If you’re a business owner, chances are you may feel that the term “Restructuring” does not apply to your business. That may be because you associate the word with a business that is struggling, nearing bankruptcy or already in bankruptcy. The fact of the matter is that many of the best run companies in the world restructure their business on a regular basis. When your company is healthy and strong is the best time to consider a restructuring process. In fact, if a business is in or nearing bankruptcy, it may already be too late for restructuring to be effective.
There are typically three different types of restructuring that a company can undertake: financial, operational and strategic. A combination of these is commonly referred to as Corporate Restructuring. For healthy companies, they can be conducted separately, but for those under stress, it may make sense to engage in all three types of restructuring concurrently in order to have the most significant impact in the shortest period of time. In this article we will explain the three types of restructurings and how they can help your business.
Financial Restructuring
Financial restructuring is the process of reorganizing a company’s existing financial structure to match its’ short-term to long-term capital needs. A business, by its very nature, is in a constant state of flux and as a result, its financing needs are continually changing. The art of restructuring is determining a capital structure that is most appropriate for a business’ changing capital needs.
A critical aspect of financial restructuring is ensuring that the existing capital structure (debt and equity) is appropriate for the company’s current income, forecasted income and revenue growth plans. As a business owner, you need to keep a close eye on your current financing agreements and understand how specific changes in market conditions, revenue, costs and profitability can affect your ability to meet existing loan covenants.
Lenders like a clear picture on which to base their financing decision. You need to proactively develop and maintain a current business plan that allows for a range of scenarios of the future financial performance. Pro-active planning should give your lender a clear picture and increase your chances of renegotiating debt.
Financial restructuring also includes the implementation of processes to track the flow of cash in and out of your company by creating a weekly cash flow forecast, typically looking forward 13 weeks. This allows you to identify any gaps you may have on the horizon and provide plenty of time to address those capital requirements.
Another component of financial restructuring is to identify your key vendors and customers and negotiate better terms with them. Your aim should be to reduce the cash conversion cycle, i.e. extend payment terms with vendors and shorten payment terms with customers. We would recommend, however, that you carefully plan and rehearse these negotiations, so as not to appear in distress. You should have a clear and credible message about the future of your company.
Operational Restructuring
Operational restructuring refers to the process of analyzing and improving the core and non-core operations of your business. This can be anything from lean techniques, implementing better operational systems and processes to analyzing capacity utilization and improving efficiencies. In certain circumstances, it may lead to elimination of product lines, services or entire divisions that are a drag on the overall performance of the business.
Benefits of operational restructuring include improving profitability and better leveraging the existing resources of your company. It may involve implementing new systems, processes and tools to better track, monitor and adjust the operations of the business.
Strategic Restructuring
As market conditions change over time, it is important to adjust your business strategy to stay ahead of the competition. Strategic Restructuring is the process of evaluating and adjusting your strategy given current and anticipated market conditions. It also considers the different opportunities that exist to pursue revenue growth.
Subtle shifts in the market are often overlooked. These shifts often develop into major trends. Unless you are on the lookout, it is easy to miss the early signs of change and suddenly find your business struggling where others are picking up market share. Management need to recognize changing conditions, make appropriate and actionable plans and continually adjust their strategy accordingly.
Conclusion
The corporate restructuring process is for all companies, not just those in trouble. It is critical for market leaders as well as market laggers. And what you will find is that the mere process of evaluating a restructuring of your company will yield significant dividends, not only in performance and the ability to make better decisions, but may also uncover data, information and trends about your business.
And please don’t be nervous about talking to a restructuring professional, advisor, or whatever else you may want to call us. We know that we are not an expert in your business. Whether or not we have worked in your industry for years, we will never know it as well as you. Lack of specific industry knowledge, however, doesn’t affect our ability to make a real difference to your business. Whether it is guiding you to implement better systems and processes, streamline your business, identify new cost saving techniques or new revenue opportunities, there is nearly always a benefit from a trained set of eyes guiding you through a restructuring process.
In the end, we help you make better decisions. We give you the tools and structure to better analyze your business and deliver critical business improvement.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.
Wednesday, May 19, 2010
Friday, April 23, 2010
The Business Sale Process: Private Auction vs. Negotiated Sale
When selling your business, there are several different methods to choose from; a broad auction, a private auction and a negotiated sale. In most cases, the owner of a privately held company wants the highest degree of confidentiality. They want to minimize disruption to customer, supplier and employee relationships. Owners also want to mitigate the risk of competitors discovering their intent to sell and using it as a tool to try and gain market share from them.
For those reasons, we are not going to discuss the public auction process, which is most often used for publicly held companies and is the least confidential. Instead, we will focus on the two methods for selling your business that provide a higher degree of confidentiality and that occur most frequently in the middle market.
Private Auction (Controlled Auction)
First, we need to dispel the myth that a private auction works in the same way that you would see at an auto auction. To start with, there is no auction room. The term private auction simply describes the process through which you encourage competing buyers to pay a higher price and better terms for your business.
Controlled auctions may include on average five to fifteen interested buyers, which we’ll refer to as “buyer prospects.” After extensive planning and analysis, your M&A advisor will prepare a confidential memorandum, which describes the company’s stock or assets to be sold, as well as the business opportunity for the acquirer. Other information in the memorandum may include the history of your company, products and services, explanation of processes, business model, customers, industry reviews, geographic coverage, strategy for growth, ownership, legal structure, facilities, people, competitors, competitive advantage, assets and capital expenditures.
Next, potential buyers need to be identified and contacted. Your advisor will go through all their existing contacts and relationships, as well as conduct a fresh search of all likely buyer candidates. After receiving an executed nondisclosure agreement from interested prospects, your advisor will request your approval to send them the memorandum, which includes a timetable for the auction process.
After follow-up conference calls and additional information requests, your advisor will request a preliminary indication of interest from each prospect. You will then choose the most qualified and most likely buyer prospects who will be granted access to additional information in a secure data room and possibly a conference call or meeting with you.
At this point, buyer prospects are requested to submit an indication of interest with a range of offer prices based on different variables. The concept is to keep moving forward and reducing the number of prospects until you are left with the most serious buyers who are most willing and able to pay the highest price at the most favorable terms.
The next step is to rank the buyer prospects into a list of buyer candidates in order of priority.
With your consent, the advisor will then request submission of a LOI (Letter of Intent) from the lead buyer, which is a non-binding commitment to purchase the company.
A more detailed description of the sale process can be found on ClearRidge’s website:
http://www.clearridgecapital.com/saleprocess.htm
Advantages of a private auction
A private auction is typically appropriate when you are able to identify multiple potential buyers. The process is designed to increase competition between potential buyers, thereby increasing your negotiation power and maximizing the bidder’s price and improving their offer terms. As the seller, you have better negotiating strength and a better chance of closing the deal with one of your preferred buyers.
Disadvantages of a private auction
A private auction is typically a more complicated and costly process than a negotiated sale. Even though all dissemination is private and to a pre-screened group, it does make the sale more widely known and increases the potential risk of other people finding out. Additionally, certain companies might not want to participate in an auction process. This could be because it’s unfamiliar, or maybe because it is more complicated and with a pressured timeline.
Importantly, it should be known that in both the private auction process and a negotiated sale, there is no “listing” of the business for sale, nor is there any kind of public announcement. It is a targeted, confidential and specific outreach to possible buyers.
Negotiated Sale
In contrast to a private auction, a negotiated sale involves only one to maybe a handful of interested parties. In situations where you have a clearly identified potential buyer and want a speedy and confidential process, a negotiated sale will likely be more appropriate than a private auction process. A strategic buyer typically expects to benefit from synergies between the companies and therefore may be willing to pay a fair price without the added pressure of a private auction.
In contrast to a private auction process, garnering a high price in a negotiated sale may not be an easy task as the lack of multiple alternative buyers diminishes your negotiating power.
A negotiated sale tends to be less disruptive to the continuing operation of your business, as you are not so tied to the particular deadlines and time requirements of a private auction. However, extensive due diligence is common in a negotiated sale, which can divert management’s attention away from daily operations. One possible solution, which is often overlooked, is to conduct the majority of the due diligence assignments in
advance of the sale process in your own time at your own pace, so that any information to be requested by the buyer is already available and just needs refreshing and updating as the sale process moves along.
Conclusion
It is important to note, however, that these two types of sale process do not have to be entirely distinct from one another. For example, it may make sense in a business sale to take the early steps of the auction process, including narrowing down a full spectrum of potential buyers, then pre-screening them for industry, products, services, capabilities, size and profitability. Then take the most qualified buyers from this list and discreetly determine the value range they would offer for a company with the same profile as your company. You could use these buyer prospects to validate the best offer from your preferred buyer.
Whichever process you choose, it should take less time and run more smoothly overall if you do most of the work up front. Buyers prefer, and will often pay a higher price for a company whose sale process is organized, efficient and time-effective. It is a good reflection of the efficiency of operations and overall management of the business.
In choosing the right process for your unique business and situation, it is a good idea to discuss your thoughts with an advisor and consider the market environment in which you are trying to sell, your objectives, concerns and also the likely number and type of potential buyers. An experienced M&A advisor will also help to manage the process and ensure that you are able to realize your goals from the sale.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.
For those reasons, we are not going to discuss the public auction process, which is most often used for publicly held companies and is the least confidential. Instead, we will focus on the two methods for selling your business that provide a higher degree of confidentiality and that occur most frequently in the middle market.
Private Auction (Controlled Auction)
First, we need to dispel the myth that a private auction works in the same way that you would see at an auto auction. To start with, there is no auction room. The term private auction simply describes the process through which you encourage competing buyers to pay a higher price and better terms for your business.
Controlled auctions may include on average five to fifteen interested buyers, which we’ll refer to as “buyer prospects.” After extensive planning and analysis, your M&A advisor will prepare a confidential memorandum, which describes the company’s stock or assets to be sold, as well as the business opportunity for the acquirer. Other information in the memorandum may include the history of your company, products and services, explanation of processes, business model, customers, industry reviews, geographic coverage, strategy for growth, ownership, legal structure, facilities, people, competitors, competitive advantage, assets and capital expenditures.
Next, potential buyers need to be identified and contacted. Your advisor will go through all their existing contacts and relationships, as well as conduct a fresh search of all likely buyer candidates. After receiving an executed nondisclosure agreement from interested prospects, your advisor will request your approval to send them the memorandum, which includes a timetable for the auction process.
After follow-up conference calls and additional information requests, your advisor will request a preliminary indication of interest from each prospect. You will then choose the most qualified and most likely buyer prospects who will be granted access to additional information in a secure data room and possibly a conference call or meeting with you.
At this point, buyer prospects are requested to submit an indication of interest with a range of offer prices based on different variables. The concept is to keep moving forward and reducing the number of prospects until you are left with the most serious buyers who are most willing and able to pay the highest price at the most favorable terms.
The next step is to rank the buyer prospects into a list of buyer candidates in order of priority.
With your consent, the advisor will then request submission of a LOI (Letter of Intent) from the lead buyer, which is a non-binding commitment to purchase the company.
A more detailed description of the sale process can be found on ClearRidge’s website:
http://www.clearridgecapital.com/saleprocess.htm
Advantages of a private auction
A private auction is typically appropriate when you are able to identify multiple potential buyers. The process is designed to increase competition between potential buyers, thereby increasing your negotiation power and maximizing the bidder’s price and improving their offer terms. As the seller, you have better negotiating strength and a better chance of closing the deal with one of your preferred buyers.
Disadvantages of a private auction
A private auction is typically a more complicated and costly process than a negotiated sale. Even though all dissemination is private and to a pre-screened group, it does make the sale more widely known and increases the potential risk of other people finding out. Additionally, certain companies might not want to participate in an auction process. This could be because it’s unfamiliar, or maybe because it is more complicated and with a pressured timeline.
Importantly, it should be known that in both the private auction process and a negotiated sale, there is no “listing” of the business for sale, nor is there any kind of public announcement. It is a targeted, confidential and specific outreach to possible buyers.
Negotiated Sale
In contrast to a private auction, a negotiated sale involves only one to maybe a handful of interested parties. In situations where you have a clearly identified potential buyer and want a speedy and confidential process, a negotiated sale will likely be more appropriate than a private auction process. A strategic buyer typically expects to benefit from synergies between the companies and therefore may be willing to pay a fair price without the added pressure of a private auction.
In contrast to a private auction process, garnering a high price in a negotiated sale may not be an easy task as the lack of multiple alternative buyers diminishes your negotiating power.
A negotiated sale tends to be less disruptive to the continuing operation of your business, as you are not so tied to the particular deadlines and time requirements of a private auction. However, extensive due diligence is common in a negotiated sale, which can divert management’s attention away from daily operations. One possible solution, which is often overlooked, is to conduct the majority of the due diligence assignments in
advance of the sale process in your own time at your own pace, so that any information to be requested by the buyer is already available and just needs refreshing and updating as the sale process moves along.
Conclusion
It is important to note, however, that these two types of sale process do not have to be entirely distinct from one another. For example, it may make sense in a business sale to take the early steps of the auction process, including narrowing down a full spectrum of potential buyers, then pre-screening them for industry, products, services, capabilities, size and profitability. Then take the most qualified buyers from this list and discreetly determine the value range they would offer for a company with the same profile as your company. You could use these buyer prospects to validate the best offer from your preferred buyer.
Whichever process you choose, it should take less time and run more smoothly overall if you do most of the work up front. Buyers prefer, and will often pay a higher price for a company whose sale process is organized, efficient and time-effective. It is a good reflection of the efficiency of operations and overall management of the business.
In choosing the right process for your unique business and situation, it is a good idea to discuss your thoughts with an advisor and consider the market environment in which you are trying to sell, your objectives, concerns and also the likely number and type of potential buyers. An experienced M&A advisor will also help to manage the process and ensure that you are able to realize your goals from the sale.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010. About ClearRidge Capital ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms. ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada. Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values. For further information, visit www.clearridgecapital.com.
Wednesday, March 17, 2010
KEY PLANNING REQUIRED to Successfully Integrate an Acquisition
Even though most mergers or acquisitions start out with the best of intentions, numerous studies have shown that the majority fail to increase enterprise value.
This is highlighted by the following statistics from The Wall Street Journal, Forbes, Fortune and CFO.com:
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.
ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
This is highlighted by the following statistics from The Wall Street Journal, Forbes, Fortune and CFO.com:
- 70% of M&A deals fail to achieve the anticipated synergie
- 50% report a drop-off in productivity in the first 6 months post closing
- 47% of acquired company executives leave in the first year, and 75% of executives leave within the first 3 years
- Management grade the financial performance of their acquisition as a
C minus on average.
Create an Integration Plan
So, how can you make sure your business is on the right side of these statistics?
Owners and managers need to put substantial time and effort into an M&A integration plan. Closing the deal is just the beginning. Before closing, you should have clearly defined your deal drivers and put them in measurable and quantifiable terms. Integration efforts should focus on delivering these goals and give you the framework to identify the critical action plan to achieve these goals.
Additionally, you need to determine the key success factors from the newly acquired company, which you may want to adopt in the existing company. Ideally, you will have two companies which learn and adopt best practices from each other to add value to the company as a whole.
Early on, you need to determine the degree to which the new entity should be integrated with the existing entity. Do you want it to remain largely independent, share the same corporate culture, processes and technologies, or maybe somewhere in between?
In making that decision, you need to look deep inside both companies and consider how they may or may not fit together. And don't make that decision from the sanctity of your office. You need to go down to the shop floor, talk to your managers, employees, live and breathe the heart of the two companies.
Based on this understanding, you should try and customize your integration structure and approach, then develop a plan for the first 100 days post closing. And then constantly refer to that plan so as not to lose sight of important items during the frenetic first few months.
Don't be afraid to adjust the plan based upon new findings after closing. This should also allow you to increase input from both sets of employees as they see the ongoing implementation and impact of the integration plan.
Leadership
Key people should be identified to manage the integration process. They need to quarterback the process while you retain the coach's role. Clear leadership roles are critical to minimize uncertainty, assign accountability and define authority.
Make sure that you have leaders on your team who are trustworthy, communicate well in both organizations, and can handle the inevitable uncertainties and morale issues with care. Leaders should be able to respond to changing conditions while keeping the strategic vision of the deal in mind and need to act according to the culture that you want to instill in the entity.
So, how can you make sure your business is on the right side of these statistics?
Owners and managers need to put substantial time and effort into an M&A integration plan. Closing the deal is just the beginning. Before closing, you should have clearly defined your deal drivers and put them in measurable and quantifiable terms. Integration efforts should focus on delivering these goals and give you the framework to identify the critical action plan to achieve these goals.
Additionally, you need to determine the key success factors from the newly acquired company, which you may want to adopt in the existing company. Ideally, you will have two companies which learn and adopt best practices from each other to add value to the company as a whole.
Early on, you need to determine the degree to which the new entity should be integrated with the existing entity. Do you want it to remain largely independent, share the same corporate culture, processes and technologies, or maybe somewhere in between?
In making that decision, you need to look deep inside both companies and consider how they may or may not fit together. And don't make that decision from the sanctity of your office. You need to go down to the shop floor, talk to your managers, employees, live and breathe the heart of the two companies.
Based on this understanding, you should try and customize your integration structure and approach, then develop a plan for the first 100 days post closing. And then constantly refer to that plan so as not to lose sight of important items during the frenetic first few months.
Don't be afraid to adjust the plan based upon new findings after closing. This should also allow you to increase input from both sets of employees as they see the ongoing implementation and impact of the integration plan.
Leadership
Key people should be identified to manage the integration process. They need to quarterback the process while you retain the coach's role. Clear leadership roles are critical to minimize uncertainty, assign accountability and define authority.
Make sure that you have leaders on your team who are trustworthy, communicate well in both organizations, and can handle the inevitable uncertainties and morale issues with care. Leaders should be able to respond to changing conditions while keeping the strategic vision of the deal in mind and need to act according to the culture that you want to instill in the entity.
Communication
According to Watson Wyatt Worldwide, 90% of acquirers agree that communication is important but only 43% deem that communication was effective and successful in their integration. Communication success depends on paying attention to all groups involved with adequate attention focused on senior management, while at the same time providing clear and consistent messages to all employees from day one. Unfortunately, many integration leaders fail to communicate early and often.
Culture
Speed of Integration
Conclusion
According to Watson Wyatt Worldwide, 90% of acquirers agree that communication is important but only 43% deem that communication was effective and successful in their integration. Communication success depends on paying attention to all groups involved with adequate attention focused on senior management, while at the same time providing clear and consistent messages to all employees from day one. Unfortunately, many integration leaders fail to communicate early and often.
Delay = Uncertainty = More Disruption = Decrease in Morale
= Loss in Productivity and Increased costs
= Loss in Productivity and Increased costs
Culture
The set of norms, values and assumptions governing daily actions and interactions are another critical issue that many acquisition integrations overlook. Most often an acquirer hopes to maintain its own culture and hopes that the new entity's culture merges into its own. But that doesn't really make sense.
Before you closed the deal, you likely placed a high value on the people in the target company. If you don't observe, understand and respect their culture, you will not only erode their productivity, but will also lose many of their key people. You need to carefully consider how their culture works and carefully design and implement incentives, compensation and benefits to reward behaviors that you believe are critical to the success of the integration and work within their culture.
Speed of Integration
Despite the fact that many managers like to take their time in integrating firms post closing, a 2008 study by PricewaterhouseCoopers suggests that waiting is a mistake. According to PwC, people are most open to changes in work culture and processes during the first 100 days.
A timely integration leads to improved employee commitment, lower employee turnover, improved focus on customers and improved adoption of new technology.
Conversely, prolonged transitions slow growth, decrease profits, erode morale and reduce profitability.
If you take too long getting to work on the integration, your company could lose market share and miss the best opportunities to deliver the anticipated synergies of the acquisition.
Conclusion
Companies that adequately plan and deliver on M&A integration issues should significantly increase the likelihood that their acquisition works out as everyone had hoped. So, remember the following three steps:
- Gain knowledge about both businesses
- Apply knowledge with a clear plan of action and constantly refer back to the plan and intended goals
- Deliver the integration plan in the first 100 days. Track, monitor and adjust to deliver integration goals.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.
ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Selling Your Company in 2010? More Analysis Is Required
More Analysis Required
If you're going to sell your company in 2010, you need to think differently. Yes, there are buyers lined up with cash right now, but most are either looking for a high growth company that has been bucking the negative economic trend, or they're looking for a stressed balance sheet and shaky capital structure to pick up a "good deal."
For companies that are somewhere in the middle, you need to be better prepared than ever before. Buyers are going to be more critical and more likely to submit a low purchase offer unless they have a real understanding of your business. To submit a fair value purchase offer, they need to be convinced of the opportunity.
You need to have clear data and analysis of your business, systems and processes before you talk to any prospective buyers. This is in addition, to the more obvious steps of highlighting competitive strengths, weaknesses, business outlook, opportunities and benchmarking. Clear means well documented and easily understandable to an independent person who has no prior knowledge of your business.
Why is this data and analysis so important? Because when a buyer makes an offer to invest in your business, they should be well informed and understand the business with an insider's knowledge. If that happens, they feel less uncertainty. Less uncertainty = less perceived risk = higher purchase price.
To illustrate this point, it is useful to consider some of the differences between the equity valuation of a public company and a private company.
It has been proven to us time and again that it is better to lose a buyer earlier in the process than have them make an uninformed low ball purchase offer.
You should spend time preparing insightful analysis of your company before negotiating with a buyer. It is natural to want to get a feel for the market value of your business before spending too much time, but by moving forward too quickly, you will lose negotiating strength and are unlikely to ever find out what the market could really pay.
So, what analysis do you need to perform? Well, we can't give away our proprietary process, but it comes from the experience of the buyer's perspective and seller's perspective from countless acquisitions. It also depends on the size, type and complexity of the business. One thing is for sure, however. When a ClearRidge client brings a company to market, prospective buyers will have access to relevant, concise and convincing analysis, so their offer is going to be based on a much clearer understanding of the business. You will lose some buyers in the process, but you'll also sort through to find motivated prospects who are more likely to meet your price expectations.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.
ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
If you're going to sell your company in 2010, you need to think differently. Yes, there are buyers lined up with cash right now, but most are either looking for a high growth company that has been bucking the negative economic trend, or they're looking for a stressed balance sheet and shaky capital structure to pick up a "good deal."
For companies that are somewhere in the middle, you need to be better prepared than ever before. Buyers are going to be more critical and more likely to submit a low purchase offer unless they have a real understanding of your business. To submit a fair value purchase offer, they need to be convinced of the opportunity.
You need to have clear data and analysis of your business, systems and processes before you talk to any prospective buyers. This is in addition, to the more obvious steps of highlighting competitive strengths, weaknesses, business outlook, opportunities and benchmarking. Clear means well documented and easily understandable to an independent person who has no prior knowledge of your business.
Why is this data and analysis so important? Because when a buyer makes an offer to invest in your business, they should be well informed and understand the business with an insider's knowledge. If that happens, they feel less uncertainty. Less uncertainty = less perceived risk = higher purchase price.
To illustrate this point, it is useful to consider some of the differences between the equity valuation of a public company and a private company.
| Public | Private |
| Information Publicly Available Audited Financials Daily Pricing Information (Stock Price) Daily Analysis by thousands of analysts Highly Regulated Equity Liquidity Highly Liquid Instant trading of minority interest (stock market) Industry of brokers, agents and market makers All sources of capital available High competition for lending and investment Public Auction Process to Sell Majority Interest Valuation Multiple Relatively HIGH | Information Little Pricing/Valuation Information Rarely Audited Financials Non-GAAP Accounting Data available, but little or no analysis Slight or No Regulation Equity Liquidity Low liquidity Few ownership/equity transfers Majority enterprise interest Fewer sources of capital available Less competition for lending Negotiated Sale or Private Auction Process Valuation Multiple Relatively LOW |
Investors in public companies have easier access to more reliable and timely information, data and analysis than investors in closely held private companies. Why is this data and analysis so important? Because when a buyer invests in a public company, they are informed with research from thousands of analysts from many different perspectives. As a result, there is less uncertainty risk. At the time of writing this article, the average PE ratio for the S&P 500 was 20 compared to an average 5.2 adjusted EBITDA multiple for middle market private companies, according to a recent AM&AA report.
Yes, there are other factors to consider when comparing public to private valuation, such as stability and liquidity, but the bottom line is that investors will pay a significant premium for "ABC Manufacturing" public company than the comparable "XYZ Manufacturing" closely held private company. The price premium can be double, triple or more. Therefore, unless the buyer of XYZ Manufacturing has a deep insight into the business before they make an offer, they're going to price in their uncertainty with a lower multiple.
Yes, there are other factors to consider when comparing public to private valuation, such as stability and liquidity, but the bottom line is that investors will pay a significant premium for "ABC Manufacturing" public company than the comparable "XYZ Manufacturing" closely held private company. The price premium can be double, triple or more. Therefore, unless the buyer of XYZ Manufacturing has a deep insight into the business before they make an offer, they're going to price in their uncertainty with a lower multiple.
Let's be realistic. A private company is rarely ever going to sell for a public company multiple, but just bridging some of this information gap and shifting 10 or 20 percentage points towards a higher multiple can mean millions of dollars to you.
So, what can be done to bridge this gap? If you look at the typical closing process when you buy a closely held company, there is a boilerplate due diligence list. And due diligence nearly always begins after the sale price has been negotiated and the letter of intent has been executed.
If you're the seller, this is counterintuitive. If you want a buyer to stretch and pay maximum price for your business, they need to be fully informed when making an offer. After signing a letter of intent, they only have two real options. They either buy your business for somewhere close to the negotiated sale price or walk away. Yes, a buyer will often use due diligence to try and negotiate lower, but the majority of negotiations are already complete by that point.It has been proven to us time and again that it is better to lose a buyer earlier in the process than have them make an uninformed low ball purchase offer.
You should spend time preparing insightful analysis of your company before negotiating with a buyer. It is natural to want to get a feel for the market value of your business before spending too much time, but by moving forward too quickly, you will lose negotiating strength and are unlikely to ever find out what the market could really pay.
So, what analysis do you need to perform? Well, we can't give away our proprietary process, but it comes from the experience of the buyer's perspective and seller's perspective from countless acquisitions. It also depends on the size, type and complexity of the business. One thing is for sure, however. When a ClearRidge client brings a company to market, prospective buyers will have access to relevant, concise and convincing analysis, so their offer is going to be based on a much clearer understanding of the business. You will lose some buyers in the process, but you'll also sort through to find motivated prospects who are more likely to meet your price expectations.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2010.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.
ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Tuesday, January 19, 2010
Cost of Debt and Equity Capital in 2010
Source: Pepperdine University Private Cost of Capital Survey
Pepperdine University, along with research contributor Robert Slee, conducted the first ever private cost of capital survey (PCOC), which was the first survey of its kind to provide information on the capital markets for small to midsized US companies.
They surveyed senior lenders (typically banks), asset-based lenders (ABLs), mezzanine capital, private equity and venture capital as they relate to midsized private companies.
This survey may be useful for your business, as the results highlight the benchmarks that must be met to qualify for capital, along with the required investment returns for the capital providers.
Armed with this information, you should be better able to plan your budget, your ideal capital structure and determine the likely cost of capital in 2010.
We are going to summarize what we think are some of the most important points, but would also encourage you to download the full 67-page survey.
At the end of this email, we provide a link to go to Pepperdine University's website to download the complete survey.
BANKS (Cash-Flow Lending)
Interest Rates
According to Pepperdine's survey, over half of banks responded that their current all-in interest rate (including spreads over prime and LIBOR) is between 6% and 6.5%, with the remainder lending at rates between 6.5% and 7.5%.
44% of loans were refinancing existing debt as opposed to loans for working capital, acquisitions, new equipment and other purposes. While they didn't expect lending rates to increase significantly, most banks expect lending to become more restrictive through the middle of 2010.
ClearRidge: Please take action early in preparation to refinance debt. A major concern is the number of business owners that are going to be surprised by higher loan costs and tighter credit requirements when it comes time to replace debt. That, coupled with declining bank lending levels throughout 2010 will likely lead to liquidity problems for thousands of US businesses.
Fixed or Variable Rates - 38% use fixed rate and 62% use variable rates, of which most are pegged to prime.
Median Credit Ratios
Fixed-Charge Coverage (Min): 1.2
Funded Debt to EBITDA (Max) 3.0
Debt Service (Max) 1.25
Debt to Net Worth (Max) 3.0
Covenant Thresholds
Max Debt/ Total Assets 3x
Min Cash Flow Percentage 125%
Min Fixed-Charge Coverage 1.2x
Max Debt/EBITDA 2.75x
You will notice that these ratios and thresholds are more restrictive than in recent years when many businesses last refinanced debt.
ASSET-BASED LENDING (includes some banks)
Asset-Based Lending focuses mainly on collateral and liquidity; whereas a traditional bank loan focuses mainly on cash flow. An ABL is a loan secured against the assets of a company - mainly inventory and accounts receivable, but sometimes also machinery and equipment, intellectual property or trademarks.
[Banks also operate within this category and sometimes offer a blend of cash flow and asset-based loan.]
Asset-based loans are typically categorized into three tiers depending on loan dollar amount:
Tier 1 loans : >$10M; Tier 2 loans: $3-$10M; Tier 3: <$3M
Interest Rates
According to Pepperdine's survey, variable interest rates in 2009 and 2010 are ranging from prime plus 0.5% to prime plus 16%. For larger loans typically pegged to LIBOR, rates range from LIBOR plus 3.5% to LIBOR plus 6%.
Other fees
ABLs may also have closing fees ranging from 0.5% to 4% of the loan amount; modification fees from 0.1% to 3%; commitment fees from 0.5% to 1.5%' collateral monitoring fees from 0.1% to 12%; unused-line fees from 0.25% to 1%, as well as audit fees, attorneys' fees, insurance, annual and due diligence fees.
ClearRidge: In other words, it's important to look beyond the headline rate and determine the all-in cost of an ABL, which will likely cost you north of 10% and can be as high as 35%.
Over half of Asset-Based Lenders expect prime rate to increase, LIBOR to increase and credit spreads to widen through mid 2010.
Median Credit Ratios
Fixed-Charge Coverage (min): 1.0
Funded Debt to EBITDA (max) 4.25
(compared to bank lending max at 3.0)
Debt Service Ratio (min) 1.2
Lending Advance Rates
Accounts Receivable: 85.0%
Inventory - Low quality: 22.5%
Inventory - Intermediate quality 35.0%
Inventory - High quality 55.0%
Equipment 67.5%
Real Estate 65.0%
Land 50.0%
Firm's Cash Flow 65.0%
Marketable Securities 80.0%
Refinancing accounted for over half of ABLs, followed by acquisition and growth financing. In spite of rising costs, almost every asset-based lender expects demand for ABLs to increase through 2010.
ClearRidge: When traditional bank lending becomes too restrictive or is unavailable, many businesses will turn to ABLs to refinance their debt.
MEZZANINE CAPITAL
According to Pepperdine's survey, all-in interest rates for mezzanine loans are currently running at around 18%.
Mezzanine is most often used to fund a management buyout, growth or acquisition financing, with only about a third for refinancing.
Most mezzanine capital loans would be made to firms with more than $10M in annual sales and for loan amounts between $1M and $10M. One in three mezzanine loans are straight interest, with two thirds comprising interest plus stock warrants.
Pre-funding Median Ratios
Total Debt to EBITDA (max) 3.75
Senior Debt to EBITDA (max) 2.5
Fixed-Charge Coverage (min) 1.2
Median Financial Ratios
Maximum Multiple of Recast EBITDA 4.0
Maximum Multiple of Operating Cash Flow 4.0
Maximum Total Debt to EBITDA 4.0
Maximum Senior Debt to EBITDA 2.5
Minimum Fixed-Charge Coverage 1.2
PRIVATE EQUITY
According to Pepperdine's survey, Private Equity in today's market has an expected annual rate of return of between 20% and 30% on new investments.
Only 7.5% of private equity funds will consider an equity investment of $1M or less, but around 40% will consider an investment smaller than $5 million. Two-thirds are control investments and one third are non-control.
The median targeted equity ratio as a percentage of invested capital in each deal is 41%, with a range between 20% and 50%.
ClearRidge: This equity ratio is in contrast to the easier credit days in 2007 and 2008 when private equity would rarely need to contribute much more than 20% equity to the capital structure.
VENTURE CAPITAL
According to Pepperdine's survey, VCs currently have an expected rate of return on investment of 40% to 43% for each investment they make. However, the average rate of return for realized investments in prior funds is between 24% and 29%.
Below is the Pepperdine Survey's summary of VC investment stages:
Stage 1: 22.5% of VC investments fall into this category.
No product revenues to date and limited expense history, typically an incomplete management team with an idea, plan, and possibly some initial product development. Expected exit by VC in 6.2 years.
Stage 2: 17.0% of VC investments.
Still no product revenue but substantive expense history, as product development is underway and challenges are thought to be understood. Expected exit by VC in 5.8 years.
Stage 3: 17.8% of VC investments.
Significant progress in product development; key development milestones met and development is near completion, but generally no product revenue. Expected exit by VC in 5.1 years.
Stage 4: 28.3% of VC investments.
Additional key development milestones met and some product revenue, but still operating at a loss. Expected exit by VC in 4.8 years.
Stage 5: 10.9% of VC investments.
Product revenue and operating profitability or breakeven/positive cash flows. Expected exit by VC in 4.0 years.
Stage 6: 3.5% of VC investments.
Established financial history of profitable operations or generation of positive cash flows. Expected exit by VC in 3.5 years.
Summary of Capital for Business in 2010
To reiterate what we said in 2009, we would urge you to be thoroughly prepared when it comes time to refinance or recapitalize debt. The credit markets and equity markets are open for business, but it will take better preparation than in the past to get through the loan committee and get your loan approved.
If you need to look at alternatives, raise some capital or replace debt, please give ClearRidge a call and we would be happy to talk through your options with you.
Tax Credits
If you would like to learn about business incentives and tax credits that may be available for your business, you may find the following useful:
Pepperdine Survey
Download a PDF of the full Private Capital Markets report from Pepperdine's website:
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midldle market businesses, banks and law firms.
ClearRidge’s Team have completed M&A transactions, provided restructuring advice and secured new and replacement capital for midsized companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Wednesday, December 16, 2009
Management Buyouts and Buyins
Are you thinking whether or not you should raise capital or sell your company or in 2010?
ClearRidge Management Buyouts
Tulsa Oklahoma
Now, more than ever, you need to consider all your options. Most business owners typically see two options when it comes time to raise new equity or sell their company: 1) strategic buyer or 2) financial buyer. In reality, you have many more options open to you.
In fact, an outright sale rarely yields the highest price, so consider these 9 alternatives before making up your mind:
i) sell to employees;
ii) take the company public
iii) sell to family members;
iv) sell to co-owners;
v) sell through a charitable trust;
vi) sell majority interest and immediately exit the business;
vii) sell minority interest to new investors and use their capital to grow the business;
viii) enter a joint venture to test the water with a possible acquirer;
ix) merge your business with another company.
The important point here is that there are many options available and it makes sense to work through the merits, advantages, challenges and tax implications of each one before starting down the road.
How about a Deal with Management?
Today, we are going to discuss one of the more favorable options in this climate: Management Buyouts (MBOs) and Management Buyins (MBIs). Over the last few months, MBOs and MBIs have become increasingly popular for a variety of reasons.
The first thing to do is assess the likely value that the transfer could bring. In a climate where the majority of midsized companies have seen revenues and earnings fall in the last 18 months, a transfer to management can be the best way to sell for the highest price and realize the most value.
Transfer Ownership to Managers
Management transfers (buyouts and buyins) typically occur when: i) the owner of a privately-held company decides to sell; or ii) a larger company sells off a division; or iii) a bankruptcy forces liquidation of a failed business.
Differences between an MBO and MBI
Management buyouts occur when existing management of a company acquire majority ownership from the owners. Management buyins take place when external financial investors back an outside manager/operator with key industry knowledge and experience to lead and grow the company.
Will an MBO or MBI work for your company?
Below is an outline of the characteristics that would typically favor a MBO or MBI.
Industries
Management deals often occur in mature industries that require low levels of capital investment. Ideally the company would have a loyal customer base. Non-cyclical businesses with reasonable to high margins are favored.
Management Team
Management experience, track record and credibility are paramount. Time and again it is proven that investors back a management team above most everything else. Management needs to have some skin in the game and should be able to raise their own funds or pledge assets. To avoid future headaches, you should only involve managers who are critical to the success of the business. The fewer the better.
Company
The Company should have predictable and stable cash flows with profit margins above industry averages. Financial reporting should be process driven, clear and efficient. Proprietary or defensible products and services are preferred.
Investor and Deal Structures
MBOs and MBIs are often backed by private equity investors and are typically structured either as an Equity sponsored buyout or a Leveraged buyout:
1) Equity-sponsored buyout (ESB). In the current climate, equity-sponsored buyouts typically consist of 2%-10% management equity, 40%-50% private equity capital and 40%-60% bank or asset-based lending. So, in effect, majority equity ownership is taken up by the private equity sponsor, with debt funding about half of the proceeds to the Seller. It is possible that equity sponsors may also require up to 10% in a Seller note.
Management may contribute a token investment of equity and earn additional equity interest based on company performance, as well as the right to acquire further equity pari-passu to the equity sponsor's contribution.
2) Leveraged buyout (LBO). In the free-wheeling, easy credit days (pre-2008), many management buyouts were structured through a leveraged buyout. A LBO would typically consist of 5%-15% management equity, 10%-25% seller note, 5%-20% mezzanine capital and 40%-60% bank or asset-based lending. So, in effect, it would be seller debt, mezzanine debt and bank debt that funds the acquisition.
In the near term, it is unlikely that a LBO will be used to fund a management buyout. Not only is there a higher failure rate than with an ESB, but it would also be difficult to secure the financing with so much leverage.
Advantages of an MBO for Seller:
An MBO will likely have a more efficient and cooperative due diligence process. Management knows the business intimately and may even know more about the business than the Seller.
Management's desire to have skin in the game shows their confidence in the Company's future, which in turn increases investor confidence in the deal. Higher confidence and less perceived risk may allow a higher sale price.
Difficulties to overcome for Seller:
There is an inherent conflict of interest in a MBO. Management is in a position to reduce the sale price or block competitive offers leading up to the sale. Management may also not agree to stay if a competing offer is accepted.
The Seller may have less information about the business and less leverage in negotiations because of the management's role in the business.
Timing is critical. At the closing table, there could be management, private equity, a bank, mezzanine lender and the seller all having to sign off on the deal at the same time. Each group has their own agenda and is represented by different counsel. It is a real challenge to accommodate each party's needs in a timely and professional manner. From the outset, a MBO should be a well planned and carefully orchestrated effort to get the deal closed and each party needs to enter the process with a willing attitude to make some compromises to get the deal done.
Hiring advisors from a specialist M&A firm who have extensive MBO experience will increase the odds of getting a deal done, as well as help to satisfy the needs of all parties and smooth negotiations. Our team at ClearRidge would welcome the opportunity to represent you in your management buyout.
Difficulties to overcome for Management:
Time view of investors vs. managers: 5 years for equity sponsors vs. possibly 10 to 15 years for managers. Management and equity sponsors need to resolve these differences early in the process.
Investors want the company to be run to maximize returns within a short time-frame. Managers may have alternative ideas about long-term appreciation of the Company. There needs to be a common agreement and clear plan agreed between managers and equity sponsors before entering an agreement.
Managers need to understand the implications of the new capital structure and be comfortable that they will support the transaction. Management need to determine if the new capital structure will allow sufficient runway for the newly acquired company to succeed.
This brief overview of management buyouts only scratches the surface of everything you are likely to encounter. If you would like to dig deeper, you can call our team at ClearRidge to arrange a no-cost consultation to discuss how a management buyout could work for your Company.
This is our last newsletter before the holidays and we would like to wish you and your family a Merry Christmas and a Peaceful and Prosperous New Year.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge Management Buyouts
Tulsa Oklahoma
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
ClearRidge Management Buyouts
Tulsa Oklahoma
Now, more than ever, you need to consider all your options. Most business owners typically see two options when it comes time to raise new equity or sell their company: 1) strategic buyer or 2) financial buyer. In reality, you have many more options open to you.
In fact, an outright sale rarely yields the highest price, so consider these 9 alternatives before making up your mind:
i) sell to employees;
ii) take the company public
iii) sell to family members;
iv) sell to co-owners;
v) sell through a charitable trust;
vi) sell majority interest and immediately exit the business;
vii) sell minority interest to new investors and use their capital to grow the business;
viii) enter a joint venture to test the water with a possible acquirer;
ix) merge your business with another company.
The important point here is that there are many options available and it makes sense to work through the merits, advantages, challenges and tax implications of each one before starting down the road.
How about a Deal with Management?
Today, we are going to discuss one of the more favorable options in this climate: Management Buyouts (MBOs) and Management Buyins (MBIs). Over the last few months, MBOs and MBIs have become increasingly popular for a variety of reasons.
The first thing to do is assess the likely value that the transfer could bring. In a climate where the majority of midsized companies have seen revenues and earnings fall in the last 18 months, a transfer to management can be the best way to sell for the highest price and realize the most value.
Transfer Ownership to Managers
Management transfers (buyouts and buyins) typically occur when: i) the owner of a privately-held company decides to sell; or ii) a larger company sells off a division; or iii) a bankruptcy forces liquidation of a failed business.
Differences between an MBO and MBI
Management buyouts occur when existing management of a company acquire majority ownership from the owners. Management buyins take place when external financial investors back an outside manager/operator with key industry knowledge and experience to lead and grow the company.
Will an MBO or MBI work for your company?
Below is an outline of the characteristics that would typically favor a MBO or MBI.
Industries
Management deals often occur in mature industries that require low levels of capital investment. Ideally the company would have a loyal customer base. Non-cyclical businesses with reasonable to high margins are favored.
Management Team
Management experience, track record and credibility are paramount. Time and again it is proven that investors back a management team above most everything else. Management needs to have some skin in the game and should be able to raise their own funds or pledge assets. To avoid future headaches, you should only involve managers who are critical to the success of the business. The fewer the better.
Company
The Company should have predictable and stable cash flows with profit margins above industry averages. Financial reporting should be process driven, clear and efficient. Proprietary or defensible products and services are preferred.
Investor and Deal Structures
MBOs and MBIs are often backed by private equity investors and are typically structured either as an Equity sponsored buyout or a Leveraged buyout:
1) Equity-sponsored buyout (ESB). In the current climate, equity-sponsored buyouts typically consist of 2%-10% management equity, 40%-50% private equity capital and 40%-60% bank or asset-based lending. So, in effect, majority equity ownership is taken up by the private equity sponsor, with debt funding about half of the proceeds to the Seller. It is possible that equity sponsors may also require up to 10% in a Seller note.
Management may contribute a token investment of equity and earn additional equity interest based on company performance, as well as the right to acquire further equity pari-passu to the equity sponsor's contribution.
2) Leveraged buyout (LBO). In the free-wheeling, easy credit days (pre-2008), many management buyouts were structured through a leveraged buyout. A LBO would typically consist of 5%-15% management equity, 10%-25% seller note, 5%-20% mezzanine capital and 40%-60% bank or asset-based lending. So, in effect, it would be seller debt, mezzanine debt and bank debt that funds the acquisition.
In the near term, it is unlikely that a LBO will be used to fund a management buyout. Not only is there a higher failure rate than with an ESB, but it would also be difficult to secure the financing with so much leverage.
Advantages of an MBO for Seller:
An MBO will likely have a more efficient and cooperative due diligence process. Management knows the business intimately and may even know more about the business than the Seller.
Management's desire to have skin in the game shows their confidence in the Company's future, which in turn increases investor confidence in the deal. Higher confidence and less perceived risk may allow a higher sale price.
Difficulties to overcome for Seller:
There is an inherent conflict of interest in a MBO. Management is in a position to reduce the sale price or block competitive offers leading up to the sale. Management may also not agree to stay if a competing offer is accepted.
The Seller may have less information about the business and less leverage in negotiations because of the management's role in the business.
Timing is critical. At the closing table, there could be management, private equity, a bank, mezzanine lender and the seller all having to sign off on the deal at the same time. Each group has their own agenda and is represented by different counsel. It is a real challenge to accommodate each party's needs in a timely and professional manner. From the outset, a MBO should be a well planned and carefully orchestrated effort to get the deal closed and each party needs to enter the process with a willing attitude to make some compromises to get the deal done.
Hiring advisors from a specialist M&A firm who have extensive MBO experience will increase the odds of getting a deal done, as well as help to satisfy the needs of all parties and smooth negotiations. Our team at ClearRidge would welcome the opportunity to represent you in your management buyout.
Difficulties to overcome for Management:
Time view of investors vs. managers: 5 years for equity sponsors vs. possibly 10 to 15 years for managers. Management and equity sponsors need to resolve these differences early in the process.
Investors want the company to be run to maximize returns within a short time-frame. Managers may have alternative ideas about long-term appreciation of the Company. There needs to be a common agreement and clear plan agreed between managers and equity sponsors before entering an agreement.
Managers need to understand the implications of the new capital structure and be comfortable that they will support the transaction. Management need to determine if the new capital structure will allow sufficient runway for the newly acquired company to succeed.
This brief overview of management buyouts only scratches the surface of everything you are likely to encounter. If you would like to dig deeper, you can call our team at ClearRidge to arrange a no-cost consultation to discuss how a management buyout could work for your Company.
This is our last newsletter before the holidays and we would like to wish you and your family a Merry Christmas and a Peaceful and Prosperous New Year.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
ClearRidge Management Buyouts
Tulsa Oklahoma
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Thursday, November 19, 2009
Acquisitions Should Compliment, Not Substitute, Good Corporate Growth Strategy
If you own or manage a business and intend to use the current softness in your industry as a springboard to pick up market share in 2010 and 2011, you need to carefully consider your growth strategy.
Organic Growth
To what extent can you fund and develop growth internally? What are your risks and returns on any capital investment you make? What access do you have to different types of capital and what are the overall costs? And, perhaps most importantly, how will your growth strategy affect future cash flows?
Growth through Acquisition
Will 2010 and 2011 provide some exceptional acquisition opportunities for your business? More than likely, yes. But the most successful business owners will only use mergers and acquisitions as one tool in their overall growth strategy. Acquisitions should be used to gain access to new markets, products or intellectual property where organic growth would be a less effective alternative, but only if it also complements a company's strategic plan.
Challenge your assumptions
As you are considering an acquisition, you need to challenge every assumption you have about the market and the opportunity before proceeding. In times like this, there is a rebalancing of the market. The days of easy credit and pure financial engineering will likely be replaced with one where organic growth, operational strength, smart planning and business acumen are more important.
Acquisitions are often rationalized as a faster and more cost effective way of growing, but that typically doesn't take into account the planning, time, disruption, financial and organizational resources that are required to successfully integrate companies after an acquisition. Synergies on paper are not realized without a thorough integration plan with detailed and realistic profitability targets. We'll talk more about that in the coming weeks.
Does it add value?
An important rule to remember is accretion and dilution. After integrating the two companies, will the acquisition add incremental value to the combined companies? Will it increase the overall value of the group (accretion) or dilute the value of the combined companies? Accretion is good. Dilution is bad.
Go for Growth
A little over 2000 years ago, Virgil told our ancestors that
Fortune Favors the Bold.
However, if Virgil were a business owner today, maybe he would a few caveats to that statement:
Fortune Favors the Bold ... so long as you have scrubbed the numbers, appropriately analyzed the risk, developed the most cost effective capital structure and are confident that your growth and profitability strategy will add value to your company.
There are going to be some great acquisition opportunities next year and we are already seeing buyers setting up for the start of 2010. Our message today, however, is to make sure that any acquisition fits your overall growth strategy. Now is the time to plan that strategy and then find the acquisition opportunities before anyone else does.
This is the first in our series of Secrets to Successful Mergers & Acquisitions.
Next post - Transferring Business Ownership (Part I)
Following post - Business Growth through Acquisition (Part II)
Call ClearRidge for impartial and expert advice on your corporate growth strategy: (918) 392-2900.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Organic Growth
To what extent can you fund and develop growth internally? What are your risks and returns on any capital investment you make? What access do you have to different types of capital and what are the overall costs? And, perhaps most importantly, how will your growth strategy affect future cash flows?
Growth through Acquisition
Will 2010 and 2011 provide some exceptional acquisition opportunities for your business? More than likely, yes. But the most successful business owners will only use mergers and acquisitions as one tool in their overall growth strategy. Acquisitions should be used to gain access to new markets, products or intellectual property where organic growth would be a less effective alternative, but only if it also complements a company's strategic plan.
Challenge your assumptions
As you are considering an acquisition, you need to challenge every assumption you have about the market and the opportunity before proceeding. In times like this, there is a rebalancing of the market. The days of easy credit and pure financial engineering will likely be replaced with one where organic growth, operational strength, smart planning and business acumen are more important.
Acquisitions are often rationalized as a faster and more cost effective way of growing, but that typically doesn't take into account the planning, time, disruption, financial and organizational resources that are required to successfully integrate companies after an acquisition. Synergies on paper are not realized without a thorough integration plan with detailed and realistic profitability targets. We'll talk more about that in the coming weeks.
Does it add value?
An important rule to remember is accretion and dilution. After integrating the two companies, will the acquisition add incremental value to the combined companies? Will it increase the overall value of the group (accretion) or dilute the value of the combined companies? Accretion is good. Dilution is bad.
Go for Growth
A little over 2000 years ago, Virgil told our ancestors that
Fortune Favors the Bold.
However, if Virgil were a business owner today, maybe he would a few caveats to that statement:
Fortune Favors the Bold ... so long as you have scrubbed the numbers, appropriately analyzed the risk, developed the most cost effective capital structure and are confident that your growth and profitability strategy will add value to your company.
There are going to be some great acquisition opportunities next year and we are already seeing buyers setting up for the start of 2010. Our message today, however, is to make sure that any acquisition fits your overall growth strategy. Now is the time to plan that strategy and then find the acquisition opportunities before anyone else does.
This is the first in our series of Secrets to Successful Mergers & Acquisitions.
Next post - Transferring Business Ownership (Part I)
Following post - Business Growth through Acquisition (Part II)
Call ClearRidge for impartial and expert advice on your corporate growth strategy: (918) 392-2900.
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Signs Point to Tight Business Lending in 2010
October is when many companies are preparing budgets and business plans for the following year, so it seems a good time to consider the credit environment for 2010.
While there is no crystal ball, we do have 100 years of historical data from the Federal Reserve to give us clues to business lending levels and business failures coming out of a recession.
The good news is that there are some clear patterns that have occurred after every recession.
To apply historical data to the future, we need to know when this recession ended, and industrial production has proved to be a consistent marker. More accurately, a reduction in year-over-year declines in industrial production defines the end of a recession.
So, unless there is a "double dip" in the coming months, the recession likely ended in July.
Before we consider future business lending levels, we need to understand the current business lending landscape. In the last 30 years, even at the fastest pace of growth, it has typically taken 10 or more years to double commercial and industrial lending levels. However, it took less than half that time for C&I lending to double from May 2004 to a peak in November 2008, according to the Federal Reserve Bank of St. Louis.
C&I lending has been declining since December, and history suggests it will continue to decline - year-over-year - for up to three years after the end of this recession.
And not only is business lending declining, but the pace of the decline is increasing. Typically, the pace of declines has increased for up to 18 months after the end of a recession, so it is likely that this time we are going to break the 1949 record of a 9.3 percent year-over-year decline.
If C&I lending follows the historical pattern, lending levels could drop from $1.64 trillion in October 2008 to less than $1.3 trillion at some time in 2011. Assuming no change in supply and demand for loans, that would be a shortfall of approximately $350 billion.
The demand for new and replacement debt will likely increase in the next two years. Many stronger companies that previously carried little or no debt will start to take on new debt. Banks are competing for this business.
This will be combined with medium- and higher-risk business loans that were made to what appeared to be strong companies at competitive rates a year or so ago, when less stringent credit was available. At a minimum, these weaker companies are going to need to renew or replace their existing debt and there are not as many banks competing for this business.
The supply of new and replacement debt will likely fall over the next two years. As a result, there will be a widening gap between supply and demand, and it will be the weaker companies that will suffer when they are unexpectedly unable to replace or renew their debt.
This could trigger three things: a) Lenders will increase interest rates and fees to compensate for the additional risk of these medium to high risk loans, thus putting further pressure on companies' already weak balance sheets; b) some businesses will have to switch to more costly forms of debt; or c) a shortfall in supply will lead to an increase in defaults on C&I loans, which leads us to review historical business failures after a recession.
According to the American Bankruptcy Institute, U.S. Business bankruptcy filings have now risen every quarter for 13 straight quarters since the bankruptcy rules changed in 2005. To compound this trend, business bankruptcy filings have kept increasing for between two years to five years after the end of each previous recession.
Below is the data from the American Bankruptcy Institute.
Quarterly Business Filings by Year (1994-2009)
Our intention is not to spread doom and gloom, but to raise awareness that the economic battle is not yet over. As a CEO or CFO, you may want to consider professional advice, assistance or even a confidential sounding board to renew, raise or replace debt next year.
If you would like a confidential sounding board to discuss your debt and budget plans for 2010, we are happy to sit down and discuss any options. You don't have to hire us as your advisor, we just want to provide a structure and framework to shape your thinking. If you want us to advise you on restructuring or corporate finance, that's an engagement and we can talk about hiring ClearRidge. (918) 392-2900
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
While there is no crystal ball, we do have 100 years of historical data from the Federal Reserve to give us clues to business lending levels and business failures coming out of a recession.
The good news is that there are some clear patterns that have occurred after every recession.
To apply historical data to the future, we need to know when this recession ended, and industrial production has proved to be a consistent marker. More accurately, a reduction in year-over-year declines in industrial production defines the end of a recession.
So, unless there is a "double dip" in the coming months, the recession likely ended in July.
Before we consider future business lending levels, we need to understand the current business lending landscape. In the last 30 years, even at the fastest pace of growth, it has typically taken 10 or more years to double commercial and industrial lending levels. However, it took less than half that time for C&I lending to double from May 2004 to a peak in November 2008, according to the Federal Reserve Bank of St. Louis.
C&I lending has been declining since December, and history suggests it will continue to decline - year-over-year - for up to three years after the end of this recession.
And not only is business lending declining, but the pace of the decline is increasing. Typically, the pace of declines has increased for up to 18 months after the end of a recession, so it is likely that this time we are going to break the 1949 record of a 9.3 percent year-over-year decline.
If C&I lending follows the historical pattern, lending levels could drop from $1.64 trillion in October 2008 to less than $1.3 trillion at some time in 2011. Assuming no change in supply and demand for loans, that would be a shortfall of approximately $350 billion.
The demand for new and replacement debt will likely increase in the next two years. Many stronger companies that previously carried little or no debt will start to take on new debt. Banks are competing for this business.
This will be combined with medium- and higher-risk business loans that were made to what appeared to be strong companies at competitive rates a year or so ago, when less stringent credit was available. At a minimum, these weaker companies are going to need to renew or replace their existing debt and there are not as many banks competing for this business.
The supply of new and replacement debt will likely fall over the next two years. As a result, there will be a widening gap between supply and demand, and it will be the weaker companies that will suffer when they are unexpectedly unable to replace or renew their debt.
This could trigger three things: a) Lenders will increase interest rates and fees to compensate for the additional risk of these medium to high risk loans, thus putting further pressure on companies' already weak balance sheets; b) some businesses will have to switch to more costly forms of debt; or c) a shortfall in supply will lead to an increase in defaults on C&I loans, which leads us to review historical business failures after a recession.
According to the American Bankruptcy Institute, U.S. Business bankruptcy filings have now risen every quarter for 13 straight quarters since the bankruptcy rules changed in 2005. To compound this trend, business bankruptcy filings have kept increasing for between two years to five years after the end of each previous recession.
Below is the data from the American Bankruptcy Institute.
Quarterly Business Filings by Year (1994-2009)
Our intention is not to spread doom and gloom, but to raise awareness that the economic battle is not yet over. As a CEO or CFO, you may want to consider professional advice, assistance or even a confidential sounding board to renew, raise or replace debt next year.
If you would like a confidential sounding board to discuss your debt and budget plans for 2010, we are happy to sit down and discuss any options. You don't have to hire us as your advisor, we just want to provide a structure and framework to shape your thinking. If you want us to advise you on restructuring or corporate finance, that's an engagement and we can talk about hiring ClearRidge. (918) 392-2900
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Tuesday, October 6, 2009
ClearRidge was quoted on likely trends in 2010 for bank lending and business bankruptcy filings.
Matthew Bristow, Managing Director was quoted on bank lending and business bankruptcy filings after a recession in Oklahoma's Statewide newspaper, Journal Record. VIEW FULL NEWSPAPER ARTICLE
Has recession turned into recovery?
October 2, 2009
TULSA – Oklahoma State University economist Russell Evans believes the national recession could bottom out late this year.
BOK Financial Chief Investment Officer Jim Huntzinger is far more optimistic.
“I think it ended at the end of June this year,” said the 27-year veteran of Oklahoma’s largest bank.
Although some national observers agree with Huntzinger, Bob Dauffenbach doesn’t buy it. While he’s seen some indications of improvement, the University of Oklahoma economist expects lingering problems to keep the U.S. recession in a sustained flat bottom well into 2010.
“There’s just a wide, wide variance of opinion about where things are headed,” said Dauffenbach, director of the OU Price College of Business Center for Economic and Management Research.
“You may be having the blue-chip economists forecasting a big rebound, but they didn’t predict the downturn, so why should we trust them?
“It’s just an upside-down world and I fear it’s going to remain so for a while,” he said in a phone interview Thursday. “It’s going to stabilize, but I don’t think that’s the end of the story. My sort of best-guess as to what we’re going to look at for the next two years is periods of positives and periods of negatives. We’re going to kind of oscillate a lot around the lower edge.”
All agree on one thing: When it comes, the U.S. will endure a mild, restrained recovery, with Oklahoma continuing to perform above national standards despite today’s still-low natural gas prices and slowly recovering oil prices.
“Knock on wood, we’ve made it through this recession in pretty good shape,” said Huntzinger.
But several potential time bombs could derail both trains. While rising unemployment brings immediate concern, with Huntzinger and others anticipating national levels could reach 10 percent,many wounded retailers fear the worst from shaken consumers heading into the key holiday sales season.
Looming over those issues are worries concerning the nation’s $700 billion-plus mortgage-backed securities nightmare, rising bank failures and bankruptcies, revenue-stressed state and municipal governments, mounting war debt and military reinvestment costs, health care reform questions and the looming bill for President Barack Obama’s multitrillion-dollar economic stimulus package.
“This has been a very different set of circumstances that have set up this problem in our economy,” said Matthew Bristow, managing director of ClearRidge Capital of Tulsa. “So this could be a very different outcome.”
Those many governmental issues spiking the federal deficit raise what is, to some, the supreme chill of increased taxes – a budget-freezing point for executives even in Oklahoma.
“Clearly taxes have got to go higher,” Huntzinger said in an office interview Thursday. “The medicine we took to help get us through the recession and the economic meltdown one year ago came at a very high cost.
“But higher taxes would be problematic for the economy, as weakened as it is,” he continued. “We’ve got to find some ways around that.”
While BOKF’s executive vice president agrees the national economy’s not out of danger, Huntzinger takes his recovery position from several months of improving data topped by the Conference Board’s leading indicator index.
“They have been up five months in a row now,” Huntzinger said of the 12-element index. “And not just slightly, but rather significantly higher.” While indicators charted by the OU Price College of Business mirror some of that, Dauffenbach attributed some key spikes to Obama’s temporary stimulus, including the Cash for Clunkers program. He fears those improvements may not sustain themselves, as Thursday’s report of declining national auto sales suggest.
“Calling the recession at an end just because you bounced off the bottom is kind of an incomplete picture in my view,” he said. “There’s a lot of cheerleading going on to keep the consumer spending, to keep the consumer borrowing.”
Both Dauffenbach and Huntzinger noted positive movement in both consumer saving and spending trends, although the OU economist said the improvement needs to be stronger. Huntzinger said some of the negative data that continues to churn concerns in the press, such as rising unemployment, reflect lagging results that always trail real economic activity. He suggested national unemployment stats might show continued volatility through next year even as they slowly improve.
As for the number of troubled real estate loans and securities, which some analysts chart at more than $1 trillion, Huntzinger said falling property values have adjusted for many of those problems.
“We’re not out of the woods yet,” he said. “However, I think the market has priced itself appropriately for the magnitude of the problem.”
The lingering credit crunch remains a concern for Bristow, who like Huntzinger feels the economy bottomed out this summer. But his studies of past recessions indicate the nation’s banking system may face a $350 billion shortfall in capital needed for commercial and industrial loans vital to any recovery.
Huntzinger doubted that, although like Dauffenbach, he foresees a muted turnaround on the horizon.
A normal expansion following a recession of this magnitude might lift the nation’s gross domestic product by 6 to 8 percent, he said. Huntzinger expects this recovery to chart at just a third or fourth of that.
That paralleled Dauffenbach’s expectations, as well as an outlook of a midyear economic update issued last month by Evans and Kyle Dean at the OSU Spears School of Business Center for Applied Economic Research.
“The consumer is still overleveraged,” said Huntzinger. “He needs to pay down debt and is already doing so. He has taken the proper steps.”
Bristow’s studies indicate business bankruptcy filings, already up 64 percent in the second quarter from a year ago, could continue to increase two for five years after the recognized end of the recession, dampening any recovery efforts. Dauffenbach fears this may prove true.
Like unemployment statistics, Huntzinger suggested bankruptcies could represent trailing data to economic activity, not withstanding the key recovery role bankruptcies play in recycling capital and resources.
But he understood how the negative public perceptions brewed by that activity hampers consumer and business confidence, which Huntzinger sees as one of two key foundations for a sustained recovery.
All that led Dauffenbach to question the method of defining how or when a recession turns its corner.
“There’s all these different kinds of ways of measuring it,” he said. “One of the ways you can look at it is how long it takes you to return to the prior level of employment you had in the economy at the time when the recession began. From the year 2001 recession, that took 47 months. It took an extended time from the ‘91 recession to return to your previous end of employment.”
Under that standard, with unemployment levels increasing, today’s proposed turnaround could mark a false bottom, or no turnaround at all. Or historians may glance back and consider it a retooling period, when employment standards revised themselves.
Huntzinger expects a sustained recovery to hinge on two factors: improved consumer and business confidence, and how the federal government works through its building funding crises.
“It’s clear that we’ve got to have a plan as well thought-out as it can possibly be to take the economy out of the government’s hands and put it back in the hands of private business,” he said, expecting that to evolve over the next three to five years.
While everything from health care reform to Social Security to military infrastructure will play into how Congress and the president untangle the growing deficit, Huntzinger focused on the still burgeoning stimulus package as a prime foundation for his recovery views.
“In many cases I think it was appropriate for the government to do some of what we did, because we are clearly in better shape today than we were in September 2008,” he said. “So far, so good.
“It was the worst period of extended market conditions that I’ve seen in my life,” he said. “Much of the corporate infrastructure had ceased to operate. That’s how serious it was.”
As one who questioned several of the stimulus policies, Dauffenbach fears these approaches point to more short-term solutions. To the OU economist, the real issue reflects America’s standard of living and economic role in a growingly global economy.
“I think the cure is America waking up to the opportunities of the future, to begin saving again and investing again, making things, drilling the earth for energy and growing the economy,” he said.
“There’s this thing we call the real standard of living that we enjoy in this increasingly global economy. That’s increasingly under debt when you’re the top dog.
“It’s competitiveness, and in the long term, how do we remain competitive in a world economy?” he said. “Those are ultimately the issues we have to examine. Our standard of living is based on the real stuff we consume. That’s the malaise I see. I see us remaining on top, but on a relative sense less so in comparison with the rest of the world. I don’t know what you do about it, except you do what those countries do, which is save more.”
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
Has recession turned into recovery?
October 2, 2009
TULSA – Oklahoma State University economist Russell Evans believes the national recession could bottom out late this year.
BOK Financial Chief Investment Officer Jim Huntzinger is far more optimistic.
“I think it ended at the end of June this year,” said the 27-year veteran of Oklahoma’s largest bank.
Although some national observers agree with Huntzinger, Bob Dauffenbach doesn’t buy it. While he’s seen some indications of improvement, the University of Oklahoma economist expects lingering problems to keep the U.S. recession in a sustained flat bottom well into 2010.
“There’s just a wide, wide variance of opinion about where things are headed,” said Dauffenbach, director of the OU Price College of Business Center for Economic and Management Research.
“You may be having the blue-chip economists forecasting a big rebound, but they didn’t predict the downturn, so why should we trust them?
“It’s just an upside-down world and I fear it’s going to remain so for a while,” he said in a phone interview Thursday. “It’s going to stabilize, but I don’t think that’s the end of the story. My sort of best-guess as to what we’re going to look at for the next two years is periods of positives and periods of negatives. We’re going to kind of oscillate a lot around the lower edge.”
All agree on one thing: When it comes, the U.S. will endure a mild, restrained recovery, with Oklahoma continuing to perform above national standards despite today’s still-low natural gas prices and slowly recovering oil prices.
“Knock on wood, we’ve made it through this recession in pretty good shape,” said Huntzinger.
But several potential time bombs could derail both trains. While rising unemployment brings immediate concern, with Huntzinger and others anticipating national levels could reach 10 percent,many wounded retailers fear the worst from shaken consumers heading into the key holiday sales season.
Looming over those issues are worries concerning the nation’s $700 billion-plus mortgage-backed securities nightmare, rising bank failures and bankruptcies, revenue-stressed state and municipal governments, mounting war debt and military reinvestment costs, health care reform questions and the looming bill for President Barack Obama’s multitrillion-dollar economic stimulus package.
“This has been a very different set of circumstances that have set up this problem in our economy,” said Matthew Bristow, managing director of ClearRidge Capital of Tulsa. “So this could be a very different outcome.”
Those many governmental issues spiking the federal deficit raise what is, to some, the supreme chill of increased taxes – a budget-freezing point for executives even in Oklahoma.
“Clearly taxes have got to go higher,” Huntzinger said in an office interview Thursday. “The medicine we took to help get us through the recession and the economic meltdown one year ago came at a very high cost.
“But higher taxes would be problematic for the economy, as weakened as it is,” he continued. “We’ve got to find some ways around that.”
While BOKF’s executive vice president agrees the national economy’s not out of danger, Huntzinger takes his recovery position from several months of improving data topped by the Conference Board’s leading indicator index.
“They have been up five months in a row now,” Huntzinger said of the 12-element index. “And not just slightly, but rather significantly higher.” While indicators charted by the OU Price College of Business mirror some of that, Dauffenbach attributed some key spikes to Obama’s temporary stimulus, including the Cash for Clunkers program. He fears those improvements may not sustain themselves, as Thursday’s report of declining national auto sales suggest.
“Calling the recession at an end just because you bounced off the bottom is kind of an incomplete picture in my view,” he said. “There’s a lot of cheerleading going on to keep the consumer spending, to keep the consumer borrowing.”
Both Dauffenbach and Huntzinger noted positive movement in both consumer saving and spending trends, although the OU economist said the improvement needs to be stronger. Huntzinger said some of the negative data that continues to churn concerns in the press, such as rising unemployment, reflect lagging results that always trail real economic activity. He suggested national unemployment stats might show continued volatility through next year even as they slowly improve.
As for the number of troubled real estate loans and securities, which some analysts chart at more than $1 trillion, Huntzinger said falling property values have adjusted for many of those problems.
“We’re not out of the woods yet,” he said. “However, I think the market has priced itself appropriately for the magnitude of the problem.”
The lingering credit crunch remains a concern for Bristow, who like Huntzinger feels the economy bottomed out this summer. But his studies of past recessions indicate the nation’s banking system may face a $350 billion shortfall in capital needed for commercial and industrial loans vital to any recovery.
Huntzinger doubted that, although like Dauffenbach, he foresees a muted turnaround on the horizon.
A normal expansion following a recession of this magnitude might lift the nation’s gross domestic product by 6 to 8 percent, he said. Huntzinger expects this recovery to chart at just a third or fourth of that.
That paralleled Dauffenbach’s expectations, as well as an outlook of a midyear economic update issued last month by Evans and Kyle Dean at the OSU Spears School of Business Center for Applied Economic Research.
“The consumer is still overleveraged,” said Huntzinger. “He needs to pay down debt and is already doing so. He has taken the proper steps.”
Bristow’s studies indicate business bankruptcy filings, already up 64 percent in the second quarter from a year ago, could continue to increase two for five years after the recognized end of the recession, dampening any recovery efforts. Dauffenbach fears this may prove true.
Like unemployment statistics, Huntzinger suggested bankruptcies could represent trailing data to economic activity, not withstanding the key recovery role bankruptcies play in recycling capital and resources.
But he understood how the negative public perceptions brewed by that activity hampers consumer and business confidence, which Huntzinger sees as one of two key foundations for a sustained recovery.
All that led Dauffenbach to question the method of defining how or when a recession turns its corner.
“There’s all these different kinds of ways of measuring it,” he said. “One of the ways you can look at it is how long it takes you to return to the prior level of employment you had in the economy at the time when the recession began. From the year 2001 recession, that took 47 months. It took an extended time from the ‘91 recession to return to your previous end of employment.”
Under that standard, with unemployment levels increasing, today’s proposed turnaround could mark a false bottom, or no turnaround at all. Or historians may glance back and consider it a retooling period, when employment standards revised themselves.
Huntzinger expects a sustained recovery to hinge on two factors: improved consumer and business confidence, and how the federal government works through its building funding crises.
“It’s clear that we’ve got to have a plan as well thought-out as it can possibly be to take the economy out of the government’s hands and put it back in the hands of private business,” he said, expecting that to evolve over the next three to five years.
While everything from health care reform to Social Security to military infrastructure will play into how Congress and the president untangle the growing deficit, Huntzinger focused on the still burgeoning stimulus package as a prime foundation for his recovery views.
“In many cases I think it was appropriate for the government to do some of what we did, because we are clearly in better shape today than we were in September 2008,” he said. “So far, so good.
“It was the worst period of extended market conditions that I’ve seen in my life,” he said. “Much of the corporate infrastructure had ceased to operate. That’s how serious it was.”
As one who questioned several of the stimulus policies, Dauffenbach fears these approaches point to more short-term solutions. To the OU economist, the real issue reflects America’s standard of living and economic role in a growingly global economy.
“I think the cure is America waking up to the opportunities of the future, to begin saving again and investing again, making things, drilling the earth for energy and growing the economy,” he said.
“There’s this thing we call the real standard of living that we enjoy in this increasingly global economy. That’s increasingly under debt when you’re the top dog.
“It’s competitiveness, and in the long term, how do we remain competitive in a world economy?” he said. “Those are ultimately the issues we have to examine. Our standard of living is based on the real stuff we consume. That’s the malaise I see. I see us remaining on top, but on a relative sense less so in comparison with the rest of the world. I don’t know what you do about it, except you do what those countries do, which is save more.”
All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.
About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.
Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.
For further information, visit www.clearridgecapital.com.
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