WEST MICHIGAN – Merger-and-acquisition activity is picking up in West Michigan and it’s moving further downstream, local experts say.
While mega-deals involving local public companies made headlines in early 2012, the past few months have seen a significant uptick in M&A transactions involving small and middle-market companies. The hottest sectors locally have been manufacturing and professional services, though activity has been spread across many industries.
Last week alone, MiBiz reported on three acquisitions by local middle-market firms, including publicly traded restaurant operator Meritage Hospitality Group Inc. and two closely held trucking companies. Meritage, which posted revenues of $92 million in 2011, moved into the North Carolina market with the acquisition of three Wendy's restaurants. Star Truck Rentals, Inc., a Grand Rapids-based firm with 330 employees and $60 million in annual revenues, told MiBiz on Thursday it had acquired a Roseville, Mich. truck maintenance firm. Earlier in the week, Byron Center-based M&K Trucking Inc. announced it would expand into the Chicago area with the acquisition of four companies that provide sales, service and leasing.
Previous weeks have also seen multiple transactions involving West Michigan accounting and architecture firms, including the merger of Progressive AE and Design Plus that will create one of the region’s largest architectural firms.
While local companies were buyers in many recent transactions, two deals that closed in late July involved West Michigan firms on the sell-side: Caledonia-based Aspen Surgical Inc., a $120 million (annual revenues) supplier of operating room instruments, was purchased by Hill-Rom Inc. for $400 million, and Grand Rapids-based Internet company Iserv Inc. was acquired by Boston-based 382 Communications. Terms were not disclosed.
For many companies, like Holland-based National Bulk Equipment Inc. (NBE), the opportunity to grab market share quickly and cost-efficiency is spurring the increase in activity. NBE, which makes material-handling equipment, bought a Chicago-based competitor in May and added three complementary product lines to its mix.
The country’s economic recovery as well as increased credit availability and improved operating results at companies are all factors that are helping increase deal activity among companies in the $5 million to $100 million revenue range.
“When the economy came back, the deal activity coming out of the recession was large market deals and the lower end of the market lagged,” said John Kerschen, managing partner of The Charter Group, a Grand Rapids-based merger and acquisition advisory firm that works with small and middle-market companies.
In recent months, “the deal flow has moved downstream and the lower end of the market started to catch up,” he said. Lenders have become more active of late, having worked through their own internal issues – TARP repayments, capital requirements and devalued real estate portfolios, in particular – that stifled loan activity in 2010 and 2011. Getting banks back into the game has been important because “at the lower end of the (M&A) market, it definitely takes credit to drive deals,” Kerschen said.
Operating results at target companies have also stabilized or improved, which allows them to trade off current earnings rather than pro-forma results. That’s pushing valuations up, as is the move to quality, said Kevin Hirdes, managing director of Nuvescor Group, a Grand Rapids-based M&A advisory firm that focuses on companies with $5 million to $500 million in annual revenues.
During the recession, buyers sought out distressed companies they could turn around. Now, they’re pursuing strong performers, Hirdes said.
“”The value propositions for sellers have gone up and buyers are recognizing that … (so) we’re seeing higher multiples than we had previously,” he said.
While deal flow is picking up among small and middle-market companies, experts don’t expect a slowdown in the number of transactions involving larger Michigan companies. Private equity firms have an estimated $420 billion to invest, according to industry statistics. International buyers, especially investors and companies in the Pacific Rim, are actively seeking deals for companies in the automotive supply chain, said Nuvescor's Hirdes.
“They have specific interest in making inroads into the supply chain,” he said. “They recognized the value of automotive manufacturing and want to be a part of that, so they’re buying companies with (existing) relationships with automotive manufacturers.”
Tracy Larsen, managing director of the Michigan office of Barnes & Thornburg LLP, can’t remember a time in his more than two-decades-long legal career when he’s seen more M&A work.
The Grand Rapids-based attorney, who has worked on domestic and global transactions of all sizes, is working to wrap up one of the most complex M&A transactions he’s been involved with: a multi-billion dollar purchase of Collective Brands Inc. by Rockford-based Wolverine World Wide Inc. and two private equity firms. That deal is expected to wrap up in the next few days.
As that high-profile deal winds down, Larsen said he’s been adding an average of one new M&A client per week, and the rate of transactions shows no sign of slowing down.
“I’ve been busy my entire career, but I have more on my plate now than I’ve ever had,” said Larsen. “I’ve never had so many transactions as I do now. It’s crazy."
The increase in transaction activity is pushing M&A advisory firms to expand. The Charter Group recently added three executives including Linda Chamberlain, PhD, the former executive director of the West Michigan Science & Technology Initiative, and Mike Brown, a Chicago transplant with significant experience working on deals in the $50 million to $500 million range.