The value of M&A and why you can’t afford to ignore it

Smart Business 

(by Jayne Gest with Chris Farmakis)

Vivak Gupta has hands-on experience with M&A — including his share of battle scars — after 36 years in the IT industry. Most recently, he was the president and CEO behind Mastech Digital’s $55 million deal for InfoTrellis in 2017.

No two acquisitions are the same, but he says he tries not to make the same mistakes twice.

“It’s a pretty complex process, and there is no shortcut but to actually learn from experience,” Gupta says. “It’s baptism by fire — you have to burn your fingers and then you really get to know what works and what doesn’t work.”

But even when Gupta isn’t actively looking to buy or sell a business, he keeps an eye on the dealmaking market — who is buying and selling companies and raising capital — because it’s a good indicator of what’s happening in the industry.

“Why is my competitor acquiring a company in, just as an example, the cloud space?” he says. “How is it connecting with their current strategy? Then, you watch how they complete the acquisition and how the market rewards them or penalizes them for that acquisition.”

Gupta isn’t alone in his feelings about the value of M&A. Many executives, investors and advisers see how mergers, acquisitions and dealmaking play a critical role in business today — both directly and indirectly. And those who ignore it run the risk of falling behind as their competitors scoop up a new technology, diversify into new geographies, raise growth capital and implement long-term exit plans that help them operate better.

You owe it to yourself to build your M&A knowledge and network, but don’t take our word for it. Here’s what some of Pittsburgh’s dealmakers had to say.

Take the initiative

M&A is done by different companies for different reasons, Gupta says, adding that you can get ideas from watching others, including honing your own strategy, because it’s important to agonize, from the beginning, about why you’re doing deals.

Many times, organizations are approached by someone looking to sell, such as founders looking to exit.

“That’s not a bad thing, but that’s more reactive,” he says.

It’s better to start at the drawing board and figure out your purpose for buying a company, Gupta says. Is it to bulk up or add new capabilities? Are you trying to diversify? Are you trying to realign the organization?

Gupta stays in touch with what’s going on in his industry by subscribing to numerous M&A reports and scrutinizing them to try to determine what his competitors’ objectives are and if they’re working out — and sometimes gets good ideas from his research.

Watching the dealmaking market isn’t just a way to gather ideas. It’s also a way to be ready for changing market conditions.

Chris Farmakis, shareholder and chairman of the board at Babst Calland, sees a lot of private equity capital in the marketplace chasing down middle-market deals. These firms are good at spotting regional or family-owned businesses, investing in one and then doing roll-up acquisitions to consolidate the industry.

“Business owners need to pay attention to this activity because what could happen is, you might be in an industry that consolidates and you’re the last standalone business,” he says. “You wait too long — you have no one to sell to or, at best, your purchase price is lower.”

Even if you’ve been successfully operating your business for 30 years, consolidation can add pricing or competitive pressures because your competitors now have scale.

“Business owners focus more on customer relationships and operations, as opposed to changing market conditions outside of their industry,” Farmakis says. “Sometimes, it’s important for them to lift their heads up and take a broader look at the market.”

Farmakis recommends utilizing trade associations as a resource, but doing so requires a different kind of networking than what business owners would normally be doing — which is mining customers, looking at new operations and other things that relate to operations.

For example, business owners can get a sense of market-based pricing for their industry, and people share things like, “The multiples are landing here,” or “This is what I heard they sold their company for.”

“Trade associations and industry associations can be a very good heartbeat or pulse as to what’s going on in the industry, and it’s a way to get direct and indirect information about people who have sold,” Farmakis says. “You can get a sense of, if you’re buying, what companies might cost and how they’re funded.”

Know your value

President and CEO Michael Wagner started Target Freight Management more than a decade ago. He did his first two deals in 2019 when he bought out his business partner and acquired his first company. However, he paid attention to M&A prior to that, as it helped him understand the market and how his company’s value was changing.

Wagner knew what multiples logistics businesses were selling for — and he even had larger corporations pitching to him and asking him to sell.

“I wasn’t looking to exit, but there were big numbers thrown around in my business in the last three or four years,” he says. “I think it’s slowed down a little bit, but it’s just good to understand and know what’s going on in your business from that standpoint.”

Wagner also already had a foundation of knowledge when his partner wanted to sell. Wagner, who has never worked in another industry, wasn’t ready to retire at age 40, and he didn’t want to work for somebody else or wait until a noncompete ran out.

“It was important for me to understand the value of the business, and what it was going to cost me to buy him out,” he says.

John Roppo believes that knowing your value is just the start. Preparing for a sale takes time — especially if you want to get the best price you can. The long-time CFO started his own firm, Roppotunity LLC, to help companies prep for sale, among other things.

“You can’t bring somebody in three to six months out and say, get the company ready for sale,” he says. “You can do it, but you’re not going to get the best value, or you’re going to have a higher risk of the deal falling apart.”

Dawn Fuchs Coleman and her family’s business, Weavertown Environment Group, is a good example of why it’s important to be prepared. They had been approached numerous times by venture capital groups and angel investors but were never really interested.

When Univar, however, came to the environmental services company in 2015, she decided to listen to its offer, and nine months later, the sale went through.

Her reasons were many, but the timing was right. Fuchs Coleman wasn’t sure if the next generation, which was still young, was interested in running the company. She also knew the company couldn’t continue to self-finance, so a large strategic buyer was appealing.

“I had an uncle that had a very successful family business in the second mortgage lending space,” she says. “He had an offer to sell his business. He turned it down, and years later, I think he always regretted it. So, I had that in the back of my mind, too.

“You can’t be naïve, and you can’t be ignorant. You’ve got to be willing to hear it. If it feels right, listen; don’t just stop and say, ‘I’m not interested.’ You have to be open-minded.”

Use all available growth tools

Sreekar Gadde, executive director at BlueTree Capital Group, has noticed that staying updated on the M&A market allows business leaders to better plan for the future.

“This allows leaders to make informed decisions about their business — basically making sure that they are moving with the market and not stagnating,” he says. “In addition, this allows leaders to keep an eye open for M&A opportunities.”

They may discover a strategically advantageous chance to merge or acquire companies at a low value that will improve the business’s future opportunities, Gadde says.

BlueTree Capital Group also tends to view all major decisions in the context of M&A, he says. What is the ROI? Can the venture capital firm see a way to get a 3x to 5x on the capital or resources spent?

“In view of that, most, if not all, parts of a growth strategy need to be considered within the context of the M&A market,” Gadde says.

Business owners may want to use a similar lens on their decisions, especially if there’s a possibility that they want their company to be acquired in the future.

“Business owners need to constantly be informed about the M&A ecosystem — both the current status and where the ecosystem is headed,” he says. “This informs every decision they make, from product roadmap, to hiring, to financing and, eventually, when to start the acquisition process and how to position their company to get the most favorable terms.”

The most effective business leaders use all available tactical and strategic tools to grow shareholder value, says Louis Testoni, a retired market managing partner with PricewaterhouseCoopers who serves on a number of corporate boards.

Buying companies or divesting assets is one of those tools.

“Divestitures can be a valuable tool to monetize underperforming assets and/or assets no longer aligned with the core business strategy,” he says.

They can also unlock intrinsic value sitting on the balance sheet to reinvest in alternative ways, or reduce debt or increase working capital to support other parts of the business’s growth strategy.

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