LET’S (STILL) MAKE A DEAL

“We haven’t done an acquisition in two years because of Covid and the focus on our internal technology transformation, but I’m feeling very bullish about M&A at the moment.” —Kate Duchene, CEO, RGP

In the reset to a buyer’s market, acquirers are (so far) shrugging off higher interest rates to nab the right opportunities. But while the game is much the same, the rules are definitely shifting. Here’s how to play.

BY RUSS BANHAM

OVER THE LAST TWO YEARS, Josh Rogers, CEO at data integrity solutions provider Precisely, completed seven acquisitions. So did CEO BJ Schaknowski at healthcare operations software and services provider Symplyr. Not that it’s a race, but Robert DiPietro pulled off six acquisitions in the past year as the CEO at Air Pros USA, a fast-growing HVAC repair and installation business in seven states.

The midsize companies’ recent acquisition splurge tempered a bit in Q2 2022, but the three chief executives are resolved to continue splurging, despite an economy that whipsaws in an average month from good news (another terrific jobs report) to bad news (persistent inflation, higher interest rates and recession fears).

“We’ve easily got 200 companies on our M&A heat map,” says Schaknowski. “We’ve done fewer deals in the last few months, since a lot of sellers were hoping their valuations would come back to where they were six months ago. This hasn’t been the case, and we’re more engaged with them than we were before. I’m flying out tonight to meet with

“We’ve easily got 200 companies on our M&A heat map.” —BJ Schaknowski, CEO, Symplr the CEO of another large healthcare operations provider to talk up a deal.” “Our M&A pipeline is very active,” Rogers concurs. “We’re funding deals primarily from cash flow, so higher debt capital is not much of an issue for us. We’re profitable, and the companies we’ve bought are profitable. The pace of dealmaking has not slowed.” It hasn’t slowed at Air Pros USA either, which is on tap to acquire the same number of businesses transacted it did last year. “Our sweet spot is around six to eight acquisitions annually,” says DiPietro. “We’re not slowing down at all.”

Buy, buy, buy is the refrain echoing across medium-size companies, assuming they have steady cash flow, strong banking relationships and a compelling business proposition to entice sellers to the table. Deals are predicated on producing bigger revenues, cost synergies and geographic market share, as well as to access needed skill sets, suppliers, intellectual property and technologies.

In the first half of 2022, the aggregate number of closed M&A deals in the U.S. fell 13 percent, and newly announced transactions were down 31 percent, compared to the same period in 2021. But last year’s M&A activity was one of the highest watermarks in recent memory, meaning this year’s figures are nothing to sneeze at.

“Mega-deals have slowed because of higher interest rates causing a tighter debt market and deeper regulatory scrutiny of deals, but we’re seeing a significant uptick in sub-billion-dollar deals,” says Joseph Radecki, corporate finance managing director at audit and advisory firm KPMG. “The volume of M&A deals in the $500 million range and especially in the sub-$500 million range is surprisingly resilient.”

Investment banker Gregory Bedrosian shares this perspective. “Our firm focuses on midmarket deals up to $1 billion,” says Bedrosian, CEO of global technology-focused investment bank Drake Star. “In that ecosystem, we’re seeing privately held companies and portfolio-owned companies more active in M&A activity than large corporations, particularly in the technology, ecommerce, fintech and digital media spaces.”

He projects that this activity will continue through the balance of 2022 and into 2023. Radecki is reading the same tea leaves. “There is a healthy mix of entrepreneurial founder-owned private companies and also a good-sized block of private equity-backed and venture capital-backed businesses seeking an exit at attractive prices, especially for midsize companies looking to acquire in the technology, media, telecom, healthcare, payments and construction sectors,” he says.

Is it a buyer’s market? “Yes, in the sense that there are quality companies that are growing with healthy margins that are available to acquire, but not in the sense that buyers can come in and dictate the prices and terms to these entities,” Radecki says. “There’s still some competitive tension.”

Jay Langan, partner and national M&A industry leader for financial services at Deloitte & Touche, has a similar opinion. “It was a seller’s market last year, but there’s now some instability as to who is in control,” he says. “Certainly there are a lot of strategic and financial reasons for midsize buyers to be out there buying.”

One of those financial reasons is a buying price reflecting many sellers’ lower valuations. “I interact with hundreds of clients and counterparties on a regular basis, and they are attesting to what they see as a great reset in valuations following the chill that froze many deals in the second quarter,” says Bedrosian.

He explains that once buyers realized the NASDAQ was down 30 percent, the Russia-Ukraine war wasn’t ending anytime soon, interest rates were headed upward and a recession was an actual possibility, “they stress-tested the target’s forecasted revenue and profitability, causing a lot of

THE NEW DUE DILIGENCE MUST-DO’S

Adequate due diligence into a target company’s operations, finances, people and technology, among other considerations, is what separates a good deal from a lesser one. The challenge in a buyer’s M&A market is a tendency to rush the deal to a close before a competitor arrives with a better offer. Like the saying goes, speed kills.

More than half of all M&A combinations fail to achieve their intended goals, with a famous Harvard Business Review study in 2011 pegging the rate of failure between 70 percent and 90 percent. To be fair, stuff happens after a deal closes that no one can control (like an unexpected recession), but many transactions come to tatters because not enough consideration was given the target’s strategic fit.

These days, fit is a more complicated subject, says Gregory Bedrosian, CEO at global tech-focused investment bank Drake Star, which has completed 450 transactions on the buy-and-sell side in the past nine years.

“The sectors the firm covers, like technology, digital media, fintech and telecom, are all heavily regulated and getting more so,” he says, pointing to recent SEC proposals to disclose ESG data like greenhouse gas emissions and human capital risks. “More time is needed in the due diligence period for buyers to deeply assess and stresstest the target’s forecast, much more than in the past, given newer risks like ESG that can affect the acquired company’s prospects.”

Jay Langan, a partner at Deloitte & Touche, where he is the national M&A industry leader for financial services, says several clients have “walked away from deals once they discerned the target company’s ESG profile, concerned that it would make their ESG profile worse. Every company needs to improve their ESG metrics, and you don’t want to unroll what progress you’ve made because of someone else’s problems.”

Other consultants agree that ESG is gumming up a lot of deals. “We’re seeing it become a key consideration across the board for all buyers, especially among larger acquirers,” says Joseph Radecki, corporate finance managing director at audit and advisory firm KPMG. “This doesn’t mean that targets have to have a fully implemented, soup-to-nuts ESG program, but there does need to be evidence the company is thoughtful about its responsibilities to stakeholders like customers and employees.”

Due to the uncertain economic path ahead, Radecki also advises deeper due diligence into more traditional concerns. “If we find ourselves in a recession, which some people think already is underway, you need to know how the target company’s earnings forecast, operations and customers will react in a recessionary environment,” he says.

Another customary due diligence consideration, distilling the impact of a more rigorous regulatory agenda governing the combined organization, is also in scope, following the Biden administration’s abandonment of the long-held view that vertical mergers pose no competitive threats.

“The possibility a mega-deal may not close due to regulators’ enhanced scrutiny is having a chilling effect [on some M&A transactions],” says Bedrosian. “For large deals to close, there needs to be a high certainty they actually will close.”

Otherwise, the costs of dealmaking—the fees paid external consultants, auditors and law firms, as well as the time squandered by senior executives in developing the offer and lining up the financing—are prohibitive, he explains. “If, at the end of the day, there’s a good possibility the deal will be quashed by regulators, you want to know this beforehand.”

transactions to be renegotiated over the summer with different ‘bells and whistles,’” he says.

These new features included a flurry of earnout considerations, where the negotiated purchase price was contingent on the acquired entity satisfying specific performance goals for a period of time after the deal closing. The delayed payments haven’t stopped sellers from selling, a sign of confidence in their business prospects ahead. As Bedrosian sums up current midmarket dealmaking, “The summer months thawed the deep freeze.”

Hot Prospects

Depending on the industry sector, acquisition opportunities seem there for the taking. “We haven’t done an acquisition in two years because of Covid and the focus on our internal technology transformation, but I’m feeling very bullish about M&A at the moment,” says Kate Duchene, CEO at global consulting firm RGP, a publicly traded company with more than 4,300 employees and $805 million in FY 2022 revenues.

These feelings are prompting Duchene to scout around for assets like technology companies that were high-priced six

“Lots of small businesses are looking for an exit, with their owners nearing retirement, worried about the economy and looking to get out.” —Robert DiPietro, CEO, Air Pros USA

“Valuations have come down to earth a bit.” —Amanda Eisel, CEO, Zelis months ago but are “no longer white hot,” she says. “I’m not looking for transformational deals per se; rather, I’m interested in tuck-in acquisitions that expand areas of expertise we already have. For example, I’d like our tax consulting practice to be much bigger. There’s strong demand for these services, but we can’t build it organically fast enough.” Having retooled RGP’s list of acquisition targets, Duchene and her CFO, Jennifer Ryu, are presently engaged in negotiating three deals. “I have a great CFO who presciently renegotiated our credit facility last year, in anticipation of us becoming more acquisitive this year,” she says, noting that RGP has the financial means to execute the three transactions without going to the financial markets.

Profitable cash flow is prompting other CEOs to plot possible strategic tuck-in acquisitions. At public company BlackLine ($424.7 million in 2021 revenues and more than 1,900 employees), CEO Marc Huffman sees M&A opportunities for midsize companies that are “well capitalized and have cash on the balance sheet,” he says. BlackLine fits this profile. Over the past year and a half, the global provider of automation solutions for finance and accounting closed two strategic acquisitions, Rimilia and FourQ Systems, with cash. The tuck-in acquisitions augmented BlackLine’s capabilities and competencies in accounts receivable automation and intercompany financial management solutions, respectively. “With approximately $1 billion in cash on our balance sheet, we’ll continue to be opportunistic in our M&A strategy, canvassing the marketplace for potential acquisitions accretive to the portfolio and valued at a fair price point,” Huffman says.

Tuck-in acquisitions are in view at privately held healthcare payments and pricing company Zelis, with 1,700 employees and an estimated $1 billion in annual revenues. In August 2022, Zelis acquired Payer Compass, a provider of healthcare-related claims, administration and processing solutions. Another tuck-in acquisition, Sapphire Digital, a healthcare platform for provider selection, patient access and digital transparency, closed in 2021.

“We do M&A for long-term strategic value creation,” says CEO Amanda Eisel, a former consultant at Bain Capital and McKinsey & Company. “We’re very deliberate about the deals we do. This was the case with Sapphire Digital, as it had specific solutions in the healthcare space that were needed because of regulations coming into effect around price transparency. Either we needed to build this capability or buy. We bought.”

Eisel isn’t just focused on tuck-in acquisitions. “Valuations have come down to earth a bit,” she explains. “There are some large players that were thinking about going public but are now rethinking it. I’m not averse to big transformational M&A deals. Potential downturns open minds to unique opportunities.”

Price is a big factor in the appetite to buy at BurgerFi, a rapidly expanding chain of 122 fast casual restaurants, 97 of them franchised. Two years ago, BurgerFi merged into a SPAC, giving it access to the public markets to fuel the company’s growth strategy. “It’s an opportune time in the restaurant sector to buy right now,” says Patrick Renna, president of BurgerFi, which also owns the Anthony’s Coal Fired Pizza & Wings chain of 61 restaurants and hopes to buy other established regional brands.

Brands may be willing to sell, given economic headwinds and the pandemic’s cataclysmic impact, which resulted in the shuttering of 90,000 restaurants nationwide. Renna explains, “There’s a lot of uncertainty in the market right now, with inflation, higher interest rates and talk of a recession [causing] anxiety for business owners, particularly those looking for an exit. In such cases, it might be better

Navigating Complex M&A: Five Moves for Success

By Carole Streicher

INCREASED COMPLEXITY IN M&A HAS CREATED NEW challenges for dealmakers. But business leaders can succeed by taking a systematic approach to addressing the additional challenges created by complexity.

Based on observations from KPMG deal professionals from around the world, we outline five practical moves companies can make immediately to improve their odds of success when undertaking a complex transaction. These moves emphasize enhanced ways of thinking and require shifts in mindset, ambition and execution. They are, however, not exhaustive; each transaction will require a tailored approach.

Make strategic value your ‘north star’

The ultimate payoff from complex deals is often strategic value—new opportunities or new ways of doing business that build long-term value, transcending traditional synergies. The strategic goals of the transaction, therefore, must be clearly defined, widely supported and pursued methodically and relentlessly.

It starts with leaders from both the buyer and target establishing a combined vision around strategic value. This north star sets the stage for execution and should be translated into tangible goals and objectives for leadership. Key individuals who bring elevated commercial and operational value to bear should be involved early on in this process. A cadence of effective strategic reviews that continuously “restate” the core elements of strategic value can keep executives and teams aligned across time.

Play offense to win during diligence

Diligence should not be a check-the-box exercise to validate baseline assumptions. Deal teams need to stretch further in search of greater value. This requires harnessing the power of data analytics to unearth new opportunities. Diligence is also your opportunity to explore the art of what’s possible with target management. Buyers should proactively engage with their soon-to-be colleagues to gain new and deeper insights, validate key assumptions, build buy-in around strategic value and enlist the target management’s help to imagine and design the future. Meanwhile, ask yourself what you need to do to be the best owner of the new business.

Get a running start before Day 1

The moment a complex deal is announced, the stakes couldn’t be higher. Risks are immediately elevated around customers, talent, suppliers and other key stakeholders. Complex deals demand a different approach to Day 1 readiness—one with greater purpose, intensity and speed. Sophisticated buyers use the sign-toclose window to protect business momentum, find and mitigate blind spots, continue to seek even higher synergy upside and accelerate tailored integration planning.

To increase the odds of success, sophisticated buyers also establish a small high-functioning team. This agile, highly bespoke team of six to eight people launches immediately upon signing and is responsible for accelerating the pace and success of the transaction. Its mission is to move with the highest levels of focus, intent, speed and empowerment to protect and create value in line with the deal’s north star.

Adopt a people strategy for the times

More than ever, the value of a target lies in the capabilities, energy and culture of its people. Losing talent can make it impossible to achieve the deal’s objective. Understand what positions and capabilities are most critical to success, current attrition rates by key employee group, time to fill open positions, sources of available labor and recruiting processes. Then create targeted incentives.

Buyers need to be transparent about their plans and present the target’s employees with a clear and compelling value proposition that is connected to the strategic goals of the deal. Communicate the goals of the transaction, build trust and excitement, and enlist your new employees in your quest for strategic value. Then create a supportive, nurturing employee experience.

Think continuous value creation

Buyers define synergy targets at the outset, but they shouldn’t stop there. Be alert to new opportunities and prepare to flex as markets, leadership and strategies evolve. Beware of backsliding: After the integration reaches key late-stage milestones and initial synergy targets have been achieved, don’t assume the gains will stick. Don’t lose sight of the north star.

Carole Streicher is partner, US deal advisory and strategy leader at KPMG US

Learn more in the latest KPMG report, Navigating Complex M&A: how to win in the age of the complex deal.

“There’s a lot of uncertainty in the market right now, with inflation, higher interest rates and talk of a recession causing anxiety for business owners.”

—Patrick Renna, President, BurgerFi to sell the company than adapt to Covid, which changed the restaurant business model forever.”

He’s referring to capital expenditures in technologies providing digital point of sale, on-premises kiosk commerce and third-party delivery to customers, in addition to constructing outdoor dining spaces. “At a time when the cost of capital is higher, now may be a good time to look for a buyer,” Renna says.

Russ Banham is a Pulitzer-nominated business journalist and best-selling author.

Buy, Buy, Buy

At Symplr, Precisely and Air Pros USA, the ink on one acquisition is barely dry before the contract is drawn up for another one. For example, Symplr ($500 million in revenues and nearly 2,000 employees) is growing at a near double-digit rate, engineering a presence in 90 percent of hospitals nationwide due in large part to its expanding capabilities.

These additional capabilities have been developed internally and through a spree of 11 acquisitions since 2018. The dealmaking isn’t over—far from it. Schaknowski says recent healthcare regulations on transparency and physician credentialing have compelled a closer look at companies with competencies and technologies involving data management, governance and compliance, just a few of the hundreds of potential acquisitions on his heat map. “If caregivers can handle the administrative tasks more quickly, they have more time to provide quality care,” he says.

Rogers at data integrity solutions provider Precisely is similarly upbeat about closing additional deals on top of the seven acquisitions executed since May 2020, five in the last four quarters. “Softness in the valuations is making sellers more flexible on price,” the CEO says. “With the Fed raising rates, owners have open eyes.”

M&A targets include companies with capabilities in data integration, verification and cleansing, as well as location analytics. “Those are the four segments we’re focused on, and there is a pipeline of opportunities in these regards,” says Rogers, adding that in anticipation of executing additional transactions in the months ahead, he’s created a dedicated corporate development function focused on post-transaction integration.

Opportunities abound for Air Pros USA, given the HVAC industry’s “fragmentation,” says DiPietro. “Lots of small businesses are looking for an exit, with their owners nearing retirement, worried about the economy and looking to get out. We offer the opportunity to keep the business going to preserve their legacy.”

Having become a “known commodity,” many deals are non-brokered, emerging directly from the HVAC business owners, the CEO says. “From a size perspective, the acquisitions range from $5 million to $40 million in revenue, most of them funded through cash flow, although we do have a debt facility for the larger deals.”

With more than 700 employees and a three-year revenue growth of 3,392 percent, Air Pros is eying geographic expansion across the “smile” of the U.S., DiPietro says, from the mid-Atlantic seaboard down through Florida and across to Alabama and Texas, and then upward to the Pacific Northwest. “These regions are growing in population, resulting in high rates of new residential construction and home renovations. They all need air conditioning.” CE