The COVID-19 pandemic and global economic lockdown has seen merger and acquisition (M&A) activity plummet. From $3.9 trillion in global takeovers in 2019, announced deals plunged 51% in the first quarter in the US according to Refinitiv. Uncertainties in the business and capital markets have led to buyers delaying or cutting back on their acquisition plans. But with crisis comes opportunity. Those able to navigate the new risk landscape may find compelling deals on the other side of the pandemic. Now more than ever, expert help with strategic planning, modelling out “what if” scenarios when the world frees up from lockdown, and preparing better for post-acquisition merger integration can help owners succeed in acquiring or being acquired.
When it’s time for a private company to go public, or fundraising is needed on a large scale, an IPO is not the only option. There’s also a less-well-known and, until recently, less-well-respected option: a reverse merger into a public shell oftentimes called an Alternative Public Offering (APO).
This process, which can be faster and cheaper than a traditional Initial Public Offering, is growing in popularity and might grow faster in our confusing coronavirus world.
Scott Jordan (no relation to InterimExecs’ CEO Robert Jordan), an investment banker and CFO who spent 30+ years working in biotech, engineered a reverse merger of a biopharma company in 2019. He says that while the virus has caused capital flow interruptions, investors in the private markets are still providing capital to companies with novel / scientifically validated biotechnology companies. That means reverse mergers and PIPEs (Private Investment in a Public Entity) can still raise money needed to complete their deals. He estimates that about 20 biotech firms debuted in the public markets last year as a result of reverse mergers and the number is on track to repeat in 2020, despite the virus.
But let’s back up a step and begin at the beginning.
As the incredible success of private equity over the past couple decades has made clear to many aspiring company owners and investors, if you can find and acquire a decent company, its possible to earn great returns. This has fueled a new class of individuals seeking to launch their own search funds. What exactly is a search fund and how do you become successful at it? Let’s explore.
The Stanford Graduate School of Business Center for Entrepreneurial Studies explains search funds this way: “The model offers relatively inexperienced professionals with limited capital resources a quick path to managing a company in which they have a meaningful ownership position.”
Inexperienced professionals? Limited capital resources? It doesn’t exactly sound like a recipe for success.
But it can be.
It might be a challenge to develop a new medical facility in the United States. But it’s nothing compared to developing one in sub Saharan Africa.
That’s what Dr. Rodney Armstead learned on his 5-year quest to open the first specialty practice and minimally invasive surgery center in Accra, the capital city of Ghana.
LuccaHealth Medical Specialty Center has two campuses in Accra. One opened in November 2019 and the other in February 2020. Together, they will offer 11 specialties and minimally invasive (laparoscopic) same day surgery when LuccaHealth is fully operational at the end of 2021:
U.S. Banks are growing concerned — if not alarmed — and are reevaluating just how lax they are when it comes to handing out commercial loans. With sour loans on the rise, that’s not a pretty picture for companies that rely too much on credit lines or commercial loans. This is, in essence, a self-imposed business risk, as they are more dependent and susceptible to any fluctuations that occur.
A recent Financial Times article reported that non-performing loans increased by 20% at ten large commercial lenders. How much of an impact is that on the bank industry exactly? According to the Financial Times analyst, that’s a hefty $1.6B in the first quarter alone, a significant shift from credit quality since 2016, an era where the dust had settled from crashes and subsequent defaults on loans. The future started looking bright. Lending portfolios and credit quality began to improve.
With merely three years of positive momentum, fast forward to present day and all that has changed and not for the better. “Since most businesses utilize a credit line or other commercial loans, any slowdown will impact all types of commercial lenders – banks, asset-based lenders and factors,” said Yoav Cohen, an interim executive who has spearheaded eight turnarounds and liquidations, each one successful in paying off secured lenders in full. Cohen has seen it all, serving in roles as varied as interim CFO, COO, and a Chief Restructuring Officer.
As an executive who has spent his career growing companies, taking companies public, and successfully selling businesses, Charlie Shalvoy says the first thing he does when he parachutes into a company is begin with an assessment. Whether the company is venture-capital backed or private, or in manufacturing, energy, semiconductors, or industrial equipment, figuring out the current state of operations is always the first step. Charlie divides the stages an interim executive goes through in taking action in a new company into four phases:
Phase 1: Taking Hold (90 Days)
When a company seeks to expand into new markets or scale operations to support current and future growth, Charlie takes on a role ranging from Interim CEO to Executive Chairman, where he coaches and serves alongside the CEO and management team. He describes that in the taking hold phase, an interim executive identifies what’s broken – even fast growing companies need repairs. What is getting in the way? What is causing distress?
“How many businesses find their data to be a complete mess?” Christie Kelly, former CFO of JLL Real Estate questioned as she and a panel of high-profile CFOs discussed the changing landscape for financial leaders at an event held by the National Association of Corporate Directors.
In today’s world every business now seems to be in the game of being a technology business. That means that a new importance is placed on data, especially for CFOs.
“How do we transition to turn it (data) into insights, and how does that change finance to have more technology, process, and Six Sigma?” Kelly said.
The role of the CFO has evolved, due to the accelerated pace of the digital age. How? A strategic CFO drives transformational change. A CFO must not only understand a business from start to finish to provide financial excellence, but also must predict what is coming from a strategic standpoint and be ready to evolve.
There’s no question that the number of family offices is on the rise. A recent study by Campden Research revealed that there are over 5,300 family offices worldwide. About 2,200 of the family offices are in North America. About 67% of family offices that exist today were established after 2000.
There aren’t hard and fast rules on what a modern-day family office looks like. A single family office typically has over $150 million in private wealth and is one family. In recent years, multi-family offices have increased. In multi-family offices, families — related or not — have shared interests, investment goals, infrastructure needs, or operational requirements. By coming together, they save resources. This way family offices can focus more energy on portfolio growth and increasing net profit margins.
Over the past decade, the way family offices invest has evolved. In the past, family offices stayed in their comfort zone, by acquiring operating businesses in their business sector.
It’s not uncommon for private equity portfolio companies to double or even triple growth thanks to merger or acquisition. Albeit positive, rapid growth brings new operational challenges that can stop the upward momentum in its tracks. Interim executives bring the expertise needed to enable growth on a massive scale.
“Sometimes a business will start with $40 million in sales, and through acquisition will be two or three times that size. Often that creates an environment where you need to add to the management team, whether that be the CFO or the CEO,” said Forest Wester, a Partner at Trivest Partners that leverages interim executives to enable growth.
Private equity funds use interim executives in a variety of scenarios. However, these scenarios are typically problems that need to be solved such as the abrupt departure of a CEO.
The world of mergers and acquisitions can be complex for owners focused on building their companies.
We’re often asked by owners about their options to exit and sell the company. Often, work needs to be done to prepare – in advance of any sale process – to ensure maximum value is realized. Owners may opt to bring in an outside perspective like an interim executive to provide an operational roadmap to improve operations and package the company for eventual sale. This process, however, typically begins with two types of targets in mind:
Strategic buyers (Strategics) are companies who are already operating in the field/industry where acquiring your business will be complementary to their business, expand their customer base, or give them a competitive advantage.
Financial buyers include private equity funds, family offices, and individual investors who provide their own equity funding and borrowing to acquire businesses as a path to future gains.