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Thursday, Mar 28, 2024

Firms Get Offers They Can’t Refuse

In the last year, about 20 greater San Fernando Valley companies either acquired others or sold their companies. Some were very large, as in the acquisition by Public Storage Inc. of Shurgard Storage Centers Inc. for about $5 billion. Some, like HemaCare Corp.’s acquisition of Teragenix Corp. for $4.8 million were much smaller. But they all mirrored a larger trend around the country: after years of sitting on the sidelines, there is a frenzy of M & A; activity the business world hasn’t seen since the dotcom heyday of the late 1990s. “In my practice I’ve seen it building momentum since the first quarter this year,” said attorney Ira Rosenblatt, co-founder and director at Stone, Rosenblatt & Cha. “I’m seeing more and more clients who had not even contemplated selling twelve months ago who have received multiple unsolicited inquiries from private equity funds who are then scratching their heads and saying maybe we should contemplate this.” Unlike the late 1990s, when the focus was on technology, attention today is being showered on companies of all sizes operating in nearly all industries. It is also coming from a far wider array of buyers. Whereas M & A; activity in past years largely resulted from corporate strategies to add revenues, the current climate is characterized by any number of financial players, including banks, private equity funds, venture capitalists, hedge funds and the latest entry, the Special Purpose Acquisition Corporation or SPAC, an entity that goes public for the specific purpose of raising funds for acquisitions. At the same time, the dollar, weaker against the euro, has attracted buyers from Western Europe taking advantage of what is tantamount to an automatic discount on pricing. And India, seeking a supply of business for its outsourcing capabilities, has become an aggressive M & A; player in the U.S. The sheer number of buyers, coupled with still-low interest rates for debt financing and venture capital and private equity funds that are flush with cash they have to spend or give back, has driven valuations higher, and, in some cases, thrown caution to the wind. Anxious to get deals done, buyers are foregoing or skimping on some of the steps that used to be standard operating procedure. “Certain things have fallen by the wayside,’ said Kevin Rex, an attorney with Lewitt, Hackman, Shapiro, Marshall & Harlan. “We’re getting away with a lot more of qualifying things because buyers are anxious to get deals done.” It all started back when the dotcom bubble burst and the economy went into slumber mode, a condition that only worsened in the wake of the terrorist attacks of Sept. 11. Then, just as the climate began to improve, public companies faced looming deadlines to implement Sarbanes-Oxley (SOX) legislation, an all consuming task that left little time for anything else. “No one knew whether they were coming or going,” said Kevin McFarlane, managing director of Deloitte & Touche Corporate Finance LLC, Deloitte’s investment bank. “For sellers, particularly of smaller companies, valuations weren’t right because they didn’t know what their business would do going forward. Buyers were focused on SOX and the implications that would have.” Meanwhile, VCs, private equity and hedge funds were amassing large war chests from investors seeking better returns than stocks were providing. With a limited number of M & A; opportunities, capital players, who were obliged to spend their cash or risk having to return it to investors, were willing to bid up prices to make their deals. “There was a time when six times EBITDA was standard,” said McFarlane. “Now, they’re paying seven or eight times EBITDA or even higher in order to compete with strategic players who have big balance sheets. The market is being very persuasive now.” At the same time that prices are increasing, terms are loosening, shifting more risk over to the buyer side. “If you have a model you’ve proven to be profitable, and it’s scaleable and you’re not only showing growth in additions of locations, you’re going to be very attractive to a large number of suitors in today’s market,” said Rosenblatt. “The consequence to buyers when they find a company like that, the opportunity will belong to the buyer that brings the most to the table the quickest, whether that means that they have to abbreviate their diligence period or pay an earnest money deposit up front to go exclusive. Those are two scenarios that I have on my desk right now.” Aware that sellers may be entertaining several different bids, some buyers are short-cutting the typical due diligence period. Holdbacks, once a standard procedure whereby a portion of the purchase price was held in escrow in the event that unforeseen problems crept up after the acquisition, have been reduced. Schedules of reps and warranties, representations and guarantees about the company being sold, are more loosely written. Some skip getting opinion letters from lawyers. “Buyers are finding themselves more frequently in a competitive environment with two to three deals,” said Brent Reinke, a corporate partner who works in the area of M & A; at Musick, Peeler & Garrett. “As a consequence, you can’t be as picky with terms.” The atmosphere would seem to make it especially easy on those who want to sell businesses, and sometimes it is. Many privately-held businesses are finding ready exit strategies at lucrative prices they had not imagined even a few years ago. But particularly where family-owned businesses and those still run by their founders are concerned, that is not always the case, say those involved in some of these deals. “People are almost paralyzed,” said Rex at Lewitt Hackman. “They have been relying on this cash cow. (They think,) Can I live off the proceeds? Often they don’t know what they’re going to do with the rest of their lives.” Some acquisitions include provisions to retain the company’s management, either to continue to run the business or in a consulting role to help with the transition to the new management. But those arrangements sometimes go awry. “I recently participated in the sale of a smaller business and the seller had this normal consulting agreement in place,” said David Adelman, a partner at Greenberg & Bass. “And it was a business based on personal relationships with clients. The seller was appalled at the way they were handling the business. They were changing it, and the seller couldn’t come to grips with that. The buyer had to get a restraining order on the seller, and it wound up in litigation. Oh, it was nasty.”

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