Duane Morris LLP - Sourcing Deals

By-Lined Article

Sourcing Deals

By Duane Morris Private Equity Connections
Summer 2012
Duane Morris Private Equity Connections

Their motivations may be different, but strategics and sponsors are exploring the same territory, using the same GPS.

The hunt for an acquisition begins in much the same way for both strategic and financial buyers—with an investment thesis or a strategic goal. A corporation looking to expand into new geographies may decide to buy rather than to build. Private equity investors are inclined to pick a promising sector—healthcare or franchise retail—and then expend their considerable energies buying assets and developing proficiency in that sector.

Once a private equity firm is deeply invested in a particular industry, it tends to look much like any other strategic investor, albeit with a shorter investment horizon.

Most business development specialists for large, acquisitive corporations search for investment opportunities and vet pitches from investment banks representing middle-market sellers. Many private equity firms are employing a similar strategy. The Riverside Company, a private equity firm that targets the lower end of the middle market, has a dedicated origination group that does nothing but look for potential acquisitions in specific sectors.

On larger deals, buyers from both camps also rely on intermediaries, including lenders and due diligence partners, as well as investment bankers. These partners provide buyers with market coverage that would be hard to replicate in-house. At the smaller end of the middle market, most deals are done directly with the company owners, often a founder or a family. Finding opportunities at this level requires deep industry knowledge and a good story to present to potential sellers.

"We leverage the relationships and industry knowledge of our portfolio company management teams. Our portfolio company CEOs often identify proprietary opportunities that represent unique opportunities and meet our investment criteria." Joseph Ibrahim, The Riverside Company

"In every platform company, we try to do one large acquisition from an add-on perspective within the first six months," Ibrahim explains. "So when we negotiate to buy a platform, we try to identify a handful of add-on opportunities before we close and start thinking about how that integration would work."

Riverside does not normally use buy-side intermediaries to source acquisitions, he adds, "but we will in unique situations where we have a thesis and we're having a challenging time finding a company to back for a management team." "In those circumstances," adds Ibrahim, "we'll reach out to investment banks that have a specific focus in a particular segment where we have an interest and we'll engage them from a buyside perspective."

Deep Industry Knowledge Drives Sourcing Success

Stirling Bomar, SunTrust Robinson Humphrey

Roark Capital, an Atlanta-based private equity firm that owns Corner Bakery, Batteries Plus and Arby's, also relies on industry know-how to source most of its acquisitions. "We have industries that we know well in the franchise and restaurant space, for example, where we're proactively engaging and sourcing those deals directly with targets," says Robert Bryant, vice president at Roark Capital. He adds though that Roark also participates in traditional broad auction processes, "where we have bankers coming to us with a sell-side mandate."

Then there is the limited auction. "This is where a banker has identified a handful of the most logical buyers for a specific company, and is running a mini-auction process that's highly targeted," says Bryant.

Another potential source for deals crops up in initial public offering (IPO) filings at the U.S. Securities and Exchange Commission, says Stirling Bomar, a director of the M&A group at SunTrust Robinson Humphrey. "As a lot of bankers know, if you put your S-1 out there, that is a ‘for sale' sign, for all intents and purposes," he says. Case in point: SunTrust was involved in a deal earlier this year with a portfolio company of a private equity firm that had filed to go public. Before the company made it to market, it was purchased by a strategic investor.

Most corporate acquisitions are done to meet a strategic need. UPS, for example, is following its customers and expanding abroad by buying operations overseas where it makes sense. Chang, who worked in UPS's finance divisions in London, Singapore and California prior to his being named Global Head of M&A, estimates that 90 percent of the deals he has done are cross-border. "UPS is ubiquitous when it comes to small packages in the United States, but when you travel outside the United States, you don't see as much of UPS," says Chang. "My job is to replicate what we have in the United States in every country around the world. So I have spent a large portion of my career, both in Asia and Europe, building up our capabilities."

That dealmaking includes three transactions announced within the last six months—all in Europe—including the $6.8 billion acquisition of TNT Express NV, Europe's second-largest express package and freight company¹; a pharmaceutical distribution company²; and a business-to-consumer Internet small-package provider in Belgium.³

The Strategic Buyer's Dilemma

"People who have the broadest perspective are more likely to look at the particular transaction most creatively. I think private equity can have an advantage because of their broader perspective, and this can reduce the advantage that strategics have from their detailed knowledge of the business." Steve Voorhees, RockTenn

As with most corporations, merger activity tends to be feast or famine at UPS. "Right now, we're tempering the amount of deals that we're doing," says Chang. Integrating three acquisitions in such a short time is "a bit overwhelming for any company." Even when strategic buyers such as UPS have a specific M&A shopping list and the money to pay for it, they tend to be less opportunistic than financial buyers.

Steve Voorhees, executive vice president and chief financial officer of RockTenn, a publicly held U.S. manufacturer of paperboard and packaging based in Norcross, Ga., says this strategic focus can be both a blessing and a curse. "I think perspective is a very difficult thing to have" for a strategic buyer, he explains. "You're in the business—you're working it every day."

When he squares off with a financial sponsor in a deal, Voorhees can see that they have an advantage in the breadth of investment opportunities. "They are looking at a lot of different industries," he says. "They can look at the same asset and see it in a different way that might end up creating more value." Just as sellers cannot always pick their buyers, potential buyers cannot pick their competitors in any type of bidding process. "People who have the broadest perspective are more likely to look at the particular transaction most creatively," says Voorhees. "I think private equity can have an advantage because of their broader perspective, and this can reduce the advantage that strategics have from their detailed knowledge of the business."

Ultimately, most corporations do not mind the competition from private equity buyers, at least over the long term. UPS's Chang says that "it really is a push between us and the sponsors" when it comes to clashes over individual deals. "At the end of the day, if I lose out on a deal, my preference is to lose to a sponsor. If you sell to one of my competitors, I may never see your company again. At least with the sponsor, the company may be up for sale again in three years."

Notes

Press Release, "United Parcel Service and TNT Express to Create a Global Leader in the Logistics Industry," March 19, 2012.
Press Release, "UPS to Acquire Italian Pharma Logistics Company Pieffe," December 1, 2011.
Press Release, "UPS Acquires Kiala," February 15, 2012.