By Kenneth H. Marks, khmarks@HighRockPartners.com
Merger and acquisition (M) transactions can be a viable alternative for accomplishing a number of strategic objectives in the context of building and realizing value for emerging growth and middle-market companies (those from startup to several hundred million dollars in revenue).
Let’s take a high-level view of the buy-side and sell-side processes, and a framework for thinking about and planning each.
In many instances the distinction between selling a company (i.e. an “Exit”) and raising capital is measured by the amount of equity sold and the contractual rights obtained by the buyer. Financing growth raises the issue of long-term shareholder objectives, which many times involve eventual liquidity. As the wave of business transitions driven by baby boomers planning their legacy and succession continues, some shareholders are confronted with a multifaceted decision of how to finance the continued growth of their business, create liquidity for their owners, and lay the foundation for operations independent of the owner/founder.
Others see the opportunity to buy-out partners or create some liquidity while staying in the game for what may be deemed a second bite at the apple. This is the concept of selling a controlling interest in a company to a financial buyer (i.e., a private-equity group) and rolling over or keeping a minority interest until a subsequent sale or liquidity event happens when the company is expected to have grown in value (under the watch of the new owners with their capital). There are numerous examples where the sale of the minority interest in the follow-on transaction (three to five years from the first transaction) resulted in as much economic gain as the original sale to the financial buyer.
Shareholders and partners may find a full or partial Exit attractive for many reasons, including:
Several potential solutions exist, including recapitalization, sale to a financial buyer while keeping a minority stake, or an outright sale to a strategic or financial buyer with contractual rights for some level of future performance; and there are many variations.
Generally a recapitalization will involve a lower cash-out (as a partial Exit or staged Exit) for the active owners than a buyout (which involves a change of control). A recapitalization will most likely be focused on changing the relative mix of debt and equity with an eye toward the growth objectives of the company and the required go-forward capital. For example, a leveraged recapitalization will most likely increase the debt of the company in exchange for distributions, dividends, or purchase of equity.
Acquisitions can meet a number of goals if approached and executed as part of a long-term strategy. Some of the typical reasons executives pursue acquisitions include: