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I’ve worked in corporate finance for 33 years, starting out in secured lending in the middle market. One of my colleagues back then was Andy Code, who went on to found the private equity firm of Code, Hennessey Simmons, now CHS. I watched Andy’s success, and by the mid-1990’s, I made the transition from commercial lending to investment banking. I realized that someone had to provide the transactions for the growing appetite of PE firms.
As the market has become more efficient in large corporate and upper middle market, I’ve transitioned to middle-market and lower middle market where there are a vastly higher number of companies, the value equation is far more favorable to a buyer, and operating skills are a far greater part of the success formula due to the lack of depth on the bench at this privately held companies. I’ve been evaluating the skills of management all my career, and we now refer to this as the Human Capital component of Intellectual Capital. this way of looking at value creation is really only about 10 or 15 years old.
The other major change has been the movement of enterprise value from tangible assets to intangible assets. In 1975, only about 18% of the value of the S&P 500 was due to intangible assets, so called Intellectual Capital. Now that is 80%. Unless an M&A professional can understand the drivers behind the creation of Intellectual Capital, they are a couple decades behind the reality of the market. That’s why our firm emphasizes the importance of value creation through intangible assets, which is what Intellectual Capital really is. As for me, I’ve joined the Intellectual Property owners Association and am a member of the Licensing Executives Society. We spend a lot of time working on the Human Capital aspect of value creation. Relational Capital would be second in importance, and Structural Capital would be third, since we see that as a derivative of Human Capital.
2. How do you determine what projects to take on? What specifically do you look for?
We focus on engagements within our zone of experience, and deal size. Corporate Finance work has a high fixed cost component, and it is as much work to do a small transaction as a large transaction. Our favorite industries are Ag business, food, manufacturing, distribution, and business to business services. We’ve also done a lot of transportation, such as rail and air, and now pipelines.
Most of our clients are mature companies, and many have aspects of financial distress, or alternatively, have a high growth trajectory that puts their demand on cash beyond their ability to finance it in with internally generated funds and traditional debt.
As far as start-ups, we only work with companies that are post-revenue with a strong sales and earnings trajectory.
3. What have been some challenges you have experienced on the buy-side of the business with respect to working closely with clients and understanding their aims and objectives to develop an approach to the transaction?
Many PE firms get so many information memorandums that they are fully employed just trying to sort them into piles. I think that is a mistake. An organized search yields diamonds in the rough that they would never run across in an information memorandum or offering memorandum. The very best deals never see the light of day of competitive bid situation. We have created a buy-side search engine that we have refined over the decades, and we find things others just don’t, or can’t.
While most any PE firm will outline what their strike zone is, it is far more fluid than they really let on. That makes it a bit hard for them to delineate what they are looking for. Think of it this way: describe what you were looking for in finding your spouse? Would you ever have been able to describe them? Would you have known you had found them when you first met? Looks are deceiving, and we can’t tell a book by its cover
4. What is the general state of the mergers and acquisitions industry today?
M&A volume has been fairly quiet at the upper end of the market, but we are seeing a lot of activity in lower middle market. That’s where we are putting our resources right now. Business to business services, anything food or Ag, are popular.
5. How do you manage to foster that innovation and creativity within your team while maintaining confidentiality and ensuring that the existence of a transaction only becomes public knowledge when appropriate?
Innovation and creativity are the result of hiring the right people and nurturing them in the right environment. Lateral thinking is something we encourage. Lateral thinking is far more than thinking out of the box. It’s integrating information and ideas from disparate functions and fields and creating unique solutions to unique problems.
You only have to look down your reading glasses once at someone who has thrown out a novel idea to chill the air and prevent innovation. We just don’t do that. Genius and eccentricity are close cousins. There is a reason they use the term “mad scientist”.
Maintaining confidentiality is also the result of selecting and hiring the right people. You must also create and maintain an environment where the leadership walks the walk, where integrity comes first before all else.
6. Can you share with our readers the day to day life of your work? A motivational experience or an anecdote?
Our work is balanced between creative work, client contact, business development, and continuing education. We believe in and practice the Japanese concept of Kaizen, or constant improvement. The moment you stand still, you will be passed by the rapidly changing nature of the Knowledge Economy that we live in today.
One of our transactions right now is 30 year old company that found itself in financial distress for reasons outside of its control. We have a cash crisis coming up in six months. We’ve been able to find a PE firm to partner with them, and I believe that the combined attributes of the two parties will create a real dynamo, able to capture share in its fragmented industry. Five or ten years from now, it will be a dominant force in its space.
7. Explain how the economic downturn effected business? What were some negatives and positives?
The downturn has been great for our business. The tightening of credit, the smaller credit box of commercial banks, the imposition of Basel III, and Dodd-Frank, have led to greater demand by companies for help with their financing. Restructuring and workouts are slowing, but many companies are weary and fatiguing. They survived the shock of 2008-2009, but were sufficiently damaged to be limping along, a kind of corporate walking wounded. Many business owners are just worn out.
8. What are some goals for 2012?
We’ve built a business development model that has its roots going back to the mid 1990’s, and we have refined it to the place that it has become a smooth running business development engine. We will always have more work to do on it, but it is working very well. We have to turn it off from time to time to catch up, and that is a great problem to have.
We also have some engagements in the later stages of a long development time we hope to have up on the shelf in a new tombstone. We are quite proud of the work that is being done.
We have also made great progress on learning to use innovative collaborative techniques to create better solutions and greater efficiency. We think this will give us a competitive advantage in the market. To learn more, contact us
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