Kurt Braun looks at 75 to 100 possible deals every year. As finance chief at ClearPoint Resources Inc. (formerly Mercer Staffing), a growing private company in the highly segmented professional-staffing business, he has helped develop a rigorous methodology for valuing a target company and determining its strategic fit with the business. Lately, Braun has walked away from deals when other bidders have driven the price too high for ClearPoint’s taste. In a twist on convention, those bidders offering outsized multiples have been financial buyers.
How times have changed. “A few years ago, in an auction situation, the seller’s investment bank would typically say, ‘Here are the strategic buyers,’ and almost as an afterthought, ‘Here are the financial buyers — we’ll never get the same price from them,’” says John LeClaire, chairman of the private-equity practice at Goodwin Procter LLP. Today, private-equity buyers are competing far more aggressively for acquisitions. They have headlined some of the biggest recent deals, including Albertson’s, Hertz, Dunkin’ Brands, SunGard Data Systems, and Neiman Marcus.
There are three reasons for the change. One, private-equity and hedge-fund acquirers are flush with cash, as money continues to pour in from return-starved investors. Two, debt continues to be cheap. Three, private-equity buyers are increasingly seeking the same cost savings and operational synergies that strategic buyers have always used to justify paying higher multiples. They approach companies with plans for operational improvements, and in some cases are seeking to build on the capabilities of existing portfolio companies.
Strategic buyers, meanwhile, have plenty of cash themselves. But no longer can they expect financial buyers to shy away from competing on price, with recent private-equity deal multiples reaching nearly 13 times EBITDA. As a result, some corporate acquirers are looking for nonfinancial ways to strengthen their bids. Others are teaming up with financial buyers on large deals, while a third group is seeking private-equity backers of their own.
More Than a Number
Although in an auction situation the prize will typically go to the highest bidder, some corporate buyers are looking beyond valuation to other elements of a deal. Nonfinancial aspects of an acquisition agreement such as ability to close, time to close, and lack of contingencies can also play a significant role in determining the winning bid for a company, says Tiff Armstrong, a partner at Harris Williams & Co., an M&A advisory firm.
Armstrong says corporate acquirers are thinking more carefully than they have in the past about how to get an edge in the bidding process. Corporate buyers are continuing to offer an aggressive purchase price, free of financing contingencies and with very competitive time frames, he says. “They are also factoring in what they think the financial buyer is going to be willing to pay, and determining where they want to be relative to the financial buyer.”
Braun agrees that intangibles can play a role in determining who ultimately wins at auction. ClearPoint executives recently walked away from a target company after a hedge fund entered the bidding and offered what Braun thought was an unrealistic valuation. “I thought that maybe because they had so much cash, they weren’t under the same pressure to earn returns as we would be,” he says.