Attendance at this year’s WINDPOWER conference was down, but the mood did not match. Below are some takeaways from the conference.
Most people are aware of the litigious nature of our culture, and are clear on the notion that people are increasingly willing to play the “blame game” in the courts. At the risk of stating the obvious, when confronted with circumstances wherein the pursuit of a monetary damages claim is appropriate, it is first and foremost essential that one engage experienced legal counsel. Secondly, engaging a capable financial expert that can provide key insights to legal counsel early in the game is essential. In that regard, your financial expert should possess credentials that address a wide spectrum of knowledge, including corporate finance, quantitative economics, valuation, solvency and fairness, intellectual property and financial forensics. These skills, amongst other things, will lead to a supportable conclusion as to the quantum of the prize with “reasonable certainty;” a conclusion that will take into account all of the possible factors that might arise in the courtroom setting, whether they favor or disfavor one’s position.
The differences between controlling interests and non-controlling interests are many and manifest themselves in ways that affect both the operations of the company and the valuation of the interests in question.
Currently the stock market is doing well, optimism in the economy is good, and debt remains cheap. All of these factors have created a robust M&A market for companies across many sectors with good companies achieving valuations that strong companies would normally achieve. This is expected to continue. For company owners and sell-side advisors that is great news. At this stage, when activity levels are high the smart money should strive for acquisitions that will have sustainable revenue during the inevitable downturn. This is a more defensive strategy due to its counter-cyclical nature.
In the merger and acquisition market there have been many flavors of the month, but the demand for industrial companies is the equivalent of chocolate: almost universally and consistently liked by acquirers. Industrial companies including, manufacturing, distribution and services, are a significant portion of the American economy and will remain so well into the future. At one time, the demise of the industrial sector was predicted as low cost manufacturing transitioned overseas. In recent years the demand for industrial products produced in the U.S. has expanded. Throughout these differing viewpoints M&A activity in the industrial sector has remained strong.
Global M&A deals across all industries exceeded $1.0 trillion during the second quarter of 2014, the highest level since 2007, according to Thompson Reuters. Private equity groups and corporations, sitting on stockpiles of cash coupled with the ability to borrow at record low rates, are helping drive the acquisition spree. The healthcare industry appears to be riding the coattails of the overall market activity. Through the first half of 2014 the healthcare sectors tracked by the PCE Industry Update – Healthcare show that 729 M&A transaction deals were announced or closed compared to only 631 in the same period in 2013.
I was recently exposed to an interesting study called Roads to Resilience, which is a 2014 report by the UK’s Cranfield School of Management on behalf of the UK insurance and risk consultancy, Airmic. The basic thesis is that opportunity is the upside of risk, and that seizing risk-driven opportunities requires a decisive and rapid response, which in turn requires empowered teams, practiced processes and flexible resources.
One may anticipate a spike in corporate divestitures immediately following a period of significant economic decline as companies pull back the reigns and focus on reducing non-core / under-performing units. Similarly, one may also expect activity to decline in the years following as businesses right-size the ship and transition into a more stable market. Oddly enough, these expectations were contradicted in the years surrounding the 2008 financial crisis. Divestiture activity for the five year period prior to the crisis depicted consistent expansion with annual growth of ~ 3%, but revealed a change once the crisis set in. Activity constricted by ~ 2% between 2008 and 2009 while companies accessed what to do next, but then started on an upward trajectory with growth of nearly 7% per year thereafter through first half of 2014. In the five year period (06/09 to 06/14), divestitures increased by nearly 40% from 2,500 per year to 3,500.
While it may seem at face value (pun intended) that the value of a note is equal to the outstanding principal balance; this is often not the case. The fair market value of a note is dependent on several factors, two of the most important being “counter-party risk,” which means the creditworthiness of the debtor, and cost of capital at the date of analysis. Understanding the creditworthiness of the debtor is the more complicated of the two, and potentially involves analyzing the debtor’s financial condition, and could involve a fairly complex analysis of an operating company, including an analysis of quality of assets and cash flows, the determination of a corporate credit score (Z-score), and other such analyses that are typical for underwriting debt. As an ancillary consideration, the lender should require access to relevant records so as to be able to perform such analyses if necessary.
The compounding pharmacy industry is ripe for consolidation and many anticipate a pickup in M&A activity. As compounding pharmacist head to Washington, DC to attend the industry insiders “IACP’s 20th Compounders on Capitol Hill 2014” summit later this month, it is worthwhile to provide insight on this subsector.