M & A News

It’s no surprise that credit union consolidation continues; it is estimated that there were 65% more mergers in 2015 than in 2000. Overall, there were about 15% fewer credit unions in 2015 than in 2011. While there are fewer players today than in previous years, the credit union market is not shrinking or in decline. The number of credit unions with over $500 million in assets grew by 21% from 2011 to 2015, which means there are fewer, larger players. Consolidation is not limited to credit unions alone. We are also seeing consolidation of service organizations that provider products, services and technology to the credit union space as well.

Given the current environment, what’s the best course of action for CUSOs? One the one hand, for credit union service organizations (CUSOs) serving credit unions exclusively it means there are fewer credit unions to sell to, but on the other hand, since each player is bigger there are potentially more opportunities for CUSOs.

There are CUSOs right now proactively trying to find value and expand in today’s market. For example, CUSO currently only servicing the east coast may use strategic M&A to quickly gain a footprint in a new geographic market in order to service the growing member base of the credit unions they service.

External factors are also affecting the credit union and CUSO industry. When we look at U.S. M&A activity as a whole, 2015 was a massive year. We are in an environment where deal flow, the number of transactions, size of transactions and valuation multiples are at a peak. And peaks are followed by troughs so 2016 could be an interesting year.

There are a ton of deals going on and a lot of money chasing those deals. This means there are new competitors that CUSOs need to consider when investing in organizations. More and more people from outside the credit union space see the opportunity and are trying to figure out how to enter the industry. For example, private equity are doubling down and looking to expand in technology and financial services especially. While there is more competition from outsiders looking to invest in the same opportunities, CUSOs also provide unique access and benefits to non-exclusive credit union organizations looking to enter into the credit union world.

* This post was contributed by John Dearing, Managing Director at Capstone

Capstone CEO David Braun’s Analysis in the Memphis Business Journal

Verso Paper, after acquiring NewPage Holdings for $1.4 billion in January 2014, has filed for Chapter 11 bankruptcy. Verso, which manufactures coated paper used in products like magazines, is struggling in a declining market. With its new acquisition, the company failed to realize desired economies of scale needed to compete in a world of rising digital media.

What happened? David Braun analyzes what went wrong and what Verso might do to survive in his interview in the Memphis Business Journal. Read the full article here: “Analysis: What might Verso look like after Chapter 11?

The Letter of Intent (LOI) is far more than a legal document. It’s a key milestone in the M&A process and can be a powerful tool for getting the deal done. The LOI provides an opportunity to solidify your relationship with the seller and brings about a new level of commitment and resolve to getting the deal done.

Please join me for a 20-minute M&A Express Videocast this Thursday, January 28 at 1:00 PM ET. In this new videocast you will see how the LOI can help you position the deal in the eyes of sellers and their influencers. You will also learn how to use the LOI to test your assumptions, and set the seller’s expectations about deal structure, price and the acquisition process.

The Letter of Intent: A Key Milestone

January 28, 1:00 pm – 1:20 PM ET

About M&A Express

M&A Express is a high-impact series of videocasts presented by David Braun, founder of Capstone and author of Successful Acquisitions. Each videocast runs 20 minutes or less, and delivers cutting-edge insights on proven growth strategies for middle market companies. M&A Express is free! M&A Express is free! Visit our website for more information.

Watch previous Videocasts on-demand:

  • Why You Need a Roadmap
  • Where to Start Your Search
  • When to Walk Away
  • The Hidden Power of Minority Ownership
  • Cultural Due Diligence

 

Photo Credit: shankar s. via Flickr cc

Despite record levels of activity, the current M&A market is still quite a bumpy ride for many. In 2015, deal value reached $2.3 trillion and 9,962 deals were announced in the U.S. Compared to 2014 numbers, we saw a very significant increase in deal value, while the number of deals was relatively flat (-1.6 percent). This is because the average deal size grew 67 percent in 2015 — from $141 million to $235 million.

US M&A Activity M&A 2015 v 2014 Values

Big Brand Name Acquisitions

One of the reasons for this enormous increase in deal value was that transactions by big brand names came back in vogue. Think about Marriott buying Starwood Hotels for $12.2 billion, creating the largest hotel company in the world. The number of megadeals — deals valued at more than $10 billion — increased by nearly 130 percent while deals over $5 billion and $10 billion increased by 24 percent. A few very large deals were enough in themselves to drive up the total value of M&A activity.

Great Risk, Great Reward

Another factor that contributed to these record-level M&A numbers was an increase in valuations. Buyers were simply willing to pay more for companies. We had a certain amount of “chasing yield” where companies with cash sitting on their balance sheets were looking for ways to deploy it. Rather than getting a third of a percentage point with financial institutions, they were willing to take some risk and get a five percent return on an investment. When you get a five percent return you are willing to pay a 20 X multiple. That’s how we saw some of those deal values go up, especially in the real estate industry (with some REITs) and also in the pharmaceutical space.

Private Equity Activity Still Modest

Taking a look at private equity, the activity is still modest. The market remains one where strategic buyers have an advantage over financial buyers. Part of the reason is that strategic buyers are more motivated and tend to have more cash. Many are faced with stagnant organic growth prospects, which drives them to execute acquisitions to spur growth. In addition, since strategic buyers typically hold on to their acquisitions long-term, they tend to expect higher returns from a deal and can therefore bring a better value proposition to the table than private equity. However, we expect private equity will be back soon, even if they were not quite as vigorous in 2015.

US PE Activity 2015

Concern over Interest Rates

Historically the fourth quarter is very busy for private equity because they want to book investments before year-end. In 2015 we saw a flurry of activity in the third quarter that is usually reserved for the fourth quarter, as people accelerated to close deals earlier. A driver for this was concern over what would happen with the Fed raising interest rates.

Photo Credit: Barn Images

2015 was the “strongest year for deal making on record,” according to Thomson Reuters.  Global deal value reached $4.7 trillion, a 42% increase from 2014, and U.S. deal value reached $2.3 billion, a 64% increase. Despite this record-breaking activity, the number of deals announced globally remained relatively flat and in the U.S., the number of deals actually decreased by 1.65% from 10,129 in 2014 to 9,962 in 2015. This is mainly due to the large number of mega deals (deals over $5 billion) announced in 2015.

As we look forward to what will most likely be another year of exciting M&A activity, let’s take a look back at the posts from the Successful Acquisitions blog that you, our readers, found most interesting.

  1. Why You Don’t Need a 51% Stake to Control a Business
  2. CVS and Target Pharmacy Acquisition, Divestiture and Co-branding
  3. Strategic vs. Financial Acquisitions – What’s the Difference?
  4. How You Can Manage the M&A Process: Tools for Success
  5. Strategic Acquirers at an Advantage in Today’s Market
  6. Why ConAgra Plans to Sell Ralcorp Less than 3 Years Later
  7. New Webinar – “Leadership Essentials for Successful M&A”
  8. When Organic Growth Stalls, Consider M&A
  9. Pharmaceutical M&A: The Rush to Acquire
  10. 2014 Record Breaking Year for M&A
Photo Credit: Barn Images

In light of recent FTC rulings against market domination, Sysco has changed its M&A strategy to focus on smaller, strategic deals rather than large transformative deals. Although Sysco’s change is motivated by regulatory obstacles to larger acquisitions, using strategic, smaller deals is an excellent approach from a strategic perspective. We have long recommended that our clients pursue a series of small transactions to achieve their long-term growth goals. We call this strategy taking “frequent small bites of the apple” because it’s much easier to eat an apple one bite at a time than to cram the whole fruit into your mouth!

Among the advantages of pursuing a series of smaller deals:

1. Focus on One Reason

You may have many needs to meet before you reach your long-term growth goals, for instance improving talent and technological capabilities and expanding geographically. If your vision is growing into a worldwide paint manufacturer and distributor, but you only have manufacturing operations on the East Coast, you will need to expand geographically, build your distribution networks, and perhaps improve on your manufacturing capabilities. Doing all this with only one company may dilute your efforts, or you might acquire a company that really doesn’t fulfill any of your strategic needs.  A better approach: first focus on acquiring a company with an excellent distribution network in the U.S and then another company with quality manufacturing capabilities that match your acquisition criteria. Once you’ve adjusted to this change, you might look at acquisitions outside the U.S.

2. Stay Below the Radar

Large transactions draw attention, especially the mega-deals valued at over $5 billion that have boosted M&A value to record levels. But many transactions are much smaller than these multi-billion dollar deals; in the U.S. from November 1, 2014 to October 31, 2015 there were 12,663 M&A transactions, according to Factset data. 95% of these deals were under $500 million or undisclosed. (Undisclosed deals are typically privately held, smaller transactions that are too small for financial reporting). Smaller strategic transactions allow you to make moves below the radar, out of sight of your competition.

4 reasons why smaller acquisitions are better

3. Adjust to Integration Challenges More Easily

Even the most carefully planned acquisition encounters integration challenges as people and systems adjust to the newly merged company. By acquiring a smaller company, you dramatically limit your integration challenges. Once you’ve had time to work out any kinks and make sure your new company is operating smoothly, you can begin pursuing the next acquisition.

4. Minimize Risk of Acquisition Failure

Although acquisitions are inherently a risky undertaking, smaller strategic transactions are much less risky than large transformative deals. Because integration challenges are minimized, you can remain focused on your strategic objectives, increasing your chances of realizing synergies from the deal. There’s also less financial risk associated with smaller acquisitions; you can minimize capital outlays while rapidly growing your company to reach your long-term goals.

Executing a series of strategic acquisitions is a proven way for middle market companies to grow.

A small deal is also ideal for first-time acquirers who have never pursued growth through mergers and acquisitions. All in all, smaller acquisitions allow you to remain focused, move covertly in the market, and increase your chances of success while still rapidly moving you closer to your vision for the future.

Photo credit: UnknownNet Photography via Flickr cc

Credit unions’ traditional use of consolidation as one way to grow is a trend likely to rise over the next five years, according to industry experts. While the percentage of these deals climbs, there actually are fewer mergers because there are fewer credit unions. There were 4% fewer credit unions in September 2015 than one year earlier, according to CU Data.

Credit Union mergers and consolidation.

Credit union consolidation continues.

Given their decreasing numbers, credit unions pursuing growth will need to consider alternatives ways to grow such as strategic mergers and acquisitions, a common strategy used in the for-profit world. Strategic M&A for credit unions may be motivated by distribution — offering existing products and services to new markets, members or geographies —or breadth — adding new products or services for their existing members. This important tool can generate noninterest income and allow credit unions to create unique value for their members.

At the CUES Directors Conference, Capstone CEO David Braun presented a workshop on Strategic Mergers & Acquisitions for Credit Unions, where he challenged credit union leaders to think creatively to generate new ideas for growth. At this standing-room only session, credit union leaders discussed the increasing importance of strategic mergers and acquisitions for their organizations and for the credit union industry as a whole.

CUES David Braun Strategic Mergers and Acquisitions 2015

David Braun presented a workshop “Grow or Die: Strategic Mergers and Acquisitions for Credit Unions” at the CUES Directors Conference in Orlando Florida on December 8, 2015

Feature photo credit: Opensource.com via Flickr cc

Instead of investing in growth, companies this year have been holding more than $1.4 trillion in cash – close to a record $1.65 trillion in 2014. Oracle’s $56 billion cash stockpile is 1.5 times its sales and Cisco’s $60 billion in cash is 1.2 times its sales. Eleven companies have cash reserves double their annual revenue.

And it’s not just Fortune 500 companies. According to the Middle Market Center, more middle market firms plan to hold onto cash in 2016. Fewer of them are willing to invest extra money or plan to expand in 2016.

Have U.S. Companies Stopped Investing In Growth?

Companies that stockpile cash don’t invest in stock buybacks and dividends, research and development, other organic growth initiatives or mergers and acquisitions.  A strong balance sheet is important, but the levels of cash held by nonfinancial S&P 500 companies is astounding!  They may be worried about the economy or the upcoming elections. But there’s another possibility: all that money on the sidelines portends robust M&A activity in 2016.

Tax Savings

Publicly traded companies also are stashing profits offshore to avoid paying taxes on them. The U.S. corporate tax rate is one of the highest in the world and tax inversions in particular are being driven by the pursuit of tax savings rather than for strategic reasons. .

The latest example is Pfizer and Allergan’s proposed merger which would relocate the company to Ireland and away from the U.S. corporate tax rate. Other companies that have done this include Chiquita, Perrigo, Medtronic, Endo, and Actavis despite calls for stronger restrictions on tax inversions by Congress and President Obama. Pfizer already has found ways to save on taxes even without the acquisition. The company has designated $74 billion as “indefinitely’ invested abroad.

Invest in Growth Now

As other companies hold onto cash, you have a unique opportunity now to invest in your future. Do this by developing a long-term strategic plan, investing in new products, services or equipment, or growing organically. Or pursue the faster, more powerful vehicle of strategic mergers and acquisitions. Middle market companies can seek privately held, not-for-sale deals that focus on long-term growth rather than on cost savings or short-term quarterly updates with shareholders. This increases the likelihood of a successful transaction and sustainable growth.

Middle market companies cannot afford to dwell on cost savings and sit idle. Make sure you are thinking about long-term growth and how your company will not only survive, but thrive.

Is your company hoarding too much cash? Or are you investing in future growth?

Photo Credit: Pictures of Money via Flickr cc

As we near the end of the fourth quarter, everyone is wondering what will happen in 2016. Will the frenzied M&A activity of 2015 continue into the new year?

There seem to be mixed reviews on what activity will look like next year. The Intralinks deal flow predictor indicates a 7% increase in global M&A in Q1 2016, but Mergers & Acquisitions Magazine has been citing a downward trend in the middle market for the past few months.

On the other hand, on a recent Deal Webcast “2016 Middle Market Outlook,” dealmakers were a bit more hopeful, expecting to see activity continue due to the high levels of dry powder and capital on the sidelines, while they did admit there may be a slight downturn.

The lending environment will be similar in 2016 to what it was in 2015 and in the middle market private equity will continue to be highly competitive, according to Michael Fanelli of RSM.

Healthcare and Technology Will Dominate

The Affordable Care Act brought about widespread changes to the healthcare industry, spurring a wave of mega-mergers by massive pharmaceutical companies. Despite this wave of mega-deals, for the most part much of the uncertainty surrounding ACA seems to have worked its way out of the middle-market companies. Tim Alexander of Harris Williams says that by and large, healthcare has become less of a due diligence item for dealmakers, especially those in the upper middle market.

On the other hand, in the lower middle market, the ACA may still raise some red flags, especially for businesses with part-time employees or ones that don’t have healthcare plans at all. While some sellers may have thought about the impacts of ACA, many are waiting to begin talks with a buyer before engaging professionals to deal with these issues, according to Fanelli.

The focus on healthcare is not only due to changes brought about from the Affordable Care Act, but is also indicative of a larger health and wellness trend we’re seeing in the U.S. Expect shakeups in the consumer and food and beverage spaces as people focus on healthier, organic specialty products.

As for technology, there’s plenty of disruption that will continue over the next one to two years, with a constant flow of innovative startups. This continuing trend will have its own impact on the middle market.

The U.S. Middle Market Remains Strong

For the most part, all three dealmakers agreed that middle market M&A is much stronger in the U.S. than it is cross-border or internationally. Most investors see the U.S. as the locale where they can expect their highest returns. This regional focus is not unique to the middle market: In the first 9 months of 2015, the U.S. accounted for 47% of global M&A transactions ($1.5 trillion).

Engaging with Sellers Remains Critical

When it comes to deal-making, building a connection with the owner and sharing your strategic vision remain the critical starting points. There are numerous reasons why an owner may decide to go with a financial buyer over a strategic buyer, even though technically strategic buyers should have an advantage from a cash perspective. In our experience, the same has been true (less money for strategic acquisition vs. financial). What it comes down to is really understanding the owner’s priorities and what he or she wants out of an acquisition. Hint: It’s not always more money.

As Marc Utay of Clarion Capital Partners said, echoing one of our key principles: “Price is important, but not the most important thing. It [the company] is like a child to them.”

 

Effective leadership plays a critical role in integrating companies following an acquisition. Challenges abound, for instance when disagreements arise between the executive team and the rest of the staff. How do you bridge the gap? Communicate painful decisions? Maintain calm during a period of change?

As the leader of an integration process, you should:

  • Be aware of the key challenges and opportunities
  • Recognize that different management styles can bring new value to the combined organization.
  • Be good listeners. Those who aren’t decision-makers need to be heard and to hear from their leaders in response.

Leaders who bulldoze their way through integration breed resistance within the acquired company and are likely to be frustrated by a lack of progress. This can be avoided by adopting a collaborative approach.

That isn’t to suggest that as a leader you should simply acquiesce, but rather that you balance the input of executives and employees and make decisions that best serve the interests of the organization.

Leaders choose which issues may be negotiated, and which are beyond discussion. They must clearly communicate how decisions will be made and how information will be disseminated.

Consider the challenges of integrating Kraft and Heinz following completion of their merger last July.  The Wall Street Journal reports Kraft Heinz is closing seven facilities, including Kraft’s former headquarters near Chicago, and cutting 2,600 jobs. In situations like that, leaders must make tough choices, combining two companies with strong cultures and entrenched staff. Cost cutting, innovation and automation may be essential to the success of the integration, but so is the way in which these dramatic changes are implemented.

The quality of leadership can make or break an integration program.

Expedia will buy HomeAway, a vacation rental site, for $3.9 billion. With this acquisition — its largest since buying Orbitz in 2014 for $1.3 billion — Expedia will compete more directly with Airbnb.

Airbnb, through which people rent their homes to travelers, has become more popular in recent years, both with consumers looking for a cheap place to stay and with those seeking to make some extra cash. Airbnb is expecting its bookings to double to 80 million nights in 2015. HomeAway offers a comparable service. Although Expedia is online’s largest travel agency by bookings with 150 million bookings in 2014, it expects the growing demand for alternative accommodations to continue and possibly to cannibalize the hotel industry.

Build on Your Success

What can the middle market player learn from this deal? If, like Expedia, your business is successful or even the market leader, don’t get too comfortable. Success can easily slip away with disruptions in the market, changes in consumer demand, and new competitors. My point is that if you’re not growing, you’re dying – even if you don’t realize it.

Now is always the best time to build on your success and strengthen your position. You should proactively explore and evaluate all your growth options rather than wait until you are backed into a corner or feel pressured into hasty decision-making.

In addition, although acquisition is usually much faster than building a solution from the ground up, it still takes time to execute successfully. The entire process of crafting an acquisition strategy, finding the ideal markets and prospects, negotiating the deal, and finally signing on the dotted line typically takes about one year.

The first step to take now is to observe your market environment and customers. What do your customers want today? What will they want in the future? Think about meeting the needs of both current customers and customers you have yet to capture. You may decide to stay on your current path. Or you may find that you want to enter into a new market. Either decision is fine, but it should be made deliberately.

Photo Credit: Michael Coghlan via Flickr cc

The pharmaceutical and healthcare industry shows no sign of slowing down in terms of M&A and consolidation. There have already been $427 billion in transactions according to Dealogic data.

Last week Pfizer and Allergan announced that they are currently in merger talks to form one of the largest pharmaceutical companies in the world. Certainly one motivation for the deal is to capitalize on lower tax rates outside the U.S. Allergan is based in Ireland and is  expected to enjoy a tax rate of just 15% this year compared with U.S.-based Pfizer’s rate of 25.5% last year. Of course, this wouldn’t be the first tax-incentivized merger we’ve seen in healthcare.

Meanwhile, Walgreens and Rite Aid plan to combine in a $9.4 billion acquisition — another mega-deal to fuel the fires of M&A activity in 2015. If the acquisition moves forward the new company would own 128,000 drugstores, consolidating two of the three largest drugstores in the U.S.

Big Healthcare Gets Bigger

These large mergers and acquisitions illustrate a phenomenon that I’ve been talking about for quite some time: what I call the “dumbbell” effect. At one end of the dumbbell, large corporations continue to size up, and at the other end small mom and pops and startups are flourishing. In between, middle-market businesses are getting squeezed.   The dearth of smaller, middle-market companies is easy to identify in the retail space, where it’s visibly more challenging for independent outfits to survive.

For example, in the restaurant industry, it’s increasingly hard for independent players to afford the costs of commercial leasing as chain restaurants exploit the economies of scale and their sheer purchasing power.. In some ways it’s similar for the healthcare industry, where the flurry of deal activity is about consolidation, purchasing power, retail leases, and the most favorable contracts with retailers and insurers. Smaller companies are also under enormous pressure to deal with the cost of complying with regulations.

The big pharmacy mergers are mostly about grabbing market share on both the West and East coasts. Walgreens and Rite Aid both have a strong presence in California and New York and Massachusetts, while CVS’s acquisition of Target Pharmacy strengthens its presence in the Pacific Northeast.

Whatever the appearances, Walgreens is using its acquisition of Rite Aid to ensure the company is large enough to compete in terms of distribution, channels, and customers. When compared to CVS, Walgreens isn’t huge ($76.4 billion in 2014 revenues vs. $139.4 billion 2014 revenues). Even at that scale, it’s becoming more difficult to be the smaller player simply because of the burden and cost of regulatory compliance and ensuring that you have the right healthcare plans, contracts and exchanges to remain competitive.

Advice to Middle Market Companies

In the current climate, my advice for middle-market companies is this: Figure out how to continue growth by whatever means necessary. You’ll probably have to do something different than simply grabbing market share because you don’t have the resources of a a huge publically traded company. A strategic use of acquisitions can be a smart way around this dilemma. What’s certain is that if you don’t take action you risk becoming a “me too” player, or simply obsolete.

Wherever there is a challenge, there is also an opportunity to think outside the box and differentiate yourself – whether it’s in terms of service, technology or something else unique to your business. Middle-market companies have one key advantage: the freedom to be agile and offer new, insightful solutions for their customers in ways that large corporations can’t. Keep your growth strategy top of mind as you think about your company’s plans for 2016 and beyond.

Photo Credit: Mike Mozart via Flickr cc

M&A activity in the first 9 months of 2015 remained strong reaching $3.2 trillion globally. It was the strongest first 9-month period since 2007 for global mergers and acquisitions.

The trend of large, mega deals continued in the third quarter of 2015.  Global deal value increased by 32% in the first 9 months of 2015 when compared to the same time period in 2014. On the other hand, deal volume remained relatively flat, only increasing by 2.3%. The average deal size was $103 million, a 30% increase from 2014.

In the US, there were $1.5 trillion in the first nine months of 2015, a 46% increase in value when compared to the first 9 months of 2014.  Click on our infographic for more insights on M&A activity in 3Q 2015.

M&A update 3Q 2015

 

Feature Photo Credit: Mark Dixon via Flickr cc

SABMiller has agreed to Anheuser-Busch InBev’s $106 billion offer to acquire it. Together, they will form a global beer conglomerate with $64 billion in annual revenues that is estimated to make up 29% of global beer sales. The new company would be three times bigger than its next competitor, Heineken. Given that this is such a large acquisition, the merger will of course, be subject to regulatory approval and the two companies will likely need to sell off some assets in order to gain approval.

Strategic Rationale

With this acquisition Anheuser-Busch will gain access to fast growing markets like Latin American and Africa as sales in traditional markets like the U.S. and Europe have slowed down. This trend is widespread across the beer and even the liquor industry and is forcing large companies to take action. Earlier I wrote about liquor giant Diageo’s strategy to woo African drinkers with its own brand of spirits and beer. It seems like Anheuser-Busch is pursuing a similar path to growth by following future demand. Originally founded in Johannesburg, South Africa, SABMiller is the largest brewer in Africa, with a 34% market share. An acquisition may be the fastest and safest route for Anheuser-Busch to enter into a new market and attract new customers.

Negotiations

The agreement comes just days after SABMiller rejected Anheuser-Busch’s offer. As with many publicly traded companies, there were multiple shareholders to convince which took many talks over the course of several weeks. The investment bank 3G Capital which helped put together Anheuser-Busch, negotiated with two of SABMiller’s biggest shareholders: the Santo Domingo family and tobacco company Altria.

In any acquisition, understanding the motivations of the seller is critical to the success of an acquisition. In the case of Anheuser-Busch, without the approval of the two largest shareholders, SABMiller would not have agreed to its offer. Although privately held, middle market companies typically do not need to negotiate with multiple, large shareholders, especially not publicly, you may need to negotiate with two owners or even a family. These owners may want different things out of an acquisition. As a buyer, it’s up to you to figure out what the owner or owners really want and what will motivate them to sell. In this case, SABMiller, wanted something in addition to a high premium, it wanted assurances that the deal would pass regulatory approval and a $3 billion breakup fee.

Photo Credit: nan palmero via Compfight cc

Credit union consolidations are on the rise in 2015, continuing a trend from previous years. There were 14% fewer credit unions in March 2015 than there were in March 2010, according to data from CUDATA.com. As credit unions consolidate, the number of smaller credit unions is decreasing while the number of large credit unions between $100-$500 million and over $500 million in size is increasing.

Credit union consolidation continues. There were about 14% fewer credit unions in March 2015 than March 2010.

Credit union consolidation continues. There were about 14% fewer credit unions in March 2015 than March 2010.

With all the M&A activity, it’s no surprise M&A remains a key topic of interest for credit unions leaders. Earlier this week John Dearing, Managing Director, presented “Strategic Mergers & Acquisitions: Exploring External Growth” at the Credit Union Services and Products Conference hosted by CU Conferences in Nashville, Tennessee. About 70 executives and board members of credit unions participated in this interactive session.

John’s presentation not only covered current trends in credit union M&A, but also explored how credit unions can use strategic options in addition to consolidation when growing through M&A. These could include adding a new technology or expanding into a new market order to grow.

Below are some pictures from the conference.

John and Don Berra, hosts of CU Conferences.

John and Don Berra, hosts of CU Conferences.

John Dearing, Capstone Managing Director, presented "Strategic Mergers & Acquisitions: Exploring External Growth" at the Credit Union Services and Products Conference in Nashville.

John Dearing, Capstone Managing Director, presented “Strategic Mergers & Acquisitions: Exploring External Growth” at the Credit Union Services and Products Conference in Nashville.

Participants at the Credit Union Services and Products Conference hosted by CU Conferences in Nashville, Tennessee.

Participants at the Credit Union Services and Products Conference hosted by CU Conferences in Nashville, Tennessee.

Enjoying local music.

Enjoying local music.

Nashville at night: The Grand Ole Opry

Nashville at night: The Grand Ole Opry

 

After facing near financial disaster, J.C. Penney is slowly recovering. Under former CEO Ron Johnson, the company struggled with a strategy that abandoned traditional sales. Now Marvin Ellison, J.C. Penney’s current CEO, is determined to rebuild by adopting a strategy of efficiency. Ellison explains, “We are taking a serious stance at making J.C. Penney a more efficient and low-cost operator….”

J.C. Penney’s latest strategy to minimize costs can, at times, increase organic growth. Being the low cost provider doesn’t mean that J.C. Penney will become the retailer with the cheapest prices. Instead, they will focus on “restraining expenses” by using e-commerce in an effort to become leaner, and in particular save on the costs associated with inventory at physical stores.

The strategy to minimize costs is one of the five pathways to growth. I sometimes refer to it as the “jellyfish strategy”: you go up when the tide comes in and down when the tide goes out. With this strategy J.C. Penney will certainly survive, but the store cannot expect robust growth by following this pathway alone.

The retail industry as a whole is struggling and companies are weathering the storm differently. Macy’s has cut its full-year sales forecast and Kohl’s has reported weak sales. Walmart is grappling with rising employee wages, but remains optimistic about investing in e-commerce for long-term growth. On the other hand, other retailers like American Apparel may not be in business for much longer. If this dip continues, J.C. Penney, will struggle to grow as well.

When faced with a shrinking market, more competition and other challenges, cutting costs will not be enough. When organic growth stalls, business should consider using mergers and acquisitions to spur growth. Perhaps the jellyfish strategy is what J.C. Penney needs to recover from near financial collapse, but if the store wants to do more than just survive, it will need to adopt a new and positive strategy for long-term growth.

Photo Credit: rexboggs5 via Compfight cc

 

Aloha! We hope you have been enjoying these last few weeks of summer. Our very own Managing Director, John Dearing, recently returned from Maui, Hawaii, where he spoke at the National Credit Union Directors Conference hosted by CU Conferences on August 12 -15. John presented “Strategic Mergers and Acquisitions: Exploring External Growth” in two parts to over 100 credit union directors and executives.

FinTech Acquisitions

One trend highlighted at the conference was the focus on financial technology (FinTech) acquisitions. Banks in particular have been acquiring startups or creating their own incubators and venture capital arms.

Recent examples include:

  • Capital One acquired Level Money, a San Francisco-based money management app in January 2015.
  • BBVA acquired Simple, a banking startup, for $117 million in February 2014.
  • Context 360, Motion Savvy and Bracket Computing joined Wells Fargo’s accelerator program. The program involves direct investment in the startups and six months of mentoring for the executive teams.
  • Mastercard is using strategic M&A to build customer loyalty, data analytics and safety and security. Since 2014 it has acquired C SAM, a mobile wallet service; Pinpoint, a loyalty provider; ElectraCard Services, a payment processor; Transaction Network Services (TNS) a payment gateway service; and Applied Predictive Technologies (APT), a cloud-based analytics provider.

Mobile Banking on the Rise

Like banks, credit unions should also consider using acquisitions to build their technology. With the demand for mobile technology services ion the rise, more members are relying on smartphones to access anything and everything – including their financial data. Mobile banking is the largest banking channel. More than 25% of the world’s population will be mobile bankers within four years and organizations without a clear strategy will lose members.

Following Demand is Critical to Growth

Rather than build up this capability internally, credit unions can acquire to add unique technology products and remain competitive.

Mobile technology is just one example of how credit unions can use strategic M&A to grow. Perhaps you want to quickly expand your geographic footprint in a growing metropolitan area; acquiring another credit union would allow you to do so. Observing current demand and future demand is critical to strategic growth and may provide a competitive advantage.  As you go about developing your strategic plan, consider using acquisition to help your organization achieve its growth goals.

The beautiful view at the National Credit Union Directors Conference hosted by CU Conferences in Maui on August 12-15, 2015.

The beautiful view at the National Credit Union Directors Conference hosted by CU Conferences in Maui on August 12-15, 2015.

It seems as though the employee vs. contractor issue is popping up all over the news. Virtual assistant startup company Zirtual just fired over 400 employees by email because the company couldn’t sustain its payroll once it converted contractors to employees. The Wall Street Journal has also highlighted the many startups that are now grappling with some version of this issue.

The employee vs. contractor question needs to be considered during due diligence, especially as the issue becomes more common.

You may wonder, why does this matter? And if it’s so difficult to convert contractors to employees why are companies doing it?

“1099 Employees”

Many companies today have what we call “1099 employees,” which of course is an oxymoron. You can have 1099 independent contractors, or you can have employees. Unfortunately, some businesses have been treating contractors as if they were employees, primarily to save on costs like healthcare and benefits, which employers are required to provide for employees. It sounds like a good plan, especially for small startup companies with low margins, but you run into legal trouble when your “contractors” actually work as full or part-time employees.

If the company is employing “1099 employees” (contractors who should really be employees), and you are forced to convert them, the costs can be significant. The founder of Zirtual, Maren Kate Donovan, said in a LinkedIn post, “Simple math is add 20-30% on to whatever you pay an IC [independent contractor] to know what it will cost to have them as an employee.”

In addition, a business that is using contractors as if they were employees is exposed to myriad legal issues. Homejoy Inc., a startup cleaning company, was unable to raise more venture capital due to four lawsuits. The business was forced to close.

Take a Closer Look at Workers

A simple way to start your workforce due diligence is to find out how many contractors vs. employees work at the company. A lot of contractors at the seller’s company should raise a yellow flag. It doesn’t guarantee that something is amiss, but you should investigate further.

That’s not to say you have to walk away from a company that uses contractors, or even one that is using contractors as employees. It’s simply an area that needs to be explored. If contractors used by the company should really be re-classified as employees, what would it take to convert them? Does this change the deal for you?

One option is to convert all contractors to employees before the acquisition closes. If the problem is serious enough, you may even decide to walk away from the deal. Whatever you choose, return to your objective acquisition criteria before making your decisions.

People usually think about financial due diligence, but in light of recent news I encourage you to take a second look at the seller’s workforce. You don’t want to discover post-acquisition that all your contractors need to be reclassified as employees. Find out BEFORE you close the deal.

By now, many of you will have heard of Berkshire Hathaway’s $37.2 billion acquisition of Precision Castparts Corp. (PCC), an aerospace parts manufacturer. The acquisition is Berkshire Hathaway’s largest to-date which goes to show with each strategic acquisition, Berkshire Hathaway must make bigger and bigger deals to “move the needle.”

Strategic and to the Point

The straightforward nature of the deal’s press release is particularly refreshing and reflective of Warren Buffett’s overall attitude toward strategic acquisitions.

“I’ve admired PCC’s operations for a long time. For good reasons, it is the suppler of choice for the world’s aerospace industry, one of the largest sources of American exports,” said Warren Buffet.

Mark Donegan, PCC’s chairman and chief executive officer stated: “We see a unique alignment between Warren’s management and investment philosophy and how we manage PCC for the long-term.”

You can read the full press release here.

You’ll notice there are no flowery words or long-winded paragraphs in the press release, unlike the now infamous AOL-Time Warner deal. As I’ve stated before on this blog and in my book, at Capstone, we are big proponents of having only ONE reason for acquisition. Having a simple, clear, strategic path forward leads to success. On the other hand, pursuing many reasons makes the deal unnecessarily complicated and unfocused.

Finding Growth through M&A

Warren Buffett’s latest acquisition reflects the overall trend in the market – M&A is the pathway to growth. Dealogic data reports $2.63 trillion in deals as of August 3, perhaps the most robust year yet. The Wall Street Journal notes, robust M&A “…has been driven largely by companies buying others to drive growth at a time when earnings increases aren’t easy to achieve.”

Organic growth options are anemic or stagnant at best, forcing companies to seriously consider M&A to drive growth. In today’s market, businesses cannot be content to sit on the side lines and go about business as usual. They should take a careful look at all of their growth options – including acquisitions – and determine the best path forward based on a strategic, proactive approach. Those who fail to move now and consider their strategy for growth will be unfortunately be left behind.

Photo Credit: xlibber via Flickr cc

Last week alone, there were three major consolidations in the pharmaceutical space:

  1. Teva will acquire the generic business of Allergan
  2. Hikma pharmaceuticals will acquire Roxane, Boehringer Ingelheim’s generic drug business
  3. Mylan will acquire Perrigo

These three deals in just a few days reflect the trend of pharmaceutical consolidation as companies seek new products in order to fill their pipelines and gain scale.  Consolidation is not limited to pharmaceuticals, but is rampant throughout the healthcare industry. Global healthcare M&A reached $398.5 billion as of July 23 (an 80% increase from one year ago), according to Reuters data. The Supreme Court’s ruling to uphold the Affordable Care Act will likely drive more activity.

Earlier, we saw major health care insurers Aetna and Humana announce a merger and Anthem and Cigna agree to an acquisition.  We can expect more robust mergers and acquisitions activity, including consolidation, in 2015.

Here’s what you need to know about this most recent wave of pharmaceutical deals:

Teva to acquire Allergan’s generic drug business

Teva will pay $40.5 billion in cash and stock for Allergan’s generic business, making it the largest deal in Teva’s history. The acquisition solidifies the Israeli drug company’s position as the No. 1 maker of generic drugs. Last year Teva had $20.3 billion in revenue. The deal will allow for stronger economies of scale, which is extremely important for low-margin generics.

Teva, on the prowl for acquisitions, was caught up earlier this year in a battle with Mylan Pharma. Its unsolicited offers were rejected on numerous occasions while Mylan simultaneously pursued an acquisition with Perrigo. (At the time, Perrigo had also rejected Mylan’s numerous offers).

Reports say this new acquisition with Allergan allows for a “graceful exit” from its bid for Mylan.  Teva executives cited a better cultural fit with Allergan, which it had approached a year ago. Ultimately, a willingness to get the deal done is probably what made the transaction most attractive.

Allergan has been busy acquiring and divesting as well.

Allergan became the third largest drugmaker after being acquired by Actavis in March 2015. Allergan plans to use the revenue from the generics sale to fund a large acquisition; it wants to accelerate its growth into a “branded growth pharma leader.” Allergan acquired Naurex (depression drug developer) on July 26 for $560 million.

Mylan to Acquire Perrigo

As noted above, Mylan was caught up in an unsolicited offer from Teva while also pursuing Perrigo in April of this year. Fast forwarding three months, Mylan has received approval from the European regulators clearing the way forward for its $28.9 billion acquisition of Perrigo. The combined company will be the world’s top seller of low-price medications, with more than $15 billion in annual revenues.

Hikma to acquire Roxane

Hikma will pay $2.65 billion in cash and stock for Roxane. Like Teva, Hikma is interested in building its generic drug business, especially in the US market. The acquisition will bolster Hikma’s position in the U.S.  and “significantly expand” its manufacturing and technological capabilities.

Based in Amman, Jordan, Hikma develops, manufactures and markets branded and nonbranded generic and licensed products in Europe, the Middle East, North Africa and the United States. It had revenues of $1.49 billion in 2014 and its generics business generated $216 million in revenue.

Roxane Laboratories, founded in 1885 in Columbus, Ohio, was acquired by German drugmaker Boehringer Ingelheim in 1978. Hikma previously acquired other Boehringer Ingelheim companies including Bedford Laboratories, an injectable business in the U.S., in 2014. Hikma expects the acquisition to generate revenues of $725 million to $775 million by 2017.

Healthcare M&A Trends to Watch

Below are some trends we’re seeing in the market today:

  • Even more consolidation throughout the industry. Look to insurers as the next wave.
  • Buyers feeling pressure to execute deals now since many in the industry are consolidating.
  • Pharmaceutical companies looking to increase margins either by gaining economies of scale (like Teva and Hikma) or through acquiring expensive, high-margin, brand-name drugs.