January 23, 2012

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A Barren Playing Field

Mergers and Acquisitions Still Suffer Downturn

Tom Haraldsen

January 23, 2012

Last spring, the effects of the nation’s financial woes were already taking their toll on Utah’s economy, as well as on the rest of the world. As Utah Business magazine reported in April 2009, mergers and acquisitions (M&A) in Utah were down at least 50 percent from those in the previous year. So what’s changed since then? Not much. Across the board, experts who handle M&As are telling similar stories—the playing field is not just level, it’s somewhat barren. “In years past, we’ve seen a lot of venture capital activity,” says Scott Loveless, partner with the Salt Lake City firm Parr, Brown, Gee, and Loveless. “We were used to seeing an enormous number of smaller companies in particular that were building up their revenues over time and eventually being acquired or merged. But last year, there was virtually none of that. It’s really hard to compare the past 12 months with any other period before it. Nothing is similar.” “Significantly less” is how Bud Headman, partner at Cohne, Rappaport and Segal in Salt Lake City, calls the state’s M&A activity. “In the past year, we’ve done maybe three or four deals. Many years, we’ve had four to five times that many. I’m not really seeing a ‘pulling out’ of the downturn yet.” Financing Remains Key The main reasons cited for the slowdown are credit, lack of financing and small businesses reluctant to sell when prices are low. But essentially, it’s the lack of financing. “The credit markets have been frozen,” says Ron Moffitt, partner at Stoel Rives in Salt Lake City. “Without bank leverage, it’s all slowed dramatically. The banks haven’t opened up the credit spigot.” There seems to be few common threads among the deals that did go through the past year. Headman says his firm worked with companies valued from $800,000 to more than $400 million. In every case, “people have much sharper pencils” in dealing with mergers or acquisitions, he says. In spite of the slowdown, Loveless’ firm has remained “incredibly busy, but mostly with mining deals,” he says. Chinese investors are particularly active all around the world, wanting acquisitions or business deals that help them control critical raw materials needed for that nation’s infrastructure. Mining in Utah is a large part of that. “They are very aggressive and have lots of money, and the good news is they need local help to complete these deals,” he says. Having equity financing is the key, say the three M&A experts. “Mergers have to be equity-funded,” Headman says. “With valuations lower, and the ability to borrow money getting harder, those companies who can use their own money are the major players right now in M&A.” “Companies with cash and a firm financial base are the ones who can take advantage of opportunities and acquisitions,” Loveless says. “The leverage we used to see with these deals with banks, often up to 80 percent, is more in the 50 to 60 percent range now. So, more upfront equity is required by the lenders.” “Banks aren’t willing to lend the way they used to,” Moffitt adds. “Multiples in transactions now are more like 5.5 to 6 compared to 8 to 10, and that has dramatically affected the pricing of businesses.” In Utah, the other challenge is simply size of businesses. “We don’t have a lot of companies that are flush with cash,” Moffitt says. “There are very few public companies that could, through the market place, raise funds for strategic buys.” He says Utah has a preponderance of family-owned and closely held businesses that are conservative by nature and not as likely to be speculative in this economic climate. Looking Ahead That’s not to say all deals are off. Two RE/MAX real estate offices in Salt Lake City merged—RE/MAX Masters and RE/MAX Canyons—an effort to pool talent and resources under one roof and one management team. And Salt Lake high-technology company Twelve Horses agreed to a merger with One to One Interactive of Boston. That was a rare example of an out-of-state company absorbing a local firm. But those were the exceptions, rather than the rule in 2009. There’s another factor at work slowing mergers and acquisitions—timing. “My clients are telling me that they’re wondering if now might not be the right time to sell,” Loveless says. “They feel they would take less money if they sold now, and are thinking of holding on for another year or two. People are looking for bargains, and those with businesses to sell are aware of that.” “They feel they are better off weathering the storm,” Moffitt says. “If they are okay with their banks and their credit, they will probably hunker down and see how things come out in 3 to 5 years.” So what’s the forecast? For the short term, it will probably be much of the same. “I think at least in the first half of 2010 that companies with a firm financial base will be the only ones taking advantage of opportunities and acquisitions,” Loveless says. “There will always be some vulture funds out there snapping up bargains and taking advantage of real estate vacancies. But the traditional M&A climate we had until near the end of 2008 will take a while to rebound.” Loveless adds that “people I’ve talked to in other states are experiencing the same thing. M&A activity is significantly down from its peak—it’s a difficult kind of deal right now.” Headman agrees. “I think this year will still be difficult, but I’m buoyed by the fact that we are starting to get more phone calls in recent weeks, from people testing the waters,” he says. “I have read in recent reports that private equity funds are starting to pick up again. If we can see valuations begin to rise, that will instill some confidence as well.” Moffitt, who sits on the board of the Utah Economic Development Corporation, has seen a number of “sobering forecasts” for the short term. “It will still come down to ‘strategic buyers,’ those in business with available cash,” he says.
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