May 09 , 2008
 

Top Stories

Banking on Malaysia:  UAE bank buys stake in RHB
Abu Dhabi Commercial Bank sealed a $1.2 billion deal this week to buy a 25% stake in Malaysia's fourth largest banking group, RHB Capital Berhad.  The acquisition will make Abu Dhabi Commercial the second largest shareholder in RHB Capital. The EPF, which is Malaysia's national pension fund, will remain the single largest shareholder with a 57% stake. The deal is the largest investment to date by a Middle East investor in Malaysia’s financial sector and will drive RHB Capital's goal to become one of the top three banking groups in Southeast Asia.  Abu Dhabi Commercial is owned by the Abu Dhabi Investment Council, one of the largest sovereign wealth funds in the world.

Bank-2-Bank: First Place to Acquire Camco
First Place Financial Corp. , the holding company for First Place Bank, and Camco Financial Corporation, the holding company for Advantage Bank announced that they have reached a definitive agreement for First Place to acquire Camco for $97.2 million.  Under the terms of the agreement, which has been approved by the Boards of Directors of both companies, Camco shareholders will be entitled to receive either $13.58 per share in cash or 0.97 shares of First Place common stock for each share of Camco common stock.

The Vote is In: NuCO2 INC. Shareholders Approve Merger
NuCO2 Inc., announced that at the Company's Special Meeting of Shareholders, the company’s shareholders overwhelmingly voted to approve the merger agreement with affiliates of Aurora Capital Group.  The transaction is expected to close by the end of May this year, and is subject to the satisfaction or waiver of certain closing conditions.  Under the terms of the merger agreement, NuCO2 shareholders will be entitled to receive $30.00 per share in cash for each share of NuCO2 common stock, without interest, for a total enterprise value of approximately $487 million.

Give or Take $75 Million: Knight Capital to buy Libertas
Knight Capital Group Inc., has agreed to buy fixed-income brokerage firm Libertas Holdings LLC for approximately $75 million in cash and stock, said the financial services firm.  Knight may be forced to pay yet another $75 million in stock depending on how Libertas's earnings perform in the next three years.  The company, which executes electronic trades for its clients and provides asset-management services, will pay the initial $75 million as $50 million in cash and $25 million in stock.

Getting Rid of that Old TV Station?:  Emmis Announces Sale of WVUE-TV
Emmis Communications Corporation announced it has signed a definitive agreement to sell Fox affiliate WVUE-TV to Louisiana Media Company, LLC.  The station is principally owned by Tom Benson, owner of the New Orleans Saints. The purchase price is $41 million, with after-tax proceeds expected to be approximately $35.5 million. In addition to the sale, Emmis retains net working capital, which is expected to be approximately $4 million.  The sale of WVUE completes Emmis' divestiture of television assets. Since announcing its intent to exit the television business in May 2005, Emmis has sold all of its 16 television stations, resulting in gross proceeds of approximately $1.24 billion.


Despite cheap money the US economy continues to wobble as we enter the second half of 2008, impacting middle-market M&A deals directly.

In March non-farm payrolls fell for a third straight month and the unemployment rate rose. US construction and manufacturing also took big hits, accounting for March decline in payrolls.  Business activity has also slowed but personal spending continues a steady, if lesser, pace.  On the plus side, the housing market, which accounted for a 1% loss of GDP is showing signs of stabilizing.  And bank write-downs, as a result of CDOs, finally seem to be coming to an end.

So what does it look like for middle-market M&A deals?  With the Fed now allowing Wall Street firms to have the same access to the discount window will deals start to flow?  I say, not just yet.  M&A deals are still backlogged.  The total number of worldwide transactions in March was just 2,136 or a 26% decline year-over-year.  That dollar value of just $141.5 billion, represents a 56.5% decline from the same period 2007.  Roughly 7,000 global deals have been announced thus far this year.  

Here in the US there were just 705 announced deal transactions in March of 2008.  A 28% decline from last year.  And large multi-billion dollar deals are going nowhere fast, as of late.  In the first half of 2007, thirty-one deals over $1 billion closed.  This year the number so far is fifteen.   According to Factset Mergerstat only 5 of 49 industries tracked saw an increase in year to date transactions. 

Middle-market deals have also been anemic.  As of March there were 211 announced deals.  A 36.1% decline from 2007.  Middle-market dollar volume of $24.0 billion is also down 23.6% compared to last year.  Thus far, by the end of March 2008, there have been a total of 771 announced middle-market transactions, a 25.7% decline from the same period last year.  The total number of undisclosed deals for the year is, however, down just 12.3% compared to 2007.

The US middle-market deal total is not as weak as thought. The dollar value of middle-market deal activity for the year currently totals just $79.5 billion, a 24.5% decline compared to last year.  The good news is that middle-market multiples continue to be at the higher end of historical ranges.  Caution: these multiples are based on EBITDA that is still coming in from 2007 strong earnings.

Further good news includes the fact that private equity and venture capital firms continue to raise new funds.  So far, $58.5 billion has been raised by 68 funds in the first quarter of 2008.  This fundraising represents a 32% rise from 2007.  If capital raised continues at this pace throughout the calendar year, LBO firms will surpass 2007’s record year of $309 billion.  Driving liquidity growth is an increase in new mezzanine and distressed asset vehicles. 

European M&A activity has reflected US M&A activity.  Fears of a global slowdown, brought on by turmoil in the credit markets, has resulted in a 37.9% drop in M&A deals, or just 732 for March.  The dollar volume for the month of March was $64.5 billion, a 63.0% drop from 2007. 

Year-to-date, there have been a total of 2,523 announced European transactions, a 25.82% decline from prior year.  As of late March, the total disclosed dollar volume for EU deals is approximately $171.4 billion, an over 50% drop from the same period last year.  EU M&A dollar volume is now trailing U.S. M&A activity after exceeding U.S. deals in 2007.

So far, EU middle-market deals, as of March totaled 250, a 42.8% decline from 2007.  Total EU middle-market transaction dollar volume for the month of March was $25.3 billion, a 45.2% decline from last year, and well below the monthly average of $34.4 billion.  Year-to-date, there has been a total of 793 announced EU middle-market transactions, a 31.9% drop compared to the same period last year.

In 2008, thus far, there has been a total of 92 announced middle-market transatlantic deals. Although, these deals represent a 36.6% decline from a year ago.  The total disclosed dollar volume of $15.9 billion, however, represents just a 7.2% decline over last year.

As of late March there have been 50 acquisitions of European middle-market targets by U.S. buyers.  This, however, represents a 42.5% decline from the year-ago period.  So far, there have been just 13 EU acquisitions of U.S. middle market targets as of March, a 27.8% drop from 2007.

Here on the other side of the Atlantic, there have been 42 acquisitions of U.S. middle-market companies by EU buyers thus far, a 27.6% decline from a year ago.  These middle-market deals represent 45.7% of the total number of transactions. The total disclosed dollar volume for the acquisition of U.S. targets for the year is currently $7.2 billion, a 38.7% gain from last year, representing 45.7% of the total middle-market transatlantic dollar volume.

While the data is nothing to write home about, I still think middle-market deal makers, if not sanguine, can at least exhale.  The worst is over and liquidity is in no short supply. 

 

   
Coming Events

Annual Middle - Market Financing
Conference and Awards Gala

June 9-10, 2008
The Drake Hotel, Chicago, IL
 

Keynote Speaker

Dick Morris
 on the Race to the White House

 
Q & A

 


Cory Clemmons
Senior Manager

In light of today’s banking situation, M&A deal makers should consider the important elements of a solid and smooth post-merger strategy.  Cory Clemmons, Senior Manager, of West Monroe Partners works with banks and other companies to develop efficient post-acquisition integration. 

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M.A.: Prior to a merger what steps should senior management take to assess if cultures will fit well together? 

C.C.: A culture is driven by many factors, but a company’s values, mission, competitive strategy and senior leadership all play a significant role in shaping a company’s culture. All of these elements can be evaluated prior to closing a deal. A company with an aggressive growth strategy and values that lend to rapid career growth will struggle when integrated with an organization that focuses on slow growth and a heavy emphasis on work-life balance. 

M.A.: What should senior management do in light of a difficult fit?

C.C: Addressing cultural differences can be a big challenge when integrating companies. It is important to understand any core value and strategy changes for the unified company before the deal closes. Analyze the employee ramifications of the cultural shift and create a plan to manage the change. Employee buy-in is extremely important when evolving the culture.  Clearly communicate changes to employees along with messaging that emphasizes the rationale for the change and the value it brings.  Disconnects between company and employee direction will lead to attrition.  Plan for it by adapting the company’s hiring plans with reasonable assumptions.

M.A.:   What are some key legal documents that can be overlooked that should not be overlooked?

C.C: On a macro level, the definitive agreement (a.k.a.  the deal agreement) is the most important legal document. It governs the terms of the deal and defines how the assets will be valued. Within the deal, the legal documents for the purchased assets are also very important. I recommend evaluating the legal documentation associated with any large assets during pre-deal due diligence. Large commercial or home loans are great examples. The deal value can suffer if the contract terms for several multi-million dollar loans are unfavorable or unclear. Sampling reviews should also be performed in deals where large volumes of loans or individual customer contracts are part of the purchase. The buyer will need to bring any improperly on-boarded loans within compliance shortly after the deal is closed, so large volumes of individual problems can be time consuming and costly. 

M.A.: How far in advance to merging institutions need to get on with regard to regulatory requirements?

C.C: Addressing regulatory hurtles should be one of the first elements to plan in a banking merger. Start as early as possible to map out due dates for all federal regulator notifications and filings as well as required customer notifications. In most cases regulators can require weeks to review and respond to a deal proposal. Customer notification requirements can vary by product and locale, but plan to notify customers 6-8 weeks prior to close to address any mailing problems or returns.

M.A.: What are the cost associated with data security?

C.C: Cost relating to data security should be thought of in two separate ways;  the first being securing the data during the deal close (a.k.a. risk avoidance) .   This is the cost associated with securely managing and translating the data during the migration.  Bank Operations, Accounting and IT teams work closely to design and implement a data migration strategy to appropriately map the customer and asset information into the unified company. Example costs includes securing the transmission, translation, mapping and integrity of the customer and asset information.  The second are the ramifications of a breach (a.k.a. risk realized).  The second is the cost associated with unintentionally altering, corrupting or failing to protect customer financial information. Example costs of a breach can include customer attrition, reputational damage, regulatory fines and customer liability to damages caused. 

M.A.: What should M&A deal makers say to investors regarding physical asset holdings?

C.C. :  When announcing a deal to investors, it is important to highlight the key assets and their worth along with perceived risk and mitigation strategies. Example, X deposit accounts valued at $Y million and Z loans valued at $A million.  It is very important that deal makers set expectations on customer retention and satisfaction along with any key risks that can devalue a deal. They should also provide insight into how each value risk will be managed and minimized.

Deals tend to be structured in terms of pre-deal value and post-close true-up with clauses on management of the customer satisfaction and assets prior to deal close. In other words, an initial estimate of the deal value is made when creating the deal agreement, but arrangements exist to reconcile the true value of the assets at the time of close. In this situation, investors receive an estimated deal value when the agreement is made and the “true” deal value is reported to the investors as part of the deal close processes. 

M.A.: What are some key regulatory compliance rules that investors should look at specifically?

C.C. :  First, Federal Regulator Approval, banking M&A is under federal regulation, so gaining the federal regulator approval (OTS, Fed, FDIC) is required.  Second, Customer Notifications – changes in asset ownership requires individual customer notifications in advance of the deal close.  These notifications can be complex and costly; for example, in a situation where a bank is purchasing thousands or millions of accounts or loans.  Third, the Gramm-Leach-Bliley Act (GLBA).  GLBA protects consumers’ personal financial information held by financial institutions. Compliance to the rules of GLBA are part of day-to-day bank operations, but additional attention needs to be place on customer privacy when moving or integrating customer banking information. Controls are required to ensure customer privacy is maintained during all phases the migration.



 

  
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