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Roundtable: Mergers and Acquisitions

by | Mar 21, 2023 | Industry & Market Data Reports, James Morgan

In January 2023, Utah Business partnered with Dentons Durham Jones Pinegar to host a roundtable event featuring local finance and business leaders. Moderated by Serene Papenfuss, principal at Kickstart, the group discussed recent trends in the M&A space, the advice they give their clients, predictions for 2023, and more. Here are a few highlights from the event.

What are your thoughts about M&A trends in Utah, and have you seen a shift since Q2?

Joshua Little | Executive Committee Member & CFO | Dentons Durham Jones Pinegar

Definitely a shift since Q2. A year ago, we were probably at 150 percent of capacity, but the thing is, we’re probably still at 80-90 percent of capacity. We’re still busy. We’re definitely not scrambling like we were a year ago. I think Utah’s a little bit more active than other places I’ve seen.

Samuel Orme | Managing Director – Global Investment Banking | Bank of America Merrill Lynch

M&A has been solid. It’s been keeping the lights on because the capital markets—both IPOs and secondaries, and even leveraged finance—have been down, given the blip we had in 2021. The blip was because everything was working: revenues were working, growth was working, and leveraged finance was working. I think Utah skews tech and consumer, especially with direct-to-consumer businesses. Both of those are down compared to what I would call generic industrial/business services/energy. Those are the industries that have been performing.

Do you see similar patterns on the buy-side and sell-side? 

Flavia Rydin | VP | Silicon Valley Bank

I’ve seen some companies that are willing to go out to market and have a transaction this year, and after Q1 or Q2, realize they couldn’t get the evaluation that they wanted to get. Some operators are now holding tight and continuing to build their balance sheets because the markets will open back up and be more opportunistic probably in the latter half of 2023. I think there’s still a positive outlook, but that volume obviously has slowed down, and operators are not going to get exactly the valuations that they got back in 2022, 2021, and late 2020.

Ryan Hemingway | Managing Director | EPIC Ventures

I’ve got two right now that are in some acquisition discussions. One’s kind of non-tech, one’s tech, and these would be sub-$100 million. From the valuation side, both are lower than some indications we had last year at this time. The other piece is that both of these are very strategic—the buyers, in this case, are looking for strategic value in ROI specifics, and it’s very focused either as vertically strategic or as horizontally strategic. As far as deal terms, I don’t believe the increased cost of capital is affecting either of these significantly, but I do think it’s opened up some discussions to some more creative structures. 

Is anyone else seeing creative structuring in order to be able to fund deals?

Tara Rosander | EVP M&A – Diligence & Integration | Brandless

We’re acquiring companies in the health and wellness space, and most of them are sub-$50 million. So we are certainly focused on earnout now and getting a little bit more creative in that space. We also partner with entrepreneurs that stay on board with our company as they integrate in, and certainly, the entrepreneurs are willing to have broader discussions about what that means. That’s a shift from the previous year, and we are seeing the trend for evaluations going down. I think our deal scrutiny has tightened quite significantly in focusing on future growth margins watching the market in the particular space that they’re in. 

Steve Lindsley | Director, Business Development | Scalar

We do a lot in the venture growth stage. I’m seeing a lot of companies that traditionally would be raising a Series B right now punting and going back to a convertible note or a SAFE note, punting on a price ground, and buying a little bit of time to avoid having the set evaluation.

James Morgan | Managing Director | The Forbes M+A Group

This time last year, everyone wanted to go to market immediately. Now, you can definitely go—you’ll probably get a little bit of evaluation compression, but you’ll still get bids, and it’ll be reasonable. You’re going to have to focus on due diligence because there’s more scrutiny as you move toward close. The conversation now is more about your perfect org structure. Are there any customers with whom you can bolster your contractual relationships? How do you create that perfect set of investment highlights and maybe spend one or two more quarters to get there and show a little bit more of a track record? 

Robert Carpenter | SVP | Altabank

Since Covid, companies have become way more preoccupied with their internal operations and just triaging these various things that keep coming up in their business. Conversations tend to be more operational than strategic lately. But for the ones that are having strategic conversations, the thing we’re saying is, control what you can control in your business. Make sure your finances are in order and do all the things in preparation for a process now—as opposed to when that window does open, valuations become more aggressive, and banks become, frankly, more accommodating. You want to be ready to do that in a way that’s really credible so you can execute quickly. 

“We’re seeing a lot of divestiture activity, including some big ones in play here in Utah, and I think that’s one of the ways to transform your business.”

Rosie Staes, Principal at Cross Creek

What are you advising clients or portfolio companies as they consider running a process?

Braxton Savage | Manager, Transaction Advisory Services | Tanner LLC

We’ve got plenty of clients that ask us when the time to sell is. The first thing we tell them is, don’t try and time the market. We don’t have a crystal ball. Focus on those things that we can control operationally, strategically, and internally in the company. 

Mike Bellin | Partner – US IPO Co-Leader | PwC

We’re talking to some of our larger clients about divestitures, carving out a business, and selling the business. We’re seeing a lot of that activity both from private equity-backed portfolio companies as well as corporates out there. We think companies should re-evaluate their portfolio every so often. We’re seeing a lot of divestiture activity, including some big ones in play here in Utah, and I think that’s one of the ways to transform your business. 

Rosie Staes | Principal | Cross Creek

On the private side, one thing we’re advising is to not take the valuations personally. A lot of [founders] look at their companies and say, “I grew 2-3 times from my last valuation and you’re telling me to take a flat round or down round?” For a lot of them, I think they’re feeling like the cheese moved without them knowing. If you’re [a founder] heads-down operating a company and you pop up, and suddenly people are telling you that the thing that was valuing your company last year has changed—navigating that has been interesting.

Drew Yergensen | Utah Market President | KeyBank

The lending community is having an unprecedented time right now where interest rates are really uncertain. It’s putting a lot of pressure on the cost of funds at banks. Banks are asking for more certainty of returns and being a lot pickier about where they put their capital. That certainly challenges predictability on the lowest cost of capital that’s available. We’re trying to advise folks to take the uncertainty out of it. Try to get committed capital, and try to spend a lot more time making sure you have that capital for a long period of time that you can use. I’ve been in this industry for my whole career, but here in Utah for 12 years. This last year, I’ve seen so many banks think that they could deliver that all of a sudden can’t.

What are your predictions for 2023?

James Morgan | Managing Director | The Forbes M+A Group

I think in Q1, only very high-quality deals are going to go to the market, and you will see a lower level of transaction activity. I think it’s kind of a wait-and-see in terms of capital markets and the bank market and how constructive that could be on valuation. I think there’s the availability of capital, and there’s a willingness to transact. The question is, what price? People still ask about supply chain issues. People still ask about cost inflation and labor inflation, and until there’s more visibility on that, it’s tough to say that everything’s going to be perfect at the end of the year.

Mike Bellin | Partner – US IPO Co-Leader | PwC

I think this reset is creating opportunities in both Utah and nationally. We’re seeing an abundance of capital out there, and 90 percent of the executives out there say they’re going to do a deal as we look forward to 2023. Looking backward, you can’t compare this year to last year or even 2021—those were bubbles in some cases. Going forward, we’re seeing this economic uncertainty create a lot of opportunities from the valuation perspective. On the IPO side, we’re seeing a lot of companies right now as they look forward to 2023 starting their preparation for that to make sure they have the maturity internally. I do think we’re going to see a robust market here in Utah and elsewhere across the country.

Rob McGee | SVP, Structured Finance Group | Zions Bank

I think the conditions we have today are going to persist for some time. I think there are a lot of companies who maybe were delayed by the impact of the pandemic, and the supply chain is only now beginning to hit some companies. I also think the higher borrowing costs are going to start forcing companies that are levered to some extent—they’ll have less capital available to support R&D and marketing. Growth is going to be on top of a challenging economy. There’s just going to be less money to deploy to drive growth. I think all of these things suggest that valuations are probably going to stay lower for longer, and it’s going to have an impact on activity going forward for at least the next year.

Spencer Hoole | President | Diversified Insurance

We talked a lot about the supply-side in the last year. I think it’s the demand side that is going to slow dramatically. It took the Jobs Act in 2012 to bring that IPO market back and get it revved up again. I think M&A is going to be the path. As long as that IPO timeline plays out, M&A will rev up at some point for people looking for that as a liquidity opportunity or business combination opportunity.

Flavia Rydin | VP | Silicon Valley Bank

I think for some, it will be fire sales. That’s a little bit pessimistic, but I think some people have had the last two years of the economy where they’ve been dealing with the supply chain, the labor market, and inflation. As an operator, if you’ve been building your balance sheet for the last two years and you’ve been quiet on the M&A front, I think there will be a lot of good opportunities for you to go out and deploy capital and buy assets at a much lower price than you would have in the last two years.

Jack Fecteau | VP | K2 Securities

We’ve talked to a lot of tech companies in the last year who are getting 20 calls per week from private equity buyers or giving a mark-to-market at 10x to 20x. Talking to investment bankers who are estimating their business is worth 3-5x right now is a pretty hard pill for them to swallow. But how long can you sit on your hands when you need to sell this business, given that you can’t raise additional capital, you’re growing at five to ten percent, and you’re barely profitable? I think it’s taking a while for that reality to shift for a lot of these guys.

Joshua Little | Executive Committee Member & CFO | Dentons Durham Jones Pinegar

There’s a lot of dry powder, and venture capitalists can’t just sit on that forever. I think a lot of the delay is people just don’t trust the Federal Reserve System right now. We don’t know what they’ve done or what they’re going to do. Once people get their arms around what the Fed’s really going to do and what the future’s going to be, you’ll see more activity. 

Ryan Hemingway | Managing Director | EPIC Ventures

There’s a lack of great deals that are coming to market. The good ones, as we’ve talked about, are those that have already shored up capital for the next 12 to 18 months. I am still seeing good deals: A-plus deals that are still raising rounds at good valuations. I think the good deals that have had to go to market seem to be getting funded. There are a lot of those right now, and that’s coming from an early-stage guy. I just had a conversation with a growth stage fund that said the same thing—they’re seeing a lot of deal flow; it’s just not great deal flow. 

What does all of this mean for the state’s economy? 

Drew Yergensen | Utah Market President | KeyBank

As I look around this table, it shows that the state’s economy has really attracted more and more talent and services. We used to have a handful of VCs and a handful of investment bankers—now we have two or three handfuls. I think a lot of firms from different parts of the country are saying that Utah seems pretty predictable in its growth, its policies, and around attracting businesses and bringing people here. In the lending community, we’ve seen a lot of new entrants seeking Utah for growth. 

Matt Bartholomew | Partner | BDO USA, LLP

You used to see companies getting picked up because they hit $20-40 million in revenue. Whereas now, I’d say you have a great diversity of sizes of businesses and nature of the businesses. I think Utah’s always had the entrepreneurial spirit of being very diversified. I cover Colorado as well, and I would argue that Utah is more diverse in terms of the industries we touch on. I think it’s a little bit of a double-edged sword, meaning this state has become so attractive that you do get a lot of investment here looking to pick up companies. I think as the state finds its footing, we’re going to see some synergies that come about and some compression to larger businesses that get picked up by other larger businesses out-of-state. But that entrepreneurial spirit, combined with the dry powder that exists here, is going to elevate those smaller pre-revenue companies, make them profitable, and get them to a growth equity stage. 

Samuel Orme | Managing Director – Global Investment Banking | Bank of America Merrill Lynch

Utah is still the best state to do business. I don’t think there’s a single person around the table that would want to be somewhere else in terms of what the next 20 years are going to look like.

Read the original article in Utah Business.