Certainty to Close
Today's buyers and sellers choose terms designed to get the deal done
Given the maturity of the M&A market, it's rare to find firms that are doing anything that's totally new and innovative. However, every now and then, depending on where we are in the investment cycle, something innovative does happen, or something old comes back into favor--with a twist. Today's uncertain economic climate, combined with the pent-up demand for high-quality companies, as well as ever-looming tax increases, has led to M&A deal structures that are perhaps a little different from what we have seen in the recent past. What follows are some examples of changes that have taken place in today's environment.
More Certainty To Close
Sellers want certainty to close. That's always the case, but what's different is that in today's market sellers of strong assets can demand it. As a result, more middle-market private equity firms are foregoing financing conditions to put them on equal footing with strategic buyers, which have plenty of cash in their coffers and do not need leverage or already have in-house credit facilities to complete a deal.
For example, in late July, strategic buyer Olin Corp. (NYSE: OLN) signed an agreement to acquire K.A. Steel Chemicals for a whopping 10 times Ebitda. Olin expects to finance the $328 million purchase with cash on hand and existing borrowing facilities-in other words, with no financing contingency. "Strong companies are very sought after," says Seth Hemming, co-chair of the private equity practice group at Reed Smith LLP.
With skyrocketing multiples for top-tier assets and the ability to complete a deal quickly, it makes it hard for private equity firms to be competitive with strategic buyers, if they have to secure a loan commitment. Firms are taking the risk of completing the deal and then shopping the debt after the deal has closed. "They buy the company and sell the debt later. They can bridge the loan until they can sell the debt or, most of the time, the firms will have a commitment letter for the financing before they make a bid. However, the private equity firms are still taking a risk if the financing doesn't work out," says Hemming.
Ted Koenig, president and CEO of lending firm Monroe Capital, agrees that the competition for quality deals is fierce, and private equity firms are looking for ways to differentiate themselves. "There are more buyers than sellers today, and if a seller is going to commit to a buyer and take the deal off the street, they want certainty that the buyer will close," says Koenig. He adds that, very often, before his clients submit a letter of intent to make a purchase with no financing contingency, they will contact Monroe and let them know what they are looking at and provide relevant information about the company. At that point, Monroe will give them an early read on what their financing options will be after the deal closes.
In addition to shopping the deal unofficially, private equity firms are also engaging a greater number of lenders than normal, to make sure they will be able to finance the deal quickly after it closes.
While foregoing the financing upfront may be new to some or more popular these days, it's the way of the world for others. The Riverside Co. has been doing this for quite some time. As the firm sought out ways to give itself an advantage in purchasing situations, it recognized that completing the deal without a financing contingency is often a good differentiator. "We have done this for years, and it works well for us, but we do it thoughtfully," says Stewart Kohl, co-CEO of Riverside. "We never bid on an asset that we couldn't finance later, but we probably have a greater ability to do this because we are a large fund, buying small companies. We will finance the deal even if we have to put up all the money."
No More Escrow?
Sellers of strong assets have the upper hand, and they are being more aggressive in their negotiation of indemnification provisions.