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When is the best time to sell or buy a business?
The Simple Answer:
The best time to sell is at the peak of the market and the best time to buy is at the trough. Good luck in calling either of those, however. There are always small minorities of sellers and buyers who, by luck alone, manage to do just that and usually, as your Mom might have said, "someone ends up crying"! For the majority, there are a number of other considerations that it helps to review, especially as they relate to the rebounding chemicals M&A market that we are experiencing today.
M&A on the Rebound:
Today’s M&A market in chemicals is on the rebound from what was clearly a trough in 2009 in terms of volume and valuations. This trough followed an equally clear peak in 2007 - 8. It is not meaningful to analyze the transactions at either the 2008 peak or 2009 trough as they do not represent what all participants in the market can expect to experience in most of their transactions. A recent Chemical Week Article (7/29/10), noted that global chemical M&A dollar volume totaled $25 Billion while the first half of 2010 has exceeded that at $29 Billion. According to a recent KeyBanc publication (Specialty Chemicals Review, May 2010), trading multiples for their specialty chemicals index of publicly traded stocks returned to the 5 year average of 7.9X EBITDA , up from a March 2009 trough of 5.0X. Transaction multiples show signs of recovering, although data for these is sparse other than for publicly traded companies. Recent data show such transaction multiples for chemicals at 10.1X and 9.2X in 2007 and 2008 respectively, plunging to 7.1 in 2009. Deals done in 2010 include BASF’s purchase of Cognis, while reported at a 9.6X EBITDA (2009) multiple, was shown by BASF in their analyst conference, to be 7.3X on a LTM (last 12 month) adjusted EBITDA basis.
A number of factors important to both buyers and sellers are driving a recovery in chemicals M&A this year. These include.
- Cash: In June, the Federal Reserve reported that US corporations have more cash in the bank than at any time on record – around $1.84 Trillion, a 26% increase from 2007 and 7% of all corporate assets, the highest level since 1963. Investors get nervous when companies sit on this much cash, earning essentially zero interest. Corp Fin 101 tells us that they need to send it to shareholders in the form of dividends of share buybacks, pay down debt or invest it in capacity or acquisitions.
- More Cash: After healthy fundraising in 2006 – 2008, Un-deployed private equity capital in US focused funds, stood at $280 Billion at the beginning of this year, according to research firm Preqin. Due to the typical requirement to “use it or lose it” (ie send it back to the LP’s), this could put some urgency behind deals and Preqin cites a PE equity deployment “timetable” of $51 Billion by 2011 and another $213 Billion by 2015.
- Taxes: No serious analyst believes that taxes will go down in the near future. For sellers, this is putting some focus completing deals this year to ensure capital gains are booked at current rates. This is a special consideration for private equity fund owners, who see carried interest being taxed at a higher rate next year and so would like to lock in some gains this year where possible.
- Pent up Demand: From around September 2008 through the end of 2009, many plans were put on hold as company owners and investors waited for the financial and real markets to settle down. Now that companies have re-established a growth path and earnings and margins can be projected with better visibility, buyers and sellers are starting back into the market, often to realize plans that had bee shelved during the early months of the recession.
- Consolidation and Globalization: Chemical markets continue to globalize. The big customers for chemicals (like Unilever, P&G, Auto Companies) are global and the big suppliers key petrochemical and oleochemical feedstocks to the industry are global and getting bigger. It is harder for regional or smaller scale companies to compete unless they have a unique technology or value proposition. Regional consolidation (eg Rhodia’s acquisition of Feixang in China) or economies of scale (BASF’s acquisition of Cognis) are driving the M&A market. In addition, large entities and paring their portfolios and finding that private equity can offer a better home for their non-core businesses which can then be grown to the right scale and footprint to compete in the global market (eg Dow’s spin-out of Styron to Bain and Clariant’s spin-out of their silicones business to GenNx360 Capital Partners).
Seller Considerations:
As a seller, what are some of the key questions to answer as you decide how to proceed with the sale of a business.
- Total or partial sale: One of the advantages of selling to a private equity fund vs a corporate acquirer is the flexibility to sell part or all of your ownership. If you have the desire to continue to grow the business, but need some equity capital support for the program you have in mind, then a PE investor will often be happy to have you alongside them as a co-inventor and for you to continue to manage the business, while taking some chips off the table. The recent Post Capital investment in chemicals distributor, BHS meets this profile. The two BHS founders continue to be significant shareholders in the new company and continue to manage the business, now with additional growth capita behind them.
- Trapped Asset Strategy: A tip of the hat to GenNx360 Capital Partners on this one. If they have not trademarked this concept already, they should have. See their website for further elaboration. This is a variation on the total or partial question; when a parent corporation owns a non-core business, it often does not fund and support the growth initiatives that are needed to create substantial value. Rather than sell in one shot, the parent can bring in an investor skilled in operational improvement for a partial stake – perhaps enough to get the business of the parent’s balance sheet. The investor will grow and operate the business and then both partners (parent and investor) , will cash out their stakes together a number of years thereafter. This was the parent gets “two bites of the cherry” and can satisfy itself that the business is in good hands.
- Speed and Certainty: For obvious reasons, certainty of closing a deal is very important to sellers. For other reasons (see taxes above), speed may also be a consideration. Buyers differ greatly in this regard. During the final rounds of the sale of Cognis, it was reported that owners Permira chose the slightly lower (by €100 Million) €3.1Billion bid of BASF vs Lubrizol’s higher bid as it was felt that BASF would be more certain of closing the deal, without any financing contingencies. Other issues that may bear on a transaction include anti-trust. It is most likely that a PE purchase will not attract anti-trust scrutiny, whereas a strategic corporate purchase may.
- Flexibility: Even if a seller has decided to cash out completely, he may appreciate the flexibility to take his consideration in a combination of cash and (say) debt securities with a coupon allowing for a steady income. There are an infinite number of ways such transactions can be structured to meet a sellers financial and estate planning needs. Private equity firms have been particularly active in structuring such deals.
We trust that these notes have been helpful . In future posts we will look at what a buyer seeks in a chemical investment.
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