Should Foreign Buyers Acquire or Go Greenfield in the US?

ACQUIRE or GREENFIELD?

by Terry Stidham



The answer to this question can depend upon a combination of many factors. They won’t all necessarily point in the same direction, but it’s important to weigh each in your decision process.

Greenfield Investments are foreign direct investments where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.

Acquire or go Greenfield?

Acquire - In the case of an acquisition, 

• How similar is your product line to that of the target? 
• Are there issues with proprietary or sensitive technology?
• What place will the U.S. venture occupy in your global structure?
• What is the scope and difficulty of the integration task that you’d be taking on? 
• How relevant is the cultural gulf between the two groups you intend to knit into a team? 
• And at what pace should you move?

Generally, acquisitions can get you into the market much faster and help you pre-empt competitors. But the price tag can be hard to quantify because considerations such as stay agreements, management, recruiting and integration carry their own costs. An acquisition also depends on synergy capture.
 

Greenfield - With a Greenfield investment, it’s important to evaluate your own organization’s degree of experience doing business in the United States and the scale of the entry you’re attempting.

• Do you have the strengths in management and technical competence, or are you looking to bolster one of these areas? 
• And what type of Greenfield move are you considering: licensing, a joint venture, or starting a new entity from the ground up?

In contrast, Greenfield investments make it easier to stage or phase commitments which give investors more direct control over risk management. However, it takes longer to build something new than to add it to your organization with the stroke of a pen.

 

Questions behind the questions

• Are the customers, suppliers, and service providers you’ll work with in the United States ready for a “new face” in the market, or is their comfort with an existing entity an asset?
• Is it more important for your U.S. operation to prosper on its own terms as a market presence or for it to serve the larger needs of the global organization?

Get Started

If you’re considering this choice, you probably aren’t operating in a vacuum. Compare the top handful of acquisition targets on your list with the top handful of Greenfield opportunities. Which ones offer:

• The more timely assimilation into your target market?
• The easier route to capital repatriation?
• The preferred security for your processes and knowledge?
• The more favorable tax advantages?

 

About the author: Terry Stidham, Managing Partner of Target Search Group (TSG). TSG is a business development firm providing mid-market deal flow and investment opportunities for a select number of private equity and corporate clients. TSG sources and originates investment opportunities that fit their client's strategy, size and focus on an opportunistic and a specific search basis. 

Mr. Stidham is a Sales and Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment. He has served as the head of entrepreneurial organizations as well as Fortune 500 companies. He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms. 

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions. Mr. Stidham has instructed thousands of business owners on how to prepare for a successful exit. He improves operational efficiencies leading to significant increased value.

Best Targets Are The Ones Not Seen

Shortage of Quality Deals Above the Waterline

by Terry Stidham, President of Target Search Group

 

It has been said many times that “It’s Faster, Smarter, and Cheaper to buy than to build”. Mergers and acquisitions is one of the most effective aspects of a corporate business development strategy to help an enterprise grow. The challenge today is how or where to find the businesses to buy or invest into. 

How many times have you said or heard it said, “If we had known that company was for sale we would have bought it or at least tried to buy it" or "Why aren't we getting more targets to look at"? 

The fact is that the vast majority of business owners who would like to sell don’t want it known on the street that they are for sale. The business owners would prefer for a premium or strategic buyer to identify who they are, prove that they have the intent and means to buy and then to enter into serious discussions as to what they would like to accomplish.

 

Simple enough, Right?

 

I often get requests for my advice on something along these lines; “Our Company is looking to grow through acquisitions. I have used business intermediaries and we have an in-house person or team that is tasked with finding companies. What other options are available to us? We are not getting enough of the “right deals” to look at without too many strings attached. We have very specific requirements as to the size and geographic service area of the company we would be interested in purchasing. Efforts so far have not had very many positive results. Any suggestions or help would be appreciated.”

Strategic Buyers, Private Equity and VC firms are all faced with the challenge getting enough of the “right deals” to look at and to ultimately buy or invest into. The “right deals” are the ones that are aligned with the investment objectives that fit the strategy, size and focus of the investor.

 

Having spent the last 15 years sourcing deals, I can tell you that without a doubt that there is no shortage of quality companies to buy or to invest into. Below the waterline is where one has to go to find them. The outlook for targets to acquire looks extremely good as the baby boomers, who currently own over 60% of the businesses, continue to seek an exit in increasing numbers. 

 

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Warren Buffet to his share holders in 1989

 

The Majority of Deal Flow is being sourced from:

• Brokers or Intermediaries
• Web Sources
• In-house Business Development Teams
• Networking
• Referrals

This may be adequate for the very large players that have dedicated resources to source, review and scrub enough opportunities to meet their investment objectives. The numbers and the amount of dry powder tell us that for many this is simply not the case. Most strategic buyers and investors that are looking to grow through acquisitions may at best have a person or two that is assigned with the task of sourcing deal flow.

 

Abundance of capital (dry powder) to invest as of Q1:

• Approximately $900 Billion with private equity firms 
• Strategic Buyers (non-financial companies) with over $1 Trillion 

“Insanity is To Do the Same Thing Over and Over Again and Expecting Different Results” often attributed to Albert Einstein

 

Investors that are not meeting their acquisition/ investment objectives need to initiate or increase their Business Development efforts - either through in-house efforts or outsourcing it to a business development and deal sourcing specialist firm.

 

Advantages are exponential for the following reasons:

• The Deal is Typically Un-shopped
• Majority of the Quality Deals are Below the Waterline
• Avoidance of the Auction Process
• Committed Sellers
• Quicker Closings
• Confidentiality is Easier to Maintain
• Less Time Wasted on Deals that are Unaligned
• More Cost Effective

Successful business development to source proprietary acquisition/ investment opportunities involves being able to:

• Speak the Language of Both the Buyer and the Seller
• Segment Markets
• Identify Targets
• Establish Lines of Communication
• Gather Base Level of Information to Determine Suitability
• Get Level of Understanding as to Owners Initial Expectations

Call or contact me with your questions of comments.


About the Author:  Terry Stidham is a Sales and Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment. He has served as the head of entrepreneurial organizations as well as Fortune 500 companies. He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions. Mr. Stidham has instructed thousands of business owners on how to prepare for a successful exit. He improves operational efficiencies leading to significant increased value.

10 Year Middle-Market M&A Analysis

Strategic Buyers with Cash are Most Active

by Terry Stidham

 

Houlihan Lokey released their Deal Analysis covering a select group of public and private middle-market transactions across various industries with purchase prices ranging from $10 million to over $1 billion for which they served as a financial adviser during the past 10 years.

Their findings included the following:

• 61% of the transactions were strategic buyers
• The majority of the transactions were stock purchases with cash
• The average enterprise value/EBITDA multiple over the past 10 years was 8.2x with a high of 9.9x in 2006
• The average enterprise value/revenue multiple was 1.4x with an high in 2006 of 2.0x
• Deals with purchase prices over $100 million had higher trading multiples
• Earn-outs were used in 16% of transactions during the past 5 years
• The median amount of the earn-outs, as a percentage of the purchase price, was 10% over the past 5 years
• The average survival period for representations, warranties and indemnification escrows was 19 months
• The average escrow size was 7.8% of the transaction price with an high of 26.7% 

This information may be useful to acquirers and targets who are trying to determine if their proposed deal terms fall within the realm of historical "market" terms. 


Contact the Deal Flow Specialists to Supplement Your Acquisition or Investment Needs 

About Terry Stidham, President and Founder of Target Search Group (TSG). TSG is a business development firm providing mid-market deal flow and investment opportunities for a select number of private equity and corporate clients. TSG sources and originates investment opportunities that fit their client's strategy, size and focus on a generalist, opportunistic, and a specific search basis.

Terry is a Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment. He has served as the head of entrepreneurial organizations as well as Fortune 500 companies. He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms.

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions. Mr. Stidham has instructed thousands of business owners on how to prepare for a successful exit. He improves operational efficiencies leading to significant increased value.

2013 Investor Outlook for PE

 

2 Major Investment Considerations: Past Performance & Ability to Execute 

by Terry Stidham - Target Search Group

LP's expect for their capital to be invested into acquisitions that can return profits.
Source: Preqin Investor Intelligence

 

Public pension funds, university  endowments, insurance companies and other institutions have pledged to invest many billions with private equity provided the deal makers can find companies to buy. 
 

Investor Allocations to New PE Funds:

Source: Preqin Investor Intelligence
 

For those seeking to raise capital this is encouraging to see that a reasonable proportion of investors will be allocating large sums of capital to the asset class:  

Source: Preqin Investor Intelligence

The LPs that are looking to make new investments in the next 12 months will be highly selective in such a competitive fundraising market. 

 

Consequently, private equity fund managers’ need to be able to invest wisely in a timely manner.  

The time is short to invest the capital raised over the last 7 years. 

Many will be faced with returning money to clients along with a portion of the management fees already collected.

Some of the industry’s biggest players, like David M. Rubenstein of the Carlyle Group, Henry Kravis of Kohlberg Kravis Roberts and David Bonderman of TPG, have more than $10 billion apiece in uncommitted capital.

Even if more time is granted to make acquisitions the need for acquisition targets still exists.

As more firms seek to invest their cash we are seeing private equity funds become more aggressive in pursuing deals while pushing valuations upward. 

 

Challenges - 

• Sourcing deals – Committed sellers
• Valuations are be driven up - Tough competition for deals
• Abundance of capital to invest
• Approximately $900 Billion with private equity firms 
• Strategic Buyers (non-financial companies) with over $1 Trillion 
• Competition from the giants - Tight credit has slowed the gigantic buyouts pushing big players like Apollo and K.K.R. into the middle market for deals – causing bidding wars

Solution - Contact Target Search Group to:

• Source specific companies to match specific mandates
• Deliver Committed Sellers - sellers that can let go 
• Avoid the shopped deal and the auction process 
• Provide Cost Effective Sourcing

The ability to acquire companies will be the difference between success and failure in attracting and retaining institutional commitments. 

 

About the author:

Terry Stidham is the founder and senior principal of Target Search Group. He is a B2B Business Development Leader with extensive knowledge of the M&A process, combined with an in-depth understanding of the constantly changing global capital markets environment.  He has served as the head of entrepreneurial organizations as well as Fortune 500 companies.  He specializes with mid-market companies in a diverse array of industry sectors from service and manufacturing to technical and professional firms. 

Mr. Stidham speaks the language of both the seller and the buyer having vast experience on both sides of the transaction. He has been directly involved in the execution and successful closing of hundreds of investment banking and corporate finance transactions.  Mr. Stidham has been instrumental in aiding thousands of business owners prepare their businesses for eventual sale by teaching them how to maximize efficiencies in operations leading to significant increased cash flow.