Thought Leadership Gallery
Transaction Services
Despite the downturn, companies in just about every sector are considering transactions that will strengthen their balance sheets while positioning them for future growth, once the economy firms. With capital and credit in short supply, caution is the watchword of the day.
Find out where those buyers and sellers are today, where they're headed, and how they're going to get there, considering that the market outlook remains unclear:
- An opportunity to acquire discounted assets
- Patient sellers waiting out transaction slow-down
- Inventory exposure and credit sensitivity
Luc Arsenault
Partner
Transaction Services
In response to the recession and market downturn, how are clients focusing on the future and moving their businesses forward?
The main point here is that if companies have a solid balance sheet, they can accelerate investment. Growth can take place through M&A activity, by acquiring weaker companies and competitors, and through vertical and horizontal integration. Many companies are also looking at the current economy as an opportunity to acquire discounted assets.
In what key ways have you seen business leaders in your industry apply lessons learned from the past year?
Business leaders have gone back to basics. There’s an increased focus on financial and taxation due diligence. We’ve also seen players slow things down, so they don’t make a mistake. People are really taking the required time to do the appropriate amount of background work prior to making decisions. Throughout the process, the buyer can set the pace and many of the terms instead of accepting the seller’s terms and time line.
And before extending themselves on any deal, companies are looking at internal discipline and best practices—for example, quick collection of accounts receivable and expedited invoicing.
Recessions and downturns often lead to innovation and new opportunities—how are you seeing that in the industries you serve?
In the transaction services world, some buyers have moved away from traditional equity investments. Instead they’re buying discounted debt in an effort to take control of certain enterprises. They know there’s a pending restructuring of the liability section of the balance sheet. This is a new development. In private companies the buyers are often requesting that the sellers take a seller note because of the lack of available financing in the marketplace. For example, if you’re buying a company for $50 million, you might put in $25 million and get $15 million in financing; then you’d ask the seller to get the remaining $10 million. There’s also a lot more contingency earn-out plans these days.
Overall there’s been an opening in the market, and we’ve seen an increase in month-over-month activity, but there’s still a good amount of hesitation. Lots of investors are still not convinced that the increase in public equity market activity is based on solid fundamentals.
Cheresh Casinelli
Partner
Transaction Services
In response to the recession and market downturn, how are clients focusing on the future and moving their businesses forward?
Our transaction services work supports both buyers and sellers. We perform due-diligence as well as structuring and post-transaction work. And our client base ranges from private equity firms to companies that have ongoing businesses they want to add to or sell. What we’ve seen is a huge drop-off in transactions—especially private equity deals. The debt markets have basically dried up, and private equity firms with cash can’t get their targets to sell. Meanwhile, multiples have dropped from 10x to 6x. Everyone’s still dealing with the shell shock that comes with depressed values. The players are sitting on the sideline, just waiting and hoping to get a better deal down the road. Sellers are more patient; they want to control the transaction, and they’re hoping for better valuations. Buy-side players are operating similarly, although they’re not quite as skittish. Finally, there are big discounts when debt is used for buying because everyone’s afraid of bad debt. In the end, we may look back on this as a big bankruptcy cycle.
In what key ways have you seen business leaders in your industry apply lessons learned from the past year?
Across the board, all clients, but the buy side in particular, are looking at business fundamentals with a critical eye. More clients are walking away from deals because of one bad factor. Tax exposures are also becoming heightened. Private equity portfolios are struggling, and there’s big worry about debt covenants. It’s a much tougher and slower environment overall.
Recessions and downturns often lead to innovation and new opportunities—how are you seeing that in the industries you serve?
A lot of private equity shops are working without a fund or limited partnership investors. They simply go get a deal and, in effect, create an investment fund for that deal. Then they manage the company after the deal. Established private equity and deal players are leaving the big firms and doing this. It’s similar to the start-ups you see in the high-tech sector.
Ed Drosdick
Partner
Transaction Services
In response to the recession and market downturn, how are clients focusing on the future and moving their businesses forward?
It varies from industry to industry. Automotive, technology, banking, and retail are all different. But there are some common themes. Enterprises that have exposure to inventory, for example, are watching it closer than ever, and it’s never been more clear that management is both an art and a science. They’re concerned, and they’re looking to make sure they measure investment in accounts receivable as well. They also want to be certain that controls are in place to monitor working capital and manage liquidity.
In what key ways have you seen business leaders in your industry apply lessons learned from the past year?
Financial and operating officers have learned that credit arrangements can change quickly. There’s greater emphasis today on making sure you’re in contact with your lender and know the rules of the road. We’re clearly not talking about business-as-usual arrangements anymore. There’s big sensitivity to lines of credit, term loans, covenants, and lease finance of assets. Even with large credit spreads, banks are cautious. People are paying attention to their liability exposure very differently in this recession. And not only could you be in trouble, but your bank could be in trouble too. In the past we had recessions and changes in the business cycle without banks falling apart. Companies are worried about credit availability, as in, “Is my lender stressed?” It’s definitely an added dimension.
Recessions and downturns often lead to innovation and new opportunities—how are you seeing that in the industries you serve?
Innovation and opportunity are two different things. Innovation does happen in a recession; the iPod is a great example. And there will be others too, because measured risks can come out very well even in tough times. For example, opening a branch office in a geography where there’s historically a significant upside. Acquiring great talent or less expensive high-quality infrastructure are also good examples. Lastly, the marketplace seems more receptive to looking at new players and new possibilities when the economy is soft.
Transaction Services Contacts
Luc Arsenault
415-677-8287
Cheresh Casinelli
415-677-8253
Ed Drosdick
206-302-6455
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For more insight about the current business climate and the stormy economy ahead, see our other Thought Leadership Galleries.