally; others want the acquired company’s management to remain. Some PEGs will only buy all of a company; others will acquire a portion of a company, provide growth capital and work with current ownership to build the business. PEGs buy with some combination of cash, bank debt, subordinated debt and seller financing.

Local Competitors. Local competitors in any industry are always potential buyers, particularly for distressed companies. Perceived value will probably be lower. Protecting confidentiality is a significant potential problem. Availability of cash (or willingness to invest it) may be a challenge. However, transition is usually fairly easy and short. Synergies, market share and cost reduction options are often obvious. While a local competitor may not be a high bidder, in certain circumstances it might be the most viable candidate. In the current economy, there is a fairly high level of buying activity by well-capitalized companies buying struggling competitors. As painful as this kind of transaction may be for the seller of a business in jeopardy, it may be less painful than other alternatives and the easiest path to a better life for the owners.

Local Non-competitive Companies. Frequently local companies on the periphery of the seller’s business find value in a complementary acquisition. With a good match, this can be a nice win for both the seller and the buyer. In today’s environment, however, these deals can be a bit more difficult to put together, due to general economic uncertainty. Cash, conventional financing and seller financing comprise the consideration in these deals.

Regional and National Companies in same line of Business. Economic downturns are excellent times to gain market share and move into new geographical regions. Thus there are always buyers (both public and private) from out of the area in the same line of business as a seller that can be good prospects. Again, these deals can be a bit more difficult to put together, due to general economic uncertainty right now. Cash, conventional financing and seller financing comprise the consideration in these deals. Payment in stock is less likely than in past times, given the current weak stock market.

Other Regional and National Companies. Just as there may be merit in a local company on the periphery of the seller’s business, sometimes it’s possible to find a publicly held or privately owned buyer from outside the area that finds value in a complementary acquisition. Although these matches can be hard to find and can take longer to close, frequently valuations are strong, and can make the effort worthwhile. Cash, conventional financing and seller financing comprise the consideration in these deals. Payment in stock is less likely than in past times, given the current weak stock market.

Who’s buying now? All of the above.

While there are fewer buyers in the market than a couple of years ago, there is no shortage. Deals are a little tougher to conclude, as the general market exuberance and unbridled (and ungrounded) optimism of 1999 and 2000 is gone. That’s a good thing. We see transactions standing on their own merit and being evaluated carefully for the business sense of the deal. It means the days of “super lotto” deals are gone for a long time, but there are plenty of viable buyers, sufficient numbers of lenders (although cautious and conservative) and good, solid transactions occurring.
 

If you would like to discuss your business objectives in confidence and without obligation, we welcome the opportunity to speak with you. Please call Private Equities at 408.295.4299
 

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