What is the role of a restructuring expert?
To step into a Company that is in crisis, force some layoffs and slash costs? No. No. No.
Restructuring is a word most business owners want to avoid, yet ongoing restructuring processes are central to the success of the world's best companies.
Unfortunately, media coverage has associated restructuring with failure, but if implemented appropriately and before a company gets into trouble, can be a key to long-term success.
Myth 1 - Fancy Plan and Walk Away
Restructuring professionals come up with a fancy plan, take a fee and walk away. Not True.
First of all, qualified restructuring professionals are usually Certified Turnaround Professionals recognized by the ACTP and are members of the Turnaround Management Association.
To achieve this designation they have met the rigorous requirements of education, years of experience in the field, completed exams to confirm their technical knowledge, submitted case studies from successful engagements, passed interviews, a screening process and have had professional references verified.
Secondly, CTPs like to be referred to as resultants versus consultants. Meaning results are achieved as opposed to just being talked about. Walk the walk versus talk the talk.
CTPs have proven operating experience in most aspects of business from finance and accounting to manufacturing and distribution to sales and marketing.
If the company owners and senior management are willing and able to acknowledge the need for unbiased expert advice, an independent restructuring professional is much more likely to drive success.
Owners and Senior Managers understand their industry, employees and their company better than anyone.
Restructuring professionals bring experience and a track record from countless real-world companies, where their solutions have delivered long-term health, growth and profitability.
Collaboration between managers and a restructuring professional delivers fast, effective and long-lasting results.
Restructuring professionals provide the leadership, processes and day-to-day decision-making needed to lead the development and implementation of a restructuring plan.
Myth 2 - Restructuring Always Involves Layoffs
Not true.
Restructuring begins with a thorough understanding of the current processes and utilization of resources (people and assets), including technology. The Restructuring plan will include changes in the business' operational model only in areas that increase the leverage of all of these resources to maximize value for the business enterprise.
Areas in the business model that are consistent and repetitive should be standardized and processed with technology to maximize efficiency.
This frees up time for the existing employees to be more focused on adding value with customers, vendors, and other team members with support and training.
It is true that if the company has failed to operate a lean business model, that layoffs are possible, but that is the decision of the owners and senior managers. It is not the goal of the restructuring professional. Employees are the lifeblood of the company.
Remember.
The most successful entrepreneurs are those constantly looking for ways to improve their Company. Restructuring is a cost-effective and integral part of the process.
Myth 3 - Too Expensive
Not true.
Too expensive is a relative term. Doing nothing may be catastrophic. You could lose your company if you live in denial and ignore financial, operational and strategic problems. Waiting too long to engage a Restructuring Expert will cost you far more in the long run.
Having said that, you should only engage a Restructuring Professional if you feel confident that they will be able to add enterprise value far in excess of what it costs to hire them. If it costs $25,000 to add $250,000 to the bottom line, you got a great deal.
There are going to be many firms starting up as a result of the financial crisis. You should take your time interviewing a restructuring professional. Seek professional references from banks and attorneys who have hired them to help their clients and have them explain how their process could work for your company.
For a successful restructuring process, you want the experience of professionals who have successfully completed many restructuring projects over many years. It is a specialized skill and requires a specialized expert to add real and lasting value.
When you have researched and chosen the best firm for your company, it is time to be clear on what they need to achieve.
Ask your restructuring expert to detail in writing everything that they hope to achieve for your company.
In addition, you may want to carve out some of their fees into performance-related incentives. If you align their pay with your goals, then they will have additional incentives to perform.
Myth 4 - Only a Short-Term Solution
Restructuring is just financial engineering and it will only have short-term effects.
Not true.
Financial Restructuring is only one part of the process. It is, however, critical to the long-term success of your Company.
If your Company has too much leverage or fails to meet the earnings covenants in your Credit Agreement, then the restructuring of your Balance Sheet is required. This involves evaluating all of your Company's Assets, developing and executing a plan of action to increase the Asset turnover ratio and improve your company's liquidity.
Debt must be evaluated with a plan of action to reach a debt level that can be serviced and remain within negotiated covenants. This can involve bringing in equity capital, negotiating haircuts with lenders as well as negotiating deals with vendors to inject capital back into your business.
A quality restructuring of your Balance Sheet will position your company not only to survive, but to thrive for many years to come.
If you want to learn more about how Restructuring Experts could add value to your or your client's Company, please call our office in Tulsa at (918) 392-2900.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.
www.ClearRidgeCapital.com
Tuesday, March 24, 2009
Wednesday, March 4, 2009
M&A Data - Making Sense of Conflicting Reports
In 2009, the financial newswires are sending us mixed messages.
1) PricewaterhouseCoopers just released a report showing huge declines for global deals in the Industrial Manufacturing sector.
2) The same week, GF Data Resources reported that middle market deal volume for transactions valued between $10 million and $250 million remained strong in 2008.
So, on one hand we have terrible numbers for 2008 acquisition activity and the next report tells us everything is fine.
We highlight the data from both reports and then explain what it means for middle market companies in the US.
PWC Reports Negative M&A Activity
Last week, PricewaterhouseCoopers LLP ("PWC") came out with their report of 2008 M&A Data in the Industrial Manufacturing Sector, analyzing mergers and acquisitions with a disclosed value over $50 million.
The number of Mergers and Acquisitions in the industrial manufacturing sector dropped 32% in 2008 compared to 2007, with total dollar amount of deals declining 57%.
The research appeared in PWC's report: "Assembling Value: Fourth-quarter 2008 Mergers and Acquisitions Analysis" released last week.
In 2008, there were 141 deals above $50 million, compared to 206 deals in 2007 and 169 deals in 2006.
Total dollar amount of deals reached $39 billion in 2008, less than half of the $88 billion in 2007.
The average dollar amount of deals dropped to $275 million per deal in 2008, compared to $424 million in 2007 and $545 million in 2006.
Fourth Quarter 2008 shows steepest declines
Q4 2008 showed a particularly steep decline with only 11 deals, compared to 71 deals in Q4 2007 and the dollar amounts in Q4 2008 were only $3 billion, compared to $40 billion in Q4 2007.
$1 billion+ deals
In 2008 there were only 5 deals with a disclosed value over $1 billion, compared to 17 in 2007 and 23 in 2006.
Financial buyers
Financial buyers, who are typically very active in the manufacturing sector, only acquired 37 companies in 2008, compared to 72 in 2007 and 58 in 2006.
Strategic buyers
Strategic buyers acquired 104 companies in 2008, compared to 134 deals in 2007 and 111 deals in 2006.
PWC's data does not include most of the middle market deals under $50 million and many of the deals under $100 million where deal terms and sale prices remained confidential, but it is a good indicator of recent trends across the middle market.
Source: PricewaterhouseCoopers LLP
GF Data Resources reports High Valuations and Strong Deal Volume
GF Data Resources released its Middle Market M&A Valuation Report for the fourth quarter of 2008 the same week. GF Data Resources is a proprietary database that collects data on Private Equity transactions valued between $10 million and $250 million.
According to GF, Middle Market deal volume and valuations held steady across all industries from Q3 2008 to Q4 2008.
Deal Volume
114 Private Equity firms contributed to the report and they completed 25 deals in the fourth quarter of 2008. 27 deals were completed in Q3 2008, compared to 50 deals the first half of 2008. This confirms steady acquisition volume through all four quarters of 2008.
A driver for this deal volume is the substantial availability of cash at Private Equity firms. Many of the Private Equity firms ClearRidge has worked with in the last few months have confirmed that they are sitting on up to 90% of the capital they raised in 2007 and 2008 and they are being encouraged by their limited partners (investors) to keep the money, go ahead and source new acquisitions.
This untouched cash is often referred to as "dry powder" and the substantial stock piles of cash will prove to be a significant driver to Acquisition volumes by Private Equity firms in 2009.
Valuations
"Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets," according to Andrew Greenberg, CEO of GFDR.
The primary valuation metric - Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA) was 5.9x for Q4 2008, down from 6.3x in Q3 2008.
Debt Levels
The biggest change in 2008 was a decrease in debt levels for the acquisitions. "Debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals," according to Mr. Greenberg.
"Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively," said Greenberg. "Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007."
Debt Pricing
Debt spreads widened, as the 90-day LIBOR interest rate (a benchmark for commercial lending) dropped from 4.1 percent on September 30 to 1.4 percent at year end. Average initial pricing on senior debt declined only slightly (from 7.4 percent to 7.2 percent), causing the average spread on senior debt to jump from 4.3 percent to 5.8 percent. Spreads on subordinated debt also increased.
Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their website, www.gfdataresources.com. Source: PEP Digest.
The Truth Behind The Numbers
Acquisitions are still happening. Deals are getting done.
For an acquisition to get to the finish line, it needs to make sense for the acquirer and make sense for the company being acquired. Nothing has changed there.
The Sale Price of Your Company
It is true that companies are still selling for high valuation multiples. However, acquirers are forward-looking in their valuation, so last year, they would have used your 2007 full-year EBITDA number and then paid a multiple on their projection for full-year 2008 EBITDA.
Moving to the present, if your EBITDA was $7 million for 2008 and a company like yours should sell for 5x, then if you anticipate 2009 EBITDA remaining at 2008 levels then you could still anticipate that your company should sell for $35 million. Good news.
However, many companies are likely to face a tough 2009. Let's say you expect your 2009 revenues to decline and as a result you project your 2009 EBITDA to come in around $4.5 million. Well, it is still reasonable to expect a 5x multiple or more, but now that 5x may is worth around $22.5 million on projected numbers.
So, how do you get back the additional $12.5 million your company could have sold for last year? You need to be more creative and more flexible.
Instead of requiring full cash payment at closing, you should consider a combination of seller financing, stock and warrants, in order to get closer to last year's expected sale price of $35 million.
Even if the buyer tried to negotiate a reduced multiple to maybe 4.5x, that could be acceptable if they are willing to add further consideration (cash, stock, warrants) for special consideration and intangibles, which could include high market share, significant customer relationships, brand name recognition, or any other intangible that sets your company apart from the rest.
Getting your deal done is an art not a science. Every company is different, every situation is different and every deal needs to be different.
Deals are getting done. Debt financing is still available for buyers. You just need to work smarter and harder in the current environment to get your deal done.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.
1) PricewaterhouseCoopers just released a report showing huge declines for global deals in the Industrial Manufacturing sector.
2) The same week, GF Data Resources reported that middle market deal volume for transactions valued between $10 million and $250 million remained strong in 2008.
So, on one hand we have terrible numbers for 2008 acquisition activity and the next report tells us everything is fine.
We highlight the data from both reports and then explain what it means for middle market companies in the US.
PWC Reports Negative M&A Activity
Last week, PricewaterhouseCoopers LLP ("PWC") came out with their report of 2008 M&A Data in the Industrial Manufacturing Sector, analyzing mergers and acquisitions with a disclosed value over $50 million.
The number of Mergers and Acquisitions in the industrial manufacturing sector dropped 32% in 2008 compared to 2007, with total dollar amount of deals declining 57%.
The research appeared in PWC's report: "Assembling Value: Fourth-quarter 2008 Mergers and Acquisitions Analysis" released last week.
In 2008, there were 141 deals above $50 million, compared to 206 deals in 2007 and 169 deals in 2006.
Total dollar amount of deals reached $39 billion in 2008, less than half of the $88 billion in 2007.
The average dollar amount of deals dropped to $275 million per deal in 2008, compared to $424 million in 2007 and $545 million in 2006.
Fourth Quarter 2008 shows steepest declines
Q4 2008 showed a particularly steep decline with only 11 deals, compared to 71 deals in Q4 2007 and the dollar amounts in Q4 2008 were only $3 billion, compared to $40 billion in Q4 2007.
$1 billion+ deals
In 2008 there were only 5 deals with a disclosed value over $1 billion, compared to 17 in 2007 and 23 in 2006.
Financial buyers
Financial buyers, who are typically very active in the manufacturing sector, only acquired 37 companies in 2008, compared to 72 in 2007 and 58 in 2006.
Strategic buyers
Strategic buyers acquired 104 companies in 2008, compared to 134 deals in 2007 and 111 deals in 2006.
PWC's data does not include most of the middle market deals under $50 million and many of the deals under $100 million where deal terms and sale prices remained confidential, but it is a good indicator of recent trends across the middle market.
Source: PricewaterhouseCoopers LLP
GF Data Resources reports High Valuations and Strong Deal Volume
GF Data Resources released its Middle Market M&A Valuation Report for the fourth quarter of 2008 the same week. GF Data Resources is a proprietary database that collects data on Private Equity transactions valued between $10 million and $250 million.
According to GF, Middle Market deal volume and valuations held steady across all industries from Q3 2008 to Q4 2008.
Deal Volume
114 Private Equity firms contributed to the report and they completed 25 deals in the fourth quarter of 2008. 27 deals were completed in Q3 2008, compared to 50 deals the first half of 2008. This confirms steady acquisition volume through all four quarters of 2008.
A driver for this deal volume is the substantial availability of cash at Private Equity firms. Many of the Private Equity firms ClearRidge has worked with in the last few months have confirmed that they are sitting on up to 90% of the capital they raised in 2007 and 2008 and they are being encouraged by their limited partners (investors) to keep the money, go ahead and source new acquisitions.
This untouched cash is often referred to as "dry powder" and the substantial stock piles of cash will prove to be a significant driver to Acquisition volumes by Private Equity firms in 2009.
Valuations
"Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets," according to Andrew Greenberg, CEO of GFDR.
The primary valuation metric - Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA) was 5.9x for Q4 2008, down from 6.3x in Q3 2008.
Debt Levels
The biggest change in 2008 was a decrease in debt levels for the acquisitions. "Debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals," according to Mr. Greenberg.
"Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively," said Greenberg. "Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007."
Debt Pricing
Debt spreads widened, as the 90-day LIBOR interest rate (a benchmark for commercial lending) dropped from 4.1 percent on September 30 to 1.4 percent at year end. Average initial pricing on senior debt declined only slightly (from 7.4 percent to 7.2 percent), causing the average spread on senior debt to jump from 4.3 percent to 5.8 percent. Spreads on subordinated debt also increased.
Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their website, www.gfdataresources.com. Source: PEP Digest.
The Truth Behind The Numbers
Acquisitions are still happening. Deals are getting done.
For an acquisition to get to the finish line, it needs to make sense for the acquirer and make sense for the company being acquired. Nothing has changed there.
The Sale Price of Your Company
It is true that companies are still selling for high valuation multiples. However, acquirers are forward-looking in their valuation, so last year, they would have used your 2007 full-year EBITDA number and then paid a multiple on their projection for full-year 2008 EBITDA.
Moving to the present, if your EBITDA was $7 million for 2008 and a company like yours should sell for 5x, then if you anticipate 2009 EBITDA remaining at 2008 levels then you could still anticipate that your company should sell for $35 million. Good news.
However, many companies are likely to face a tough 2009. Let's say you expect your 2009 revenues to decline and as a result you project your 2009 EBITDA to come in around $4.5 million. Well, it is still reasonable to expect a 5x multiple or more, but now that 5x may is worth around $22.5 million on projected numbers.
So, how do you get back the additional $12.5 million your company could have sold for last year? You need to be more creative and more flexible.
Instead of requiring full cash payment at closing, you should consider a combination of seller financing, stock and warrants, in order to get closer to last year's expected sale price of $35 million.
Even if the buyer tried to negotiate a reduced multiple to maybe 4.5x, that could be acceptable if they are willing to add further consideration (cash, stock, warrants) for special consideration and intangibles, which could include high market share, significant customer relationships, brand name recognition, or any other intangible that sets your company apart from the rest.
Getting your deal done is an art not a science. Every company is different, every situation is different and every deal needs to be different.
Deals are getting done. Debt financing is still available for buyers. You just need to work smarter and harder in the current environment to get your deal done.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge provides Merger & Acquisition, Restructuring and Corporate Finance services advice for midsize companies.
M&A includes buyer and seller representation for companies with $20 million to $500 million in revenues.
Restructuring includes financial, operational, strategic and pre-Sale restructuring.
Corporate Finance includes raising and replacing senior debt, subordinated debt, mezzanine and equity financing.
Bankruptcy and Turnaround services include debtor and creditor advisory, bankruptcy support and turnaround management.
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