Posted: February 01, 2012
M&A Activity is Back—With a Caveat
ACG Special SectionDavid Lewis
Welcome to the new normal.
After a tough few years Colorado M&A is back almost all the way.
That "almost" caveat comes because mergers and acquisitions continue to require an extraordinary amount of hand-holding and due diligence, delays, hesitation - all of which add up to increased transaction risk.
Still, deals are getting done, particularly but not entirely within the middle-market M&A bracket occupied by most Colorado professionals.
Internationally, mergers and acquisitions negotiated a tough year, especially against the background of Europe's sovereign-debt crisis.
Locally, deal professionals had more fun. This had a lot to do with their sub-bulge bracket clientele.
Middle market means different things to different people. Denver-based Integris Partners defines its target market in the $10 million to $100 million range.
"The bulge-bracket companies need a little bit more hand-holding, a little bit more CYA than actually adding a whole lot of value," says Managing Director Patrick R. Seese. "These billion-dollar companies have a lot of sophistication, so you are often just making sure they are on track, holding their hands. In the middle-market, certainly the lower middle-market, a lot of these owners don't have the sophistication when it comes to mergers and acquisitions, so it ends up being a lot more fun."
This past year Colorado M&A experts ended up having fun and making money, too.
Not that all Colorado M&A practitioners are mid-market. Kevin Cudney of Brownstein Hyatt Farber Schreck notes that his firm represents "some very un-Denver-like clients, such as Blackstone Apollo, Carl Icahn - names you would not ordinarily associate with a Denver law firm."
"Most of our deals are in the $20 million to $150 million range, and then there are the larger transactions that are outliers that are well in excess of that," Cudney says. "Conversely, there are transactions that are smaller than that, usually as part of a longstanding relationship."
Colorado deals included examples from a variety of sectors, said Hendrik Jordaan, chair of Morrison & Foerster LLP's private equity investments and buyouts practice.
"We've got a significant energy backbone that continues to be active, whether it is pure E&P (exploration and production) or E&P services. That will continue to be robust; a very interesting trend recently. We have a deep and rich telecommunications in this town dating back to the US West days.
Telecommunications broadly defined is going to continue to be robust. Technology as well is going to continue to be strong, as is health care," Jordaan added.
Meantime, forget the classic notion of the marketplace as either a buyers' or sellers' market.
"There are haves and there are have-nots," Cudney says. "The market for targets is very bifurcated. The good deals are drawing multiple buyers, and financing sources are not afraid of them. On the other hand, the have-nots are not attracting any buyers. It's a very strange phenomenon."
A "have" possesses strong management, a leading market position, consistent operating results, and "a mental mindset of being ready to deal," Cudney says.
But, "If any of those are missing, questions start arising, and the more questions that arise, the more issues there are."
The major result may be that price is no longer the determining factor that it has been historically.
"It used to be, if the question was, ‘How do you resolve doubts?' The answer was, you adjust the pricing. Nowadays if the business is not a ‘have,' it may not attract a buyer at any price. It's a strange phenomenon. On one hand you may have an attractive target that has multiple suitors. On the other hand, you have the other ‘have-not' target, where you can hear the crickets."
These are deal differences. Deal similarities have to do with the length of time mergers and buyouts take.
"People who have capital are being much more selective and cautious on how and when they invest that capital," says Chris Wilson, founder and principal of Denver-based Fortitude MB. "So to some extent the bar has gone up on quality, but maybe more importantly the checks and balances you're putting in place to verify that quality have also gone up."
"Transactions take longer to do," than before the 2007-2008 meltdown, Cudney says. "Typically if somebody said to you, ‘I'm starting a transaction, what are my expectations?' It would be, ‘Hey, it will take you three months to six months to get a middle-market transaction done.' Probably now if someone asked me for a generalization, I would say, ‘six months to nine months.' "
The length of time deals take has to do with longer, more precise due diligence, to start. "Due diligence is longer, and it is more staged," Cudney says. "And it's less linear in the sense that due diligence used to be a step along the way. Due diligence is now part of the continuing deal process until the very end."
It's not unusual today, as a transaction appears to be reaching its end game, for the buyer to say, "'This is all well and good, but I'd like to see another month of operating results,'" Cudney adds.
Also no longer unusual are other objections that can crop up and derail a deal. "There are no sure things now," Cudney says. "Items come up."
Fortitude MB's Wilson cites the case of a company on the cusp of being acquired when it was learned that one of its executive team members had an old drug-related conviction on his record.
"A few years back that probably would have been swept under the rug because it was in the past, and ostensibly there were explanations for it," he says. "But it was unclear the CEO was completely forthcoming on the matter, and it created enough doubt about the integrity of the company and the CEO so that it was easy to say, ‘There are too many other good opportunities. Let's move on to the next deal.' "
So the rules of the game have changed, sometimes shockingly, and the M&A transaction landscape remains uncertain and prone to political change. Thus it is more important than ever - whether on the buy or sell side of a deal - to hire the best in legal, consulting and accounting help.
"You have to expect the unexpected in these transactions," Cudney says. "It's another reason why having seasoned accountants and seasoned lawyers is important. OK, so you have discovered a problem, but there is a way to soften the impact by creative drafting, by sitting around a table to figure out a way to structure around problems? It has become as important, more important now, than it ever has been."
David Lewis is a freelance writer based in Denver.