M&A Deals

Healthcare M&A Deals

Healthcare M&A deals are off to an excellent start this year as evidenced by the chart below, which shows the increase in value of M&A deals from January 1 to March 19 of this year as compared to the same period last year.

This strong M&A activity continues a trend of increasing transaction values in the Healthcare sector. Since 2012, the aggregate value of healthcare M&A deals has grown 157 percent.

In terms of revenue multiples, and M&A deals, the following segments had the highest multiples:

In terms of EBITDA multiples and M&A deals, the following segments had the highest multiples:

Most people watching healthcare M&A deals in 2015 believe that it will be a very strong year in terms of numbers of transactions and the value of such transactions. The Affordable Care Act is pushing companies to get larger and larger to achieve economies of scale in order to compete effectively. From our vantage point, it appears that healthcare companies need to get larger or they won’t be able to compete in today’s more demanding marketplace.

For companies on the acquisition “trail,” it’s imperative to have an experienced M&A advisor on the team to help refine the acquisition criteria so that important transactions are not missed. With clear criteria, targets can be identified and contacted quickly to make the process as efficient as possible. Furthermore, if a number of targets are contacted at once, the buyer gains valuable strategic market information, can complete comparison “shopping,” and conclude the best possible M&A deal.

For healthcare companies interested in selling, it’s important to have an M&A advisor that can properly identify, worldwide, every possible buyer in order to create the best possible auction. An experienced Investment Bank should be able to create a worldwide, silent auction in order to make sure that a proper market is made for the seller. The second and third bidders will also keep the “winner” honest during the due diligence phase. Furthermore, should the “winner” not be able to complete the transaction, for any reason, the second and third place bidders should be considered as excellent back up buyers.

M&A Deals

Cross Border M&A

The world is getting smaller, at least from an M&A perspective! Increased competition and globalization in almost all industries has fostered in an era of friendly M&A deals without borders. Strategic buyers have been the primary source of M&A transactions in recent years as many firms look to remain competitive in an increasingly global landscape. Most of the time, M&A deals are completed for either offensive or defensive reasons. And, post-recession, the companies with cash have wanted to deploy it quickly and efficiently. Most of the time, the best way for a company to invest is by buying another company. In the “old” days, a company would create a strategy and business plan to expand their business. This would include acquiring or building new plant and equipment. In today’s environment, that takes too long and is too risky for most companies. Therefore, buying another business is a faster, more direct, and less risky approach to expanding a business.

As technology continues to make communication throughout the world easier, companies have not hesitated to do transactions in other countries and continents. These cross-border deals have further fueled M&A in recent years. Acquisitions provide the buying company with an opportunity to expand their global reach in order to generate new sources of revenue, acquire new technology or products, etc.
It is important to note that unlike the M&A deals of the 1980’s, the transactions taking place today are much more friendly in nature as strategic buyers look for target firms that can complement their core competencies.
The role of investment banks in M&A transactions has also evolved with the motivation of buyers and sellers. Today, more than ever, investment banks are required to be global in their reach. Investment banks that fail to offer cross border services are proving to be less valuable to strategic buyers who are looking to expand their businesses across the globe. It’s imperative to work with a firm with many years of cross border M&A experience as there are many nuances and cultural factors that play into closing a successful transaction. This is true whether it’s hiring an investment bank on the buy-side or the sell side.

M&A Deals

Activist Investors and M&A

M&A deal making, over the years, has been affected by activist investors. This is particularly true for financial sponsor buyers such as private equity firms. In most cases, financial sponsors are more sensitive to changes in the valuation for a target company as compared to strategic buyers. There are two primary reasons for this. First, the shorter investment horizon for financial buyers makes it difficult for a financial buyer to add enough value and to sell out with a gain within three to five years. Strategic buyers, on the other hand, are usually making acquisitions for the long haul, which means they don’t have to face that issue. Second, strategic buyers are able to achieve economies of scale on many fronts, which means they can afford to pay more, up-front, for the target.

Activist investors have deterred some financial sponsors or private equity firms from completing M&A deals by bidding up share prices of target companies that the activist investors view as too low. Run ups in the share price of potential target companies makes acquisitions too costly for some financial sponsors, thus discouraging M&A transactions. While strategic buyers have proven to be more flexible in purchase price, they too are finding it harder to complete deals where activist investor presence is strong. The activist investors’ demand for a higher purchase price has made obtaining shareholder approval to complete an M&A transaction more challenging.
The key to getting M&A deals done amidst strong shareholder activism is through detailed target selection and management’s need to pitch the deal to their shareholders from inception. These are not easy tasks and having an experienced financial advisor to guide the management team through the M&A deal is invaluable. An investment bank with decades of experience will be better suited to help management successfully complete an M&A transaction even in the presence of strong shareholder activism or other challenges.

M&A Deals

Mortgage Backed Securities

A mortgage backed security, or MBS, is an asset backed investment that is secured by one or more mortgages. This type of financing is rarely used to complete M&A deals; however, it’s an interesting investment. Occasionally, we like to inform our readers of interesting financial instruments or other matters of interest.

Investing in an MBS is similar to lending money to a homebuyer taking on a mortgage. However, instead of receiving a mortgage that is financed solely by the bank, the mortgage is funded by an open market of investors. Investors reap a return on their investment via the interest rate associated with monthly payments on the mortgage. Because of this functionality, it is clear why a MBS can also be referred to as a “mortgage pass through.” Mortgage backed securities generally achieve a rate of return that is slightly better than government treasury bills or high grade corporate debt.

The greatest risk to investing in an MBS is known as “prepayment risk,” or the chance that the mortgage is repaid ahead of time. Prepayments of mortgages are most likely to happen in a low interest rate environment or when interest rates are declining as homeowners refinance their mortgages at a lower interest rate. The acceleration of prepayments creates a “reinvestment risk” for the investor who must reinvest the principal that has been pre-paid in a now lower interest rate environment. Due to the reduction of interest rates, it is difficult for the investor to reinvest the principal at a rate comparable to the original rate of the original MBS investment.

The opposite of prepayment risk is “extension risk.” This is the risk that the mortgage repayment takes longer than expected. This scenario is most common in a rising interest rate environment as homeowners are less likely to make the required principal payments on their mortgages. This, in effect, extends the life of a low yielding investment in an environment where interest rates are increasing.
 

M&A Deals

Acquisitions

There are several reasons why companies make, or should consider making, acquisitions. Among the more important reasons are the following:

Accelerate market access for existing products. For example, for a non-US company, the US and Canada combined would provide exposure to one of the largest and most vibrant markets in the world.

Obtain skills or technology faster or at lower cost than they can be developed.

Acquire products in other geographies that can be manufactured and sold in the company's home territory.

Increase market share and/or reduce competition.

Diversify product portfolios or add entirely new products.

Achieve economies of scale for production, sales, etc.

Develop cross-selling opportunities.

Enable vertical integration.

M&A deals require focus and attention to detail. A well-experienced investment banker can help a company refine its objectives with regard to an acquisition and help them complete a successful transaction.

Over the years, many prospective clients have come to us with an idea that they'd like to acquire another company. In many cases, the idea hasn't been a bad one, but not worth pursuing. Some CEOs believe that an acquisition will fix an unprofitable or troubled business. Yes, that's possible, but not likely. In other words, one should consider acquisitions carefully, define the goals of acquiring a company, and then devise a strategy and tactics to achieve it. Buying something for the sake of it, will not increase shareholder value. And, certainly buying a company without carefully defined objectives will only exacerbate profitability or other problems at the acquiring company.

M&A Deals

Confidential Information Memorandum

A Confidential Information Memorandum (“CIM”) (also known as an Offering Memorandum) is used as the primary marketing tool for the selling company in an M&A transaction. It is a written and detailed description of the company that is for sale. Frequently, the CIM is greater than fifty pages long and contains information about the company’s products or services, markets, technology, manufacturing, sales and marketing efforts, staffing, financial information, etc.

The selling company’s management team along with an experienced team of M&A advisors will work together to develop an accurate and comprehensive CIM that details the most important features about the company for sale. Typically, a significant amount of time is spent preparing the CIM before it is deemed to be complete and ready for distribution to interested buyers, who will have executed non-disclosure agreements in order to receive the information.

The objective of the CIM is to give potential buyers a strong understanding of the company for sale. Sometimes modified versions of a CIM are created which will be presented to strategic buyers in instances where the seller may be concerned about sharing specific confidential information with a competitor.

The financial information provided in the CIM is one of the most important sections. It always includes both historical and projected financials, which help prospective buyers determine an initial valuation for the company. The projections that are created need to be defensible and there should be a clear explanation as to how the selling company plans on reaching those goals. Potential buyers will look closely at these numbers as they are a major factor in their determination of an initial valuation of the company.

M&A Deals - Entrepreneurs

Versailles Group is pleased to announce the publication of its newest Ebook - Five Common Fears That Entrepreneurs Have When Selling Their Business." This Ebook is designed to help entrepreneurs complete M&A deals, in particular, the sale of their company.

Entrepreneurs, after spending a lot of time and effort to build a company, always have many uncertainties regarding the possible sale of their "baby." This eBook addresses several points including:

How value concerns can be mitigated with deal structure

Buyer motivation

What happens to employees and customers after a sale

What happens to employees and customers after a sale

How confidential information is kept safe throughout the sales process

M&A Deals - Leveraged Buyouts

M&A deals can take many different forms; however, leveraged buyouts (also known as an LBO), especially now with easy credit and low interest rates, have been a good way to help buyers purchase companies. Of course, the endgame for any buyer of a company is to make exceptional returns.

A leveraged buyout is the acquisition of another company using a significant amount of debt in order to finance the acquisition. In most cases, both the assets being acquired and the assets of the acquiring company are used as collateral to back the large loans required to finance the deal. The amount of capital contributed by the acquiring firm is usually minimal and it is not uncommon to see debt to equity ratios of greater than ten to one. The goal of the investors in a leveraged buyout is either to resell the acquired company for a substantial return or bring the company public after all or some of the debt is paid down or once it has become more profitable. Due to the limited equity contributed to the acquisition, these leveraged transactions can generate very large returns for the investors.

The reason companies like leveraged buyouts is that it allows them to make large acquisitions without having to commit a significant amount of their own capital. Leveraged buyouts in recent years have been far more common among two main groups; corporations and LBO funds, many of which are financial buyers. Corporations oftentimes find it easier to buy a company than to build one; an LBO can be an efficient way to acquire an existing company without tying up large amounts of equity. In contrast, LBO funds generally take companies private and sell off divisions in hope of yielding high returns, in many cases 40 percent or more.

M&A Deals

2015 Update

For the first two months of 2015, M&A deals have maintained similar volumes to the first two months of last year (2014).

In terms of the number of transactions, 10,465 transactions were completed in the first two months of this year versus 10, 915 deals n the first two months of last year. The reduction is statistically insignificant. Interestingly, as you'll note in the charts below, the number of transactions by region was nearly identical between the two time periods. With transaction count, the number of transactions in Europe was two percent lower while the number of transactions in Asia was two percent higher.

M&A Deals - 2015

M&A Deals - 2014

With regard to transaction values, approximately US$490.6 billion of transactions were completed in the first two months of 2015. In comparison, the transaction value for the first two months of 2014 was US$511.5 Billion. This was a slight decrease and because the number of transactions between the two relevant time periods actually decreased in the same period, it portrays a scenario where the average deal size increased from 2014 to 2015.

M&A Deals - 2015

M&A Deals - 2014

With regard to value in the first two months of 2015, M&A deals in Asia increased by approximately 82 percent compared to the first two months of 2014. This offsets a decrease in the value of transactions in the US, Europe, and Africa/Middle East. As you will note in the chart above, the percentage of US deals dropped from 54 percent in 2014 to 43 percent in 2015.

M&A Deals - Conclusion

Data is data and is always subject to revision, errors, and manipulation. That being said, M&A activity has been quite strong and is expected to stay that way for some time. There are always economic or political events that can have sudden impacts. No one knows exactly what will happen when the US Federal Reserve Bank starts to raise interest rates in the US. Buyers and sellers of companies both agree that they're hoping it won't have an impact.

Please click this button to view Versailles Group's Ebooks:

M&A Deals

Purchase and Sale Agreement

A Purchase and Sale Agreement is the contract that documents all of the terms agreed upon between the buyer and the seller in an M&A transaction. Sometimes, this document is referred to as the Definitive Agreement. In M&A deals, this is THE document as it controls the actual closing and any open or unresolved issues part-time.

A purchase and sale agreement can take the form of a merger agreement, tender offer document, or a stock or asset purchase agreement. All of these forms of purchase and sale agreements contain a number of important clauses and terms relating to the transaction. Therefore, it’s important for both the buyer and seller to have an experienced lawyer and a good M&A team to make sure the agreement is fair for both parties. Obviously, some of the terms are more important than others.

There are several key sections of a purchase and sale agreement including the following: valuation/consideration, execution provisions, representations and warranties, covenants, conditions to closing, termination provision, break-up fees, etc.

• Execution provisions detail the way in which the deal is structured and the form of consideration. For example, an asset purchase and an all cash consideration.

• Representations and warranties outline exactly what is being sold and that the seller is delivering a clean title which is proof of ownership.

• Covenants are the agreements made between the buyer and seller. For example, a seller could be required by the buyer to keep certain employees.

• Conditions to closing are conditions that must be met such as regulatory approval prior to the closing of the transaction.

• Termination provisions are conditions in which the transaction could be terminated. For example, if the buyer cannot finance the acquisition.

• Break-up fees are the fees that must be paid in the event that one party backs out of the transaction.

These are only some of the many topics covered in a purchase and sale agreement. These agreements are comprehensive documents that are legally binding to all parties involved in the transaction. An experienced M&A advisor knows, from experience, when and where to compromise on certain issues. Furthermore, a good M&A advisor will work closely with their client's lawyer to make sure that whether the client is on the buy-side or the sell-side that they receive a fair document for closing.