The mergers and acquisitions business is extremely competitive. Dealmakers are constantly looking for a leg up on their competition and for ways to maximize their investment returns. Products and services that may give dealmakers an upper hand are highly sought after. However, in today’s fast-paced market it’s hard for dealmakers to quickly pinpoint the products that could help them the most. To that end, M&A is showcasing some of the useful tools available to dealmakers today. (See related chart).
No good dealmaker can make the right decisions without having the numbers. Access to reliable data is extremely important. The number of data providers in the industry has grown substantially over the years, as they recognize that dealmakers seem to have an insatiable appetite for data. Venture Economics, now known as Thomson Reuters Corp. (NYSE: TRI), used to be the only formidable game in town, but today the industry has a wide variety of data providers.
Data providers are targeting narrow, tightly defined categories of customers according to size, geography and other criteria. Some of the most popular data providers are Dealogic, Pitchbook Data, Preqin and Thomson Reuters, all of which are constantly trying to gain market share. For example, Pitchbook, which had been covering only private equity deals in the U.S., started covering M&A transactions globally in the last two years.
Despite the growth in data providers, the managers of GF Data Resources LLC still felt there wasn’t enough data available on the lower middle market. In 2006, the company started collecting data on deal values from private equity groups and selling it to other PE groups. Specializing in private equity -sponsored transactions with enterprise values of $10 million to $250 million, GF Data has provided benchmark historic data for firms to value their portfolio companies based on fair value accounting standards. However, many dealmakers are also increasingly using the data of GF Data’s and other providers to coach seller valuation expectations.
“There was so little data available for deals in the $10 million to $250 million enterprise value range, which is why we launched the firm,” says Graeme Frazier, a partner with Conshohocken, Pennsylvania-based GF Data. “Today, we find business owners will say they had a friend that sold for a high multiple and then they expect the same. The reality is this is a one-time event for most of these guys and they need perspective on what drives valuations. Buyers use the data to show the sellers examples of what deals sold for and why.”
Investment bankers and private equity firms are particularly interested in this issue because usually they have to set sellers’ expectations. The data allows them to show the seller similar companies and explain why the company was valued as it was. “Instead of calling the baby ugly, you are showing the sellers real examples of deals that are similar to theirs that have closed. It really helps define expectations,” says Frazier.
In addition to helping to set deal prices and showing market trends, the data can help the involved parties understand the entire capital structure, including the debt and sub-debt in the deal. This is particularly important because of today’s fickle lending market.
Virtual data rooms, or VDRs, are now as much a part of the M&A industry as auctions. Gone are the days of traveling to an office to search through papers in a physical data room. In 2014, at least 241 virtual data room vendors were active in the market, and between 2011 and 2016 the industry grew 13.7 percent per year, according to IBIS World’s 2016 Virtual Data Rooms in the U.S.: Market Research Report. The virtual data room industry reported $839 million in revenue for 2015.
Because of fierce competition in the space, virtual data room providers are offering more services before the sale to entice sellers to work with them. For example, most virtual data rooms are offered as a secure place for documents that potential buyers review during their due diligence. But companies are increasingly using the virtual rooms to store documents permanently, keeping them in a constant state of readiness for sale opportunities that can pop up when least expected.
“The concept of the virtual data room is not new, but we have been doing a lot to wrap services around our VDR offering to address the entire deal process,” says Craig Clay, executive vice president of RR Donnelley’s (Nasdaq: RRD) financial services group. “We have also invested in innovative features, making it a lot easier to use.”
Virtual data room companies are also trying to stay on the cutting edge of technology to gain the upper hand with competitors. For example, RR Donnelley offers sellers options to create videos and graphics to tell their story. Instead of just creating a paper trail, users are able to communicate more personally through video.
“Typically, banks are used to putting out a classic pitch book, but with venue deal marketing, we bring deal information to life with video, audio and other rich media,” says Clay. “These are no longer stagnant PowerPoints. It makes the process much more interactive. We are communicating in an amazing new way today.”
Networking with the right people can go a long way. Investment bankers are always suggesting to clients that they meet people in the industry and keep a pulse on the markets they are interested in investing in. As the M&A industry has grown over the years, organizations supporting the industry have also experienced substantial growth. These organizations not only provide networking opportunities, but a sense of community, and in many cases, a national voice for the M&A and private equity industries.
That is the case with the American Investment Council (AIC). Founded in 2007 as the Private Equity Council, the Washington D.C.-based organization lobbies federal politicians on behalf of the private equity industry. In May, based on the increased diversity of private equity firms and growing focus on the industry, the organization changed its name to AIC. The organization’s mission is still the same. “This is a major step forward for our organization as we work to promote private equity and serve as a resource to our member firms,” says AIC CEO Mike Sommers. “It is more than a new name, it is a renewed commitment to be the voice for private equity in the United States.”
AIC will host over 30 events in 2016, and convene eight different committees and working groups to share private equity best practices and insights. But AIC is just one of many organizations M&A and private equity professionals belong to today. The Association for Corporate Growth has become a go-to networking organization for middle-market M&A professionals. Although the association was founded in the 1950s, it wasn’t until the late 1990s that the association started focusing its efforts on the private equity community. Today, the association has 14,500 members worldwide and offers guides on compliance issues, provides a job source network and works with AIC to lobby on behalf of the middle-market M&A industry.
“Associations provide great networking opportunities; it’s great to hear what your peers are seeing in the market,” says Gretchen Perkins, a partner with Huron Capital Partners. “They also work hard to promote the M&A and private equity because it has become increasingly important we have a voice in Washington, D.C.”
The Alliance of Merger & Acquisition Advisors focuses on dealmaking in the lower middle market, offering members networking opportunities as well educational classes. The alliance also does its fair share of lobbying on behalf of private placement brokers. The Small Business Investment Alliance focuses on the lower middle market and also provides networking opportunities and lobbies on behalf of the industry. These groups commonly work together.
Rounding out the top five associations or organizations in M&A today is the Turnaround Management Association, which catches a slightly different crowd by focusing on distressed investments. Many investment professionals belong to multiple organizations, and it’s important that they join groups that focus on their industry verticals.
“Many of the associations and organizations in middle-market M&A have become invaluable tools because they are so efficient,” says Pam Hendrickson, chief operating officer of the Riverside Co. “The ability to talk with peers about what’s happening in the market through either events or social media is a huge time saver. These organizations also provide a voice for the ‘middle child’ of the M&A industry, a group that represents over 90 percent of all M&A transactions. Historically this group has been absent from the major finance publications as well as from Washington. It is great and important to see us finally having a voice.”
Many services fit neatly into well-defined categories, while a slew of services don’t, but they shouldn’t be dismissed because they can be very important tools for dealmakers.
Axial is one company that doesn’t fit squarely in a category. While using an investment banker or business broker is still the predominant way for companies to raise money and find buyers, Axial Networks Inc. is one of the more successful online networks that sellers and buyers turn to for improved deal flow. The founders of Axial, which started in 2010, have built a platform that helps CEOs of private, mid-sized companies connect with advisers, investors and buyers as they look to grow or exit their businesses. Today, more than 11,000 firms use Axial to connect to deal partners.
“It’s a business development tool that enables investors, lenders, advisers and CEOs to connect with the most relevant partners at the right time,” says Peter Lehrman, Axial chief executive. “Particularly in a fragmented and highly competitive market, investors are looking for more efficient ways to discover deal opportunities and the old way isn’t cutting it anymore. We’re seeing all types of capital providers turn to Axial to supercharge their deal-sourcing efforts.”
Sutton Place Strategies is another company that helps users improve deal flow. The New York-based information services firm, which helps investors optimize their business development and deal sourcing effectiveness, was founded on the understanding that it’s almost impossible for dealmakers to view all of the transactions in their own sectors. Firms such as HighRoad Capital Partners, Huron Capital Partners, Little John & Co., Kolhberg Company and Moelis Capital (now NexPhase Capital) have used Sutton Place’s services.
“Deal sourcing is so competitive today. At Sutton Place Strategies we track all the transactions that have been completed in the M&A universe using a variety of methods and we are able to show clients how many deals in their space they are not seeing on a regular basis,” says Nadim Malik, founder of Sutton Place Strategies. “We can let clients know what their level of market coverage is, and who the relevant deal sources are that they ought to be spending more time with, which is very important.”
Last month the company rolled out a new feature that allows clients to see which processes were broad auctions or limited, and which banks ran them. Every intermediary is put on a scale based on the deals they closed over the last four years. “It’s very powerful to be able to target firms that are closing the most relevant deals via processes that best fit your business development strategy, as well as who you may want to engage on the sell side,” say Malik.
Another company catching dealmakers’ eyes is BoardProspects.com, which is a board recruitment network. Board members, aspiring board members and corporations join BoardProspects to find corporate governance news, education, best practices and board recruitment solutions. Founded in 2011, the members of BoardProspects include executives and board members of Fortune 100 companies, industry experts, former members of the U.S. Congress, university presidents and professors, retired military leaders and federal judges, and experienced corporate directors from well-known corporations including Dunkin’ Brands Group Inc. (Nasdaq: DNKN), Coca-Cola Co. (NYSE: KO), General Motors Co. (NYSE: GM) and Morgan Stanley (NYSE: MS).