Several Positive Business Surprises During the Pandemic
By John Herubin
Managing Director – Business Development
On occasion, I have been accused of having a “keen grasp of the obvious”. I will enhance that perception by stating that every aspect of our lives (personal, family, community, and business) has been in some regard negatively impacted during the COVID pandemic.
Amidst the economic challenges and market hardships that have been particularly experienced by many businesses, we have witnessed several sectors/areas that have been less impacted or unanticipatedly benefitted from these unwanted circumstances.
I will share several examples of these scenarios where we were able to assist clients in successfully completing a sale transaction despite persistent economic headwinds.
Surprise 1 – Residential Housing
We were engaged to sell a company that fabricated custom granite, quartz, and stone countertops for high-end kitchen installation. Almost half of their business was through a “Big Box” retail channel. We had marketed the business in late 2019 and identified interested buyers for a possible March 2020 closing, which unfortunately was put on “hold” due to the economic downturn caused by the pandemic. We anticipated, like in prior recessions, that the residential construction and building supply sector would slow down too. We remained in contact with our client to monitor their progress during the initial months of the pandemic. We were pleasantly surprised to learn that our client had their highest sales volume April, May, and June in their history! We remained in touch with prospective buyers and consummated the sale transaction in the Fall of 2020.
We wondered why this sector had not experienced the downturns of past recessions. Discussions with our client during the late Spring and early Summer of 2020, and subsequent conversations with other clients and similar industry insiders was revealing. The conclusion reached was that since so many people had been required to work at home during the early days of the pandemic, many homeowners were sitting in their kitchens and dining rooms trying to adapt. They surmised that many homeworkers were thinking that since they were going to be stuck working at home for the foreseeable future, had been saving money formerly spent on commuting costs, were likely saving money by not going on vacation in 2020, they might as well renovate or spruce up their kitchens. Therein steps our client and any other businesses supporting residential housing (bathrooms, HVAC, roofing, generators, etc.). All are experiencing strong results during the pandemic. This thesis is easily validated by anyone who has tried in the latter half of 2020 to schedule time with a residential building contractor!
This sector may continue to remain robust even after the pandemic as some housing experts see an increase in people leaving densely populated cities and moving towards more single-family and socially distanced housing options.
Surprise 2 – Telehealth
A second area of surprise emerged during our sale engagement of a mental/behavioral healthcare related company.
For investors, healthcare is often viewed as a relative safe haven during an economic downturn. Not so when that downturn is the result of a once-in-a-century pandemic. A combination of government edicts, patient fears, and intentional efforts to preserve critical resources resulted in plummeting volumes in most sectors.
For behavioral healthcare however, increasing rates of anxiety and depression related to the pandemic drove up demand for mental health services. Providers like our client, quickly adapted to using telemedicine to meet patient needs, improving profitability when so many other sectors struggled.
The longer the pandemic lingers into 2021, the more experts believe a mental and emotional toll will continue to increase for people of all ages (remote learning students/parents, isolated elderly, unemployed individuals, etc.). These problems may be exacerbated by greater drug and alcohol use (alcohol sales in many areas are at all-time highs). The behavioral health subsector (and particularly telehealth) remains a growing, attractive, and resilient business provider in a still tumultuous healthcare world.
Surprise 3 – E-commerce Food & Beverage
The early days of the pandemic saw some unusual instances of panic buying and stockpiling (i.e. empty toilet paper and cleaning wipes on grocery store shelves). These behaviors were amplified by supply-chain disruptions from international and domestic channels affected by inventory production catch-up and pandemic influenced labor shortages. Grocery stores and Amazon have filled the consumer grocery void while restaurants, although trying to adapt, have overall suffered incredibly from varying lockdown provisions. Back to my grasp of the obvious, this is certainly a business sector in flux.
A specific area where we have seen a resilient response to the pandemic involves e-commerce food and beverage distribution and manufacturing companies. With more people sheltering in place during lockdowns and working remotely, home meal preparation has greatly increased during the pandemic (some experts estimate it has doubled). Consequently, meals and beverages people were used to consuming at restaurants or outside the home are now being prepared and consumed at home. On-line grocery shopping has come of age!
EdgePoint is currently working with an e-commerce company in the alcoholic beverage category that specializes in direct-to-consumer delivery. The business was experiencing steady growth prior to the pandemic but has seen accelerated growth beyond pre-pandemic forecasted levels. This growth correlates to the increased alcohol consumption mentioned above and in addition to the large batch brewers and distillers is also benefitting many of the craft brewers and specialty spirits distillers. It is not anticipated that this trend will abate until the pandemic recedes and is creating new consumers for products that may not have been previously considered. Financial and strategic investors have taken notice and we are seeing increased interest in this segment.
There is still much to be settled in the food and beverage space when the pandemic recedes but suffice to say the resiliency and adaptations that have already occurred, will be felt for the foreseeable future.
Conclusion
It is too soon to tell what the world will look like at the end of the pandemic or exactly when it will end. One thing we can say with certainty is that we will see many industries negatively and positively impacted by the pandemic, and more surprises to the story are yet to be revealed.
As the examples above illustrate, there are already business sectors that have surprisingly excelled and buyers/investors that remain highly interested in looking at these opportunities.
If you have any questions about how the pandemic has impacted merger and acquisition activity in your business and/or industry, please feel free to contact us.
© Copyrighted by John Herubin, Managing Director, EdgePoint Capital, merger & acquisition advisors. John can be reached at 216-342-5865 or at jherubin@edgepoint.com.
Leveraging a “Deal on the Table”
By Tom Zucker
President
An-admired competitor has just extended you the ultimate compliment, “we would like to buy your business”. The pride of being recognized by your peer and being offered a compelling financial offer is intriguing. They proclaim their offer is fair and the closing process is simple and quick. Seller beware, the pre-emptive sophisticated buyer is skilled at luring a first-time seller into choosing simplicity over value.
EdgePoint’s advice to many of our clients is straight forward and simple, “A Deal on the Table is merely an invitation to the game”. The offer is an acknowledgement of market demand for your business, and that additional buyers will likely have similar interest. The first offer received is rarely the highest and best price that the market has to offer. Competition and company positioning yields the highest price and best terms.
We often advise our clients to accept the invitation to the game. Explore the pre-emptive offer, gain market insight from their competitor, and most importantly invite other buyers to the game. A seasoned and experienced deal maker can quickly identify strategic and financial buyers that would jump at the opportunity to be at the table. While the other party is answering questions and trying to secure deal exclusivity, your team can be busy garnering offers from other buyers. Explore the benefits of having multiple offers.
“Life is not always a matter of holding good cards, but sometimes, playing a poor hand well”
– Jack London
We recently had a client with a “Deal on the Table”. In fact, the client had two pre-emptive offers from strategic competitors with well-funded financial backers. The buyers desired our client’s strong market position, impressive client list, and talented leadership team. The pre-emptive $44 million offers were intriguing to our client. EdgePoint’s assessment of the situation and understanding of our client’s market positioning, led us to advise our client to bring more buyers to the table. After agreeing to engage EdgePoint, we immediately began buyer diligence and efforts to extend their timelines. We quickly added four additional buyers to the discussions and received offers 25% higher than the initial offer. The pace and size of the offers escalated to a final purchase price almost double the initial offer. In less than 60 days, we were able to add more than $15 million of additional purchase price for almost a 40% premium over the initial offers. The final bidder was one of the initial interested parties but with a more compelling price and terms. In retrospect, our client played his hand well and was rewarded for his patience and judgment.
We almost always find that the Deal at the Table was in fact not a deal worth taking. The ability to remove the prideful emotions that come with a pre-emptive offer and to thoughtfully play the game is critical to ensuring the best price and terms for a seller.
© Copyrighted by Tom Zucker, President of EdgePoint Capital, merger & acquisition advisors. Tom can be reached at 216-342-5858 or on the web at www.edgepoint.com.
The Seller Experience: Preparing the Owner for Transition
EdgePoint President Tom Zucker discusses the 4 C’s of Transition Planning: Clarity, Confidentiality, Communications and Certainty of Close.
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A Primer on Synergies in M&A
By EdgePoint
The prospect of achieving synergies in M&A transactions is an important driver of value. The concept of synergy is any effect that increases the value of a merged firm above the combined value of the two separate firms.
When a strategic acquirer, whether a stand-alone company or a portfolio company of a financial investor, identify an acquisition target with compelling synergy opportunities, the target may have a higher intrinsic value to the acquirer. When these synergy opportunities present themselves, strategic acquirers may be able to pay a premium for the target due to the higher earnings stream generated by the combined entities.
This write-up is a refresher on common categories of synergy that are available to, and form the basis of, M&A motivation and value creation. There are broadly three different types of synergies in M&A transactions to consider:
1. Revenue Synergies
Revenue synergies occur when two combined companies are able to sell more products and/or services than they would have otherwise achieved separately.
Cross-Selling / Product Bundling
The most common synergy opportunity sought by strategic buyers in an M&A transaction is the opportunity for cross-selling. Cross-selling is the ability of the acquirer to offer its product or services to the customer base of the target company, and vice versa. Often referred to as “bundling”, strategic acquirers will look for opportunities to combine existing offerings with that of the target company to provide a more comprehensive solution set to its customer base, with the goal of offering a more compelling value proposition and the opportunity for better pricing. Another compelling attribute of cross-selling synergies is opportunity to rationalize the nature of the sales team. For example, imagine a rep from Company A visits a client to discuss a product / service, and on the way out the door passes a rep from Company B visiting the same client to discuss a related product / service. If Company A and Company B were to merge, a single sales rep could visit that same customer and, in theory, discuss a broader product offering, presenting the opportunity to rationalize the or reconfigure the make up of the sales team.
New Distribution Channels
Similar to cross-selling, M&A can be used by a strategic acquirer to access a new distribution channel through the acquisition of a target with an established presence in this desired channel. One of the most common examples of this revenue synergy is in the retail sector as brick and mortar retailers look to acquire E-commerce businesses and platforms to broaden the reach of the acquirer to make their products more readily available to consumers.
Geographic Expansion
Another compelling revenue synergy is the ability to enter new geographies. Often times, strategic acquirers will look to enter a new geography via M&A by acquiring a target with an established presence in the desired territory. By expanding geographic reach through acquisitions, strategic acquirers are able to leverage the “trust” the market has with an established brand or company that has been operating in that market for a period of time. In addition, when expanding internationally, acquiring a business that is well versed in cultural customs often times proves to be a more efficient of entering a new market as opposed to organic expansion.
2. Cost Synergies
Cost synergies represent the opportunity to reduce overall costs because of combining businesses. There are several common ways in which companies seek to extract cost synergies through mergers and acquisitions, including:
- Reducing staff headcount by identifying functional duplication
- Reducing rent by consolidating offices and other locations
- Consolidating suppliers &/or renegotiating supplier terms
- Increasing utilization of capital assets such as factories, transportation etc.
- Reducing professional services fees
- Reducing costs through exchange of best practices
Cost synergies are often associated with the flurry of M&A activity during the 1980’s and are often viewed with a negative bias by the general public as they primarily focused on massive reductions in headcount. Due to the advancements in technology, many companies operate with a much leaner operational infrastructure today. Due to this, the majority of strategic buyers in today’s market look to achieve cost synergies through greater purchasing power with supplies or vendors (i.e. insurance, raw materials).
3. Financial Synergies
Financial synergies relate to a company’s cost of capital, the costs the company needs to meet in order to secure the various funding sources required to finance the operations of its business.
When a smaller company seeks to borrow money, the lender will charge a given interest rate to compensate for the risk attached to the loan. All things being equal, when the borrower merges with a larger business, the interest rate it will be charged should be lower in recognition of the larger balance sheet and cash flows supporting the loan. This will not always be the case, but it is a possible synergy that might flow from an M&A transaction.
Conclusion
Synergies in M&A are an important consideration when a seller is fielding offers from both strategic buyers and private equity firms. Synergies are an important aspect of merger and acquisition transactions and need to be carefully considered when planning the sale of a business. Sellers with a mind on highest value for their Company should prepare themselves for synergistic pricing by clearly identifying and providing supporting documentation to present to potential strategic buyers as ideas during the sale process.
© Copyrighted by EdgePoint. Tom Zucker can be reached at 216-342-5858 or at tzucker@edgepoint.com
A Look at Closing a Cross-Border Transaction During COVID-19
By Russ Warren, Managing Director
On October 20th, 2020 EdgePoint’s family-owned client Real Food Blends of Chesterton, Indiana, maker of blended healthy meals for people with feeding tubes, was acquired by Nutricia, a subsidiary of Danone S A, a Paris-based global food & beverage company with four businesses: Essential Dairy and Plant-Based Products, Waters, Early Life Nutrition and Medical Nutrition.
What was so special about this engagement, and what did it take to close this cross-border transaction during the pandemic?
Real Food Blends (RFB) was founded by a young couple whose infant son needed a feeding tube. They wanted him to have a healthy varied diet without hard-to-pronounce additives. They realized they had to develop their own meals and the business was born. Because RFB products apply to consumers globally and has the potential to disrupt its addressable global market, it was important to include the best strategic buyer candidates from around the world in the process. The EdgePoint Healthcare team and a staff member whose special needs daughter uses RFB products served in advisory roles.
Approaching a large foreign company like Danone about a middle market acquisition is often best done by someone local who knows the buyer and its organization. EdgePoint worked with DDA & Company, the French member of our international alliance AICA, to present the opportunity. Danone soon emerged as a top buyer candidate.
Due to COVID, the buyer’s Paris team could not visit Real Food Blends in person as intended, but they relied on Danone personnel in the United States to make a site visit. Communications, management presentations, due diligence and negotiations were handled virtually between Danone Paris/its advisors and EdgePoint/Real Food Blends. The parties credit the video technology of Zoom meetings with enabling them to share screens and read body language and non-verbal signals so important in keeping these dealings on track.
This win-win transaction shows that determined, creative people can achieve outstanding results even during challenging times, and that a large multi-national company can be interested in a specialty middle-market acquisition that advances its strategy.
More broadly, although the number of cross-border transactions in which a foreign buyer acquired a U. S. business dropped from 69 in Q3 2019 to 35 in Q3 2020 (or about 50%) per Pitchbook, we are able to generate interest from buyers outside the United States for other clients where appropriate despite COVID-related and other international challenges. Companies and investors around the globe are interested in re-positioning their businesses for what they expect will be the next normal.
By Russ Warren, Managing Director of EdgePoint, merger & acquisition advisors. Russ can be reached at 216-342-5854 or on the web at www.edgepoint.com.
