2011 was an interesting period for M&A. The first half of the year saw the bulk of activity, with total global deal volume of about $1.27 trillion, benefitting from a better credit outlook and accelerating economic recovery. The second half of 2011 slowed down for just $875 billion according to Bloomberg, with an overall y-o-y deal volume growth of about 9%. European debt worries and macroeconomic issues, like the natural disaster in Japan, were contributing impediments. Despite these hurdles, however, 2011 was a fairly strong year for M&A.
Where does this leave us for 2012? There is a lot to consider, but the overall outlook is for another robust year. The biggest challenge currently, and one that U.S. firms are monitoring closely, is the European debt crisis, which poses some systemic concerns for the coming year. European problems could become American problems if Europe falls into a recession. U.S. exports are not currently growing, and a European downturn could exacerbate this if demand for U.S. products drops.
Higher oil prices are another factor which is holding the U.S. back from stronger GDP growth. Q4 2011 alone saw crude oil prices jump nearly 25% over the previous quarter. Turbulence in producing countries like Libya and increasing demand in China and other emerging markets are the culprits.
The American housing market is still in a slump. Mortgage rates are extremely low but potential buyers are wary of further drops in home value. There are still a lot of inexpensive homes on the market which means less new construction. One piece of good news here is that foreclosure saw a sharp decline last year.
Unemployment is another headline issue for the U.S. economy. While joblessness seems to be improving at a modest rate, underemployment is actually increasing according to Gallup, showing that more people have given up looking for work or have taken substandard positions. Faltering job growth has been a persistent remnant of the fading recession. We are still experiencing unemployment over 8% after 10 consecutive quarters of GDP growth. But don’t be put off by these difficulties. There is plenty to be enthusiastic about, and 2012 looks to be busy for M&A. To begin with, there is upwards of $500 billion in dry powder that is expiring soon, so financial sponsors should be chasing targets very aggressively. Lending markets are
looking more attractive, as well, particularly for larger firms with lower risk
profiles. Cash is available.
2011 also saw better U.S. real GDP growth rates with each passing quarter. Q4 ended with the fastest growth rate since early 2010. And consumer spending (one the chief drivers of our economy) jumped to 4.4% growth over 2.7% in Q3. This is the fastest pace in over five years. Manufacturing is picking up speed and U.S. economic recovery is accelerating.
Prospects in the middle market are particularly promising, and this is where the action is. The lower middle market is most active. 79.5% of middle market deals in 2011 were under $100 million. Most of these deals are being done in cash. Total enterprise value to trailing 12 month EBITDA ratios are also on the rise in the middle market: averaging 7.6 in 2009, 8.6 in 2010,and 9.2 last year. Higher valuations are coming in the wake of higher corporate cash reserves, suppressed interest rates, and more M&A activity.
The middle market is particularly active in the private equity segment, as well. In the first half of 2011, 75% of deals in PE were valued under $250 million. Deals under $500 million made up nearly 80% of deal flow for the year. Much of the deal-making here is in acquisitive growth (making up as much as 50% of PE acquisition in 2011). Business products and services was the most active industry segment for private equity, while the energy sector saw a drawdown, particularly in Q4.
Please feel free to review “M&A Outlook 2012”:
http://www.slideshare.net/ennovance/ma-outlook-2012
Tuesday, February 21, 2012
Sunday, February 19, 2012
Perspective: The Marcellus Shale Boom as an Impetus for Technology Development
Strengthening domestic energy production has been a very hot topic for some time now, and for good reasons, such as drilling affect in the communities and environment, opportunities and consequences of developing an economy. American dependence on crude oil reserves from traditional foreign sources has become a more precarious situation with diminishing supply, skyrocketing demand, and geopolitical instability. To meet the energy needs of coming generations the charge is being led to bolster U.S. production, particularly with alternate and non-traditional energy sources. The natural gas extraction in the Marcellus Shale is an extremely valuable asset to petrochemical, which can convert ethane into a feedstock for their manufacturing processes in the downstream of the value-chain. Many chemical related business could indeed achieve lowest cost position in the world; thus strengthening our economic engine. Remarkably, many of the concerns and challenges associated with “Marcellus Shale” could be solved thorough chemistry related innovations and technology development.
One of the biggest windfalls for American energy in recent years has been the discovery of expansive natural gas reserves in the Marcellus Shale region of the Northeastern United States. Many of the most recent estimates peg recoverable gas supplies in the Marcellus at over 150 trillion cubic feet, with some experts suggesting a far more extensive untapped supply. Of course, ongoing technological improvements in extraction methods continue to grow this figure. Much of the gas is found in shale deposits at depths of 7,000 to 10,000 feet which, in the past, made for a prohibitively high cost exploration and removal process. Areas which were not commercially viable for gas wells fifteen years ago are now able to be exploited thanks to advances like directional drilling, where bore holes can penetrate laterally at the target depth to magnify accessibility to local gas. As the promise of unlocking a torrential supply of domestic energy in close proximity to the demand-intensive regions in the Eastern U.S. has become a reality, both public and private sector investment has surged.
And with more R&D going into extraction methods, we have seen improvements in environmental impact as well as increased supply. The primary and most efficient means of natural gas extraction in the Marcellus region is hydraulic fracturing (“fracking”). Hydraulic fracturing is actually a well-established technology, coming into broader commercial use in the mid-20th century. Recent years, however, have seen an explosion in new fracturing technology. According to IP Spotlight, the U.S. Patent and Trademark Office between January 2008 and August 2011 received more than 1,100 U.S. based patent applications which mention fracturing. This is an 80% increase over the previous 3-1/2 year period. This jump is a product of the shale gas boom – one that produced 140,000 jobs and more than $11 billion in value added in Pennsylvania alone in 2010.
On a basic level, fracking involves boring deep into shale formations and using very high pressure fluids to create fractures (or expand existing fractures) in the rock. This releases the trapped hydrocarbons for extraction. There has been no shortage of speculation as to the impact of the traditional fracturing process on local communities and water supplies, and the environment as a whole. These effects must necessarily be left to the experts to determine. What is certain now is that shale gas is a mainstream concept and a booming business, and the U.S. stands to benefit from better access to cleaner fossil fuels. What matters now to business is how they can find the safest way to exploit this resource without missing the boat. The most effective way to reach that goal is through innovation and investment in new technology.
And the more recent proliferation of the extraction process, investment, research, and regulatory pressure seems to be generating plenty of tech growth and secondary industry. Shale gas is a rapidly changing landscape. Areas like western Pennsylvania and Ohio are seeing new construction for wastewater treatment plants which process used fracturing fluids from gas wells. The plants typically operate under permits from state environmental agencies, which impose standards for use of new filtration and treatment technology. A competitive field of energy producers is striving to be the leader in the region by stepping up innovation. Chesapeake Energy, one of the largest gas producers, recently announced a new process which will allow used fracturing fluids to be recycled for new drilling at up to 100% efficiency, reducing both the burden on local water supplies and the need for wastewater processing installations. A new type of fracking method is also emerging, development from oilfield and shale gas giants like Halliburton and Schlumberger. “Super fracking” is based on several improvements to the existing process. New materials are being used to hold open shale cracks at the site of the fracture which allows a greater flow of hydrocarbons for a longer period of time. New types of pipe fittings for wells are making extraction much less time intensive and sparing about half of the surface water needed in the traditional process. And traditional plastic “valve” materials which, in the past, have had to be recovered in an expensive process after drilling are being replaced with new disintegrating materials. A Texas company called Jadela Oil is even experimenting with a waterless fracking process.
Natural gas itself is cleaner than other hydrocarbon fuels, which makes growing supply even more attractive and conducive to new tech. Burning natural gas for heat energy emits 30% less carbon dioxide than petroleum and 45% less than coal. Nitrogen oxides are reduced by two-thirds and sulfur oxides by nearly 99% compared to coal combustion. A rapidly growing supply of a cleaner hydrocarbon fuel is spurring new technology. Research is progressing in fuel cell technology which could expand on already robust electricity generation applications. Transportation is another promising sector. The U.S. is seeing growing fleets of government, public transit, and shipping vehicles powered by compressed natural gas. The Department of Energy speculates that a switch to natural gas in the U.S. transportation segment would reduce carbon-monoxide emissions by at least 90%, carbon-dioxide emissions by 25% and nitrogen-oxide emissions by up to 60%. There are even expectations to use natural gas in aviation, with estimates of 60% improvement in efficiency while decreasing harmful emissions.
Technology and innovation is developing very rapidly and is touted to present serious cost savings, as well as a reduced environmental impact. Developments like these are interesting, but also raise some important questions. In such a rapidly evolving business, what will gas producers have to do to stay relevant? The next few years should prove to be very exciting, as new technology and investment fleshes out alongside a developing regulatory scheme and a better understanding of the industry.
Chemistry is necessarily at the forefront of tech expansion stemming from the Marcellus boom because the natural gas industry is chemical intensive. As natural gas becomes more prevalent, the broader chemical industry is presented with a great deal of opportunity. It will continue to benefit from access to clean, domestic energy, as well as the demand for innovative technology. Recycling and wastewater treatment is highly dependent on chemistry, as are the new technologies in extraction. The high ethane content in Marcellus Shale gas has led to plans for ethane crackers in the region. Renewable Manufacturing Gateway and Aither Chemicals recently reached a deal for a $750 million petrochemical facility which will use shale gas as its feedstock. Clearly, energy development is a sector where chemistry continues to be relevant and our success in energy independence or economic prosperity is still INNOVATION!
One of the biggest windfalls for American energy in recent years has been the discovery of expansive natural gas reserves in the Marcellus Shale region of the Northeastern United States. Many of the most recent estimates peg recoverable gas supplies in the Marcellus at over 150 trillion cubic feet, with some experts suggesting a far more extensive untapped supply. Of course, ongoing technological improvements in extraction methods continue to grow this figure. Much of the gas is found in shale deposits at depths of 7,000 to 10,000 feet which, in the past, made for a prohibitively high cost exploration and removal process. Areas which were not commercially viable for gas wells fifteen years ago are now able to be exploited thanks to advances like directional drilling, where bore holes can penetrate laterally at the target depth to magnify accessibility to local gas. As the promise of unlocking a torrential supply of domestic energy in close proximity to the demand-intensive regions in the Eastern U.S. has become a reality, both public and private sector investment has surged.
And with more R&D going into extraction methods, we have seen improvements in environmental impact as well as increased supply. The primary and most efficient means of natural gas extraction in the Marcellus region is hydraulic fracturing (“fracking”). Hydraulic fracturing is actually a well-established technology, coming into broader commercial use in the mid-20th century. Recent years, however, have seen an explosion in new fracturing technology. According to IP Spotlight, the U.S. Patent and Trademark Office between January 2008 and August 2011 received more than 1,100 U.S. based patent applications which mention fracturing. This is an 80% increase over the previous 3-1/2 year period. This jump is a product of the shale gas boom – one that produced 140,000 jobs and more than $11 billion in value added in Pennsylvania alone in 2010.
On a basic level, fracking involves boring deep into shale formations and using very high pressure fluids to create fractures (or expand existing fractures) in the rock. This releases the trapped hydrocarbons for extraction. There has been no shortage of speculation as to the impact of the traditional fracturing process on local communities and water supplies, and the environment as a whole. These effects must necessarily be left to the experts to determine. What is certain now is that shale gas is a mainstream concept and a booming business, and the U.S. stands to benefit from better access to cleaner fossil fuels. What matters now to business is how they can find the safest way to exploit this resource without missing the boat. The most effective way to reach that goal is through innovation and investment in new technology.
And the more recent proliferation of the extraction process, investment, research, and regulatory pressure seems to be generating plenty of tech growth and secondary industry. Shale gas is a rapidly changing landscape. Areas like western Pennsylvania and Ohio are seeing new construction for wastewater treatment plants which process used fracturing fluids from gas wells. The plants typically operate under permits from state environmental agencies, which impose standards for use of new filtration and treatment technology. A competitive field of energy producers is striving to be the leader in the region by stepping up innovation. Chesapeake Energy, one of the largest gas producers, recently announced a new process which will allow used fracturing fluids to be recycled for new drilling at up to 100% efficiency, reducing both the burden on local water supplies and the need for wastewater processing installations. A new type of fracking method is also emerging, development from oilfield and shale gas giants like Halliburton and Schlumberger. “Super fracking” is based on several improvements to the existing process. New materials are being used to hold open shale cracks at the site of the fracture which allows a greater flow of hydrocarbons for a longer period of time. New types of pipe fittings for wells are making extraction much less time intensive and sparing about half of the surface water needed in the traditional process. And traditional plastic “valve” materials which, in the past, have had to be recovered in an expensive process after drilling are being replaced with new disintegrating materials. A Texas company called Jadela Oil is even experimenting with a waterless fracking process.
Natural gas itself is cleaner than other hydrocarbon fuels, which makes growing supply even more attractive and conducive to new tech. Burning natural gas for heat energy emits 30% less carbon dioxide than petroleum and 45% less than coal. Nitrogen oxides are reduced by two-thirds and sulfur oxides by nearly 99% compared to coal combustion. A rapidly growing supply of a cleaner hydrocarbon fuel is spurring new technology. Research is progressing in fuel cell technology which could expand on already robust electricity generation applications. Transportation is another promising sector. The U.S. is seeing growing fleets of government, public transit, and shipping vehicles powered by compressed natural gas. The Department of Energy speculates that a switch to natural gas in the U.S. transportation segment would reduce carbon-monoxide emissions by at least 90%, carbon-dioxide emissions by 25% and nitrogen-oxide emissions by up to 60%. There are even expectations to use natural gas in aviation, with estimates of 60% improvement in efficiency while decreasing harmful emissions.
Technology and innovation is developing very rapidly and is touted to present serious cost savings, as well as a reduced environmental impact. Developments like these are interesting, but also raise some important questions. In such a rapidly evolving business, what will gas producers have to do to stay relevant? The next few years should prove to be very exciting, as new technology and investment fleshes out alongside a developing regulatory scheme and a better understanding of the industry.
Chemistry is necessarily at the forefront of tech expansion stemming from the Marcellus boom because the natural gas industry is chemical intensive. As natural gas becomes more prevalent, the broader chemical industry is presented with a great deal of opportunity. It will continue to benefit from access to clean, domestic energy, as well as the demand for innovative technology. Recycling and wastewater treatment is highly dependent on chemistry, as are the new technologies in extraction. The high ethane content in Marcellus Shale gas has led to plans for ethane crackers in the region. Renewable Manufacturing Gateway and Aither Chemicals recently reached a deal for a $750 million petrochemical facility which will use shale gas as its feedstock. Clearly, energy development is a sector where chemistry continues to be relevant and our success in energy independence or economic prosperity is still INNOVATION!
Thursday, March 17, 2011
Perspectives: What impact higher commodity price has on a chemical company?
Few inputs impact the world economy to the same extent that the price of oil does. Oil powers cars, trucks, boats, airplanes, and even power plants, which make up the backbone of the global economy. Needless to say, higher energy prices will have an impact on consumers, as well as a company’s ability to invest in capital equipment and grow the business. Increased commodity chemical prices will place downward pressure on a company’s finance/debt as well as negatively effects consumers’ credit. From the feedstock to the commodity producer to the ultimate consumer, everyone suffers.
However, the magnitude of the impact depends on the company’s pricing power, business model, location in the value-chain, and uniqueness of their products and services. During an economy where commodity prices are rising, chemical companies’ financial performances may depend on their ability to pass along the increasing costs to customers (e.g. price escalators) and ultimately to the end-users. Hence, the management team’s ability to execute the company’s risk management strategy plays a crucial role!
The above chart provides a useful reference guide, illustrating the potential impact that certain commodity prices have on various products. Commodity chemical producers (e.g., SABIC, LyondellBasell), diversified chemical producers (e.g., Dow, Dupont, 3M), specialty chemical producers (e.g., Lubrizol, Milliken, Ferro, Solutia), agricultural/fertilizer producers (e.g., Monsanto, Potash), chemical formulators and service providers (e.g., Ecolab, Nalco), and chemical distributors (e.g., Univar, Brenntag) are influenced differently and to varying degrees of their margin. Some could even benefit from rising commodity prices. To say the least, the chemical industry is complex. Companies typically have a very long value chain, and very rarely can a company be found containing only one product line with just one end market. A savvy investor needs to possess a deep domain expertise in order to gain visibility into the value chain, take a broader view and appreciate the supply/demand dynamics.
One silver lining in this high crude price environment is that many commodity chemical producers are benefiting from relatively cheap natural gas, which is a key raw material for many products manufactured in the United States. Higher natural gas prices, in particular, severely diminish the competitiveness of the industry, as it uses natural gas not only as inputs for fuel and power, but also as a raw material and for feedstocks. Feedstocks for most petrochemicals are typically derived from either oil or natural gas (the U.S. chemical industry is the largest industrial user of natural gas, consuming one-eighth of the total natural gas demand). Oil prices, including heavy liquids (e.g., naphtha and gas oil), are determined in the global market. The price of natural gas (as well as liquid gas such as ethane, propane, and butane) is driven by local/regional supply and demand since it has inherent physical limitations moving over long distances. Many large energy companies are heavily investing in order to find ways to help alleviate this issue, for example, building liquefied natural gas (LNG) terminals. Overall, the price of a feedstock is largely determined by the price of oil and/or natural gas.
Another silver lining is that alternative energies like wind, solar, and geothermal, as well as alternative fuels like biofuels, ethanol, cellulosic ethanol and fuel cells, all see increases in demand when the price of oil increases, since oil is their principal competition – also keep in mind that fossil fuels are the main sources of environmental pollutions. Many chemical companies’ products and technologies will, in fact, benefit from an environment with higher oil or energy prices, since chemical companies produce critical materials for solar panels (e.g., PV thin-film, pastes, encapsulants, coatings, metallization, shingle roofing), components for wind energy system (e.g., carbon fiber, infusions, fiber glass, pre-impregnated materials/prepregs), materials for energy storage devices/systems, various solutions for next generation’s electric vehicles, biofuels, etc. High energy prices also spark other innovations, from industrial biotechnology and bio-plastics to fuel cells.
Arguably, chemistry is the essence of modern life, and as a result, the chemical and chemical-related industries will continue to thrive in any commodity-priced environment, so long they remain flexible.
Tuesday, March 15, 2011
Even Warren Buffet likes the "business of chemistry" ….another stamp of approval for chemical industry thorough acquisition of Lubrizol
During the last few years, Berkshire Hathaway Inc. has made many investments in chemical and chemistry related businesses such as Nalco, Dow (Rohm and Haas), Great Lakes Chemical (GLK), Kaiser Aluminium & Chemical Corp. Sealed Air Corp, GSK, J&J etc. along with some petrochemical companies like ExxonMobile, ConocoPhillips, PetroChina and so on. Mr. Buffet’s notable commitment to the chemical industry is illustrated thorough Monday's announcement to purchase Lubrizol (LZ) for $135 a share, 28% above Friday's closing price! The consummate value investor, Mr. Buffet is expected to pay $9.7bn (which includes $700m in net debt) for the transaction. Even after paying a $30 premium (i.e. 28%) over the $105 closing price on Friday, Lubrizol transaction is priced at approximately, 7x 2011’s EBITDA and 5.4x 2012’s EBITDA.
Now if you consider today’s availability of cheap money in the capital structure, the WACC is no more than 8.5% (assuming at least 2x interest coverage with a realistic leverage 4.7x - 5x), Mr. Buffet is expected to generate top quartile returns (with a minimum Internal Rate of Return (IRR) percentage in the 20s within 3-5 years!).
We can talk all day long about the public market anomalies, various deal dynamics, and business related topics such as sustainability of margins in the lubricant additives value chain or excessive swings of commodity feed stocks (e.g. energy price, oil and petroleum derivatives). However, a company’s success will continue to depend on the management’s ability to control risk and take advantage of perceived market risks. For example, Lubrizol is a well managed company that poses an excellent profile of a “very good” specialty chemical company, growing its revenue consistently (for example: $3.4B in 2004; $5.4 in 2010), generating very strong cash flows and returns on capital, displaying a strong balance-sheet and flush with cash. We should also realize that Lubrizol has been increasing earnings at a compounded growth rate of 16% (at least for last 10 years; and Lubrizol's earnings growth has accelerated to over 25% per annum during the last 5 years).
Lubrizol continues to maintain its specialty status in a “so called commodity risk” environment by focusing on: its proprietary product (not necessarily patent protected product), mastering its product application for their customers’ system/process, delivering process/system monitoring services and maintaining overall strategic focus etc. (note: Relatively speaking, Lubrizol is neither capital intensive nor over reliant on R&D expenditure). Ultimately, Lubrizol’s strong performance over the years coupled with an excellent new owner should position Lubrizol to be even more successful as it moves forward. What are your thoughts?
Now if you consider today’s availability of cheap money in the capital structure, the WACC is no more than 8.5% (assuming at least 2x interest coverage with a realistic leverage 4.7x - 5x), Mr. Buffet is expected to generate top quartile returns (with a minimum Internal Rate of Return (IRR) percentage in the 20s within 3-5 years!).
We can talk all day long about the public market anomalies, various deal dynamics, and business related topics such as sustainability of margins in the lubricant additives value chain or excessive swings of commodity feed stocks (e.g. energy price, oil and petroleum derivatives). However, a company’s success will continue to depend on the management’s ability to control risk and take advantage of perceived market risks. For example, Lubrizol is a well managed company that poses an excellent profile of a “very good” specialty chemical company, growing its revenue consistently (for example: $3.4B in 2004; $5.4 in 2010), generating very strong cash flows and returns on capital, displaying a strong balance-sheet and flush with cash. We should also realize that Lubrizol has been increasing earnings at a compounded growth rate of 16% (at least for last 10 years; and Lubrizol's earnings growth has accelerated to over 25% per annum during the last 5 years).
Lubrizol continues to maintain its specialty status in a “so called commodity risk” environment by focusing on: its proprietary product (not necessarily patent protected product), mastering its product application for their customers’ system/process, delivering process/system monitoring services and maintaining overall strategic focus etc. (note: Relatively speaking, Lubrizol is neither capital intensive nor over reliant on R&D expenditure). Ultimately, Lubrizol’s strong performance over the years coupled with an excellent new owner should position Lubrizol to be even more successful as it moves forward. What are your thoughts?
Saturday, March 12, 2011
Private equity environment continues to improve:
The private equity deal market has been quick to rebound in 2011. According to Thomson Reuters, merger and acquisition deals are already over $36 billion for the year-to-date and the value of deals are up 88% from last year. Analysts not only expect private equity investments to continue but they also expect the size of deals to increase as well, since the credit crisis hindered the purchase of cheap debt. Although the entire private equity market has vastly improved over the past year, the investments leading the way have been in the industrial industries (including chemical & chemical related businesses), health care, and real estate.
If we measure the composition of global transaction volume, capital raising, the dollar value of private equity exits, and total equity investment. Collectively, these four key components illustrate the most fundamental elements of the private equity market, and when they are indexed, one can observe that in the 3rd quarter the global private equity industry continued to rebound from the 2008-2009 recession as total equity investment in private equity transactions increase to a record $40.1 billion ($36.4 billion reported in the 2nd quarter and $17.8 billion reported in the 1st quarter). However, PE activity has not yet returned to pre-recession levels and the industry is evolving for the better as many funds/PE firms are winding down their operations.
The biggest benefit of economic downturn is that private equity firms or companies tend to lose focus or ignore inefficiencies in go-go days. A few new private equity firms continue to emerge and a few existing firms will emerge even stronger, but many will go away. A generalist investment approach for very large funds might have some particular relevancies today (return of cheap money, access to resources due to larger fund fees/scale), while the middle-market (and certainly lower middle market) needs more specialized and focused investment approach because resources are limited and the middle-market contains structural inefficiencies that are absent from larger, more liquid markets. Isn’t this a good opportunity for both private equity investors and business sellers working with specialized professionals?
If we measure the composition of global transaction volume, capital raising, the dollar value of private equity exits, and total equity investment. Collectively, these four key components illustrate the most fundamental elements of the private equity market, and when they are indexed, one can observe that in the 3rd quarter the global private equity industry continued to rebound from the 2008-2009 recession as total equity investment in private equity transactions increase to a record $40.1 billion ($36.4 billion reported in the 2nd quarter and $17.8 billion reported in the 1st quarter). However, PE activity has not yet returned to pre-recession levels and the industry is evolving for the better as many funds/PE firms are winding down their operations.
The biggest benefit of economic downturn is that private equity firms or companies tend to lose focus or ignore inefficiencies in go-go days. A few new private equity firms continue to emerge and a few existing firms will emerge even stronger, but many will go away. A generalist investment approach for very large funds might have some particular relevancies today (return of cheap money, access to resources due to larger fund fees/scale), while the middle-market (and certainly lower middle market) needs more specialized and focused investment approach because resources are limited and the middle-market contains structural inefficiencies that are absent from larger, more liquid markets. Isn’t this a good opportunity for both private equity investors and business sellers working with specialized professionals?
Monday, September 13, 2010
Synergistic acquisition to promote innovation
In January, BASF and LKCA (a subsidiary of Linde Group), announced that they would jointly market licenses and plants for the capture of CO2 from flue gases, and recently, with assistance from RWE Power, they have created (and successfully tested) a major breakthrough in carbon capture technology. The new innovative technology captures CO2 by means of utilizing new chemical solvents that can reduce energy input by about 20 percent. Furthermore, the new solvents feature superior oxygen stability, which reduces solvent consumption significantly, which consequently improves efficiency.
In the future, climate-capture technology will likely play a key role in generating climate-compatible power from coal, and this new technology process, once scaled up to large power plants, will reduce power plant waste gases and facilitate clean energy generation. In addition, as this technology should capture more than 90% of the CO2 contained in waste gases, a vast supply of recycled CO2 can be created and used for inputs in chemical transformations such as production of fertilizers. New plants demonstrating this technology are scheduled to be in operation by 2015, and the technology should be expected to be utilized commercially in coal-fired power stations by 2020. Ultimately, once this technology expands, there will be a significant reduction in the release of climate-damaging CO2 due to its successful capture and transport for recycling or sequestration.
So, why is this development relevant in the chemicals industry? And why is it relevant within the private equity industry? First, this development illustrates the strong motivations within the chemicals industry to become more environmentally sustainable while simultaneously reducing costs and improving efficiency. Furthermore, this new technology derived directly from the pooling of knowledge and resources from various firms with different areas of expertise; individually, the companies would likely have found development of this technology exceedingly difficult, however, when their resources were combined, breakthroughs were managed in rapid fashion. Similarly, in the private equity industry, companies are strategically acquired so as to enable such synergies to promote swift innovation and long-term value creation, and as this particularly example clearly illustrates, the broader chemicals industry provides a viable forum in which to initiate such developments.
In the future, climate-capture technology will likely play a key role in generating climate-compatible power from coal, and this new technology process, once scaled up to large power plants, will reduce power plant waste gases and facilitate clean energy generation. In addition, as this technology should capture more than 90% of the CO2 contained in waste gases, a vast supply of recycled CO2 can be created and used for inputs in chemical transformations such as production of fertilizers. New plants demonstrating this technology are scheduled to be in operation by 2015, and the technology should be expected to be utilized commercially in coal-fired power stations by 2020. Ultimately, once this technology expands, there will be a significant reduction in the release of climate-damaging CO2 due to its successful capture and transport for recycling or sequestration.
So, why is this development relevant in the chemicals industry? And why is it relevant within the private equity industry? First, this development illustrates the strong motivations within the chemicals industry to become more environmentally sustainable while simultaneously reducing costs and improving efficiency. Furthermore, this new technology derived directly from the pooling of knowledge and resources from various firms with different areas of expertise; individually, the companies would likely have found development of this technology exceedingly difficult, however, when their resources were combined, breakthroughs were managed in rapid fashion. Similarly, in the private equity industry, companies are strategically acquired so as to enable such synergies to promote swift innovation and long-term value creation, and as this particularly example clearly illustrates, the broader chemicals industry provides a viable forum in which to initiate such developments.
Sunday, August 29, 2010
Partner up with the seller: Preserve and Grow Capital!
For the last 2-3 quarters, we have been experiencing the greatest psychological recovery in the recent history of economics and frankly, it’s hard to pinpoint the “Real Why”. While the stock market has improved to the benefit of some, the majority of Americans continue the struggle to meet their daily needs (for as expected, job recovery is slow). Recent market activity has been surreal; however, if you looked into the dreadful realities of bankruptcy proceedings during the last few years, last month’s “Flash Crash” in equities markets should probably have been expected. Moreover, “amend to extend” loans have surfaced, seemingly pushing the inevitable off well into the future.
Unfortunately, the fact remains that access to capital continues to be tight and typical private equity firms have heaped tens of billions of debt onto companies acquired from 2004 to the end of 2007—debt that is likely difficult to service, and certainly not cheap, which ultimately begs the question whether a traditional PE firm can afford such an increase in debt (or so called financial engineering). Therefore, we expect to see lots of opportunities in the middle market, certainly in the lower middle market; however, the real difficulties lie in determining how realistic the valuations of certain companies are. Valuations for bankrupt companies are often well below the ultimate auction rates of assets for many reasons. However, unreliable and yet attractive valuations could potentially open the window to big bargains; although there still exist enormous hazards if the buyer really does not know the business and its operational complexities, the opportunities are there for the picking.
It’s critical that PE firms look carefully into protecting the principle investment (downside) as the basic guarantee, without compromising the upside for all parties involved. This “win-win” approach could be achieved through implementing a creative structure for a deal. If the PE investor understands the business and its assets, it would still make a lot sense to go for straight equity deals. An industry focused, specialty PE firm could potentially move into growth/late-stage investments where growth capital is critical for a company’s success. In these cases, industry specialization will not allow a firm to negotiate better with the market, but will also provide a perspective that enables deeper understanding of market variability, condition, the visibility of a company within the market, and general day to day operations from a business perspective. For example: one could choose a convertible structure to get the coupon for 2-4 years, then convert them into equity at a pre-decided price and include an exit structure (with a built-in clause for claw-back, earn-out, etc., if the company does not perform as promised by management/owner/i-banker; … structuring is always specific to the business and market peculiarity of the deal) under which the PE fund’s stake is bought out by the promoters (or investment banker/ placement agent) or other investors. A structured deal could be a valuable tool when a PE investor is not comfortable with a sell-side investment banker’s projection on revenue and returns. The fact is that there are many ways to get things done so long as all parties take a “partnership approach” and a PE investor has deep understanding of a business and its operating domain!
Dealing with a PE investor who has deep understanding of a domain and its business operations allows a seller to get the well deserved full value of a business, to get the deal done quickly and to sustain a long-term relationship with all parties involved.
Unfortunately, the fact remains that access to capital continues to be tight and typical private equity firms have heaped tens of billions of debt onto companies acquired from 2004 to the end of 2007—debt that is likely difficult to service, and certainly not cheap, which ultimately begs the question whether a traditional PE firm can afford such an increase in debt (or so called financial engineering). Therefore, we expect to see lots of opportunities in the middle market, certainly in the lower middle market; however, the real difficulties lie in determining how realistic the valuations of certain companies are. Valuations for bankrupt companies are often well below the ultimate auction rates of assets for many reasons. However, unreliable and yet attractive valuations could potentially open the window to big bargains; although there still exist enormous hazards if the buyer really does not know the business and its operational complexities, the opportunities are there for the picking.
It’s critical that PE firms look carefully into protecting the principle investment (downside) as the basic guarantee, without compromising the upside for all parties involved. This “win-win” approach could be achieved through implementing a creative structure for a deal. If the PE investor understands the business and its assets, it would still make a lot sense to go for straight equity deals. An industry focused, specialty PE firm could potentially move into growth/late-stage investments where growth capital is critical for a company’s success. In these cases, industry specialization will not allow a firm to negotiate better with the market, but will also provide a perspective that enables deeper understanding of market variability, condition, the visibility of a company within the market, and general day to day operations from a business perspective. For example: one could choose a convertible structure to get the coupon for 2-4 years, then convert them into equity at a pre-decided price and include an exit structure (with a built-in clause for claw-back, earn-out, etc., if the company does not perform as promised by management/owner/i-banker; … structuring is always specific to the business and market peculiarity of the deal) under which the PE fund’s stake is bought out by the promoters (or investment banker/ placement agent) or other investors. A structured deal could be a valuable tool when a PE investor is not comfortable with a sell-side investment banker’s projection on revenue and returns. The fact is that there are many ways to get things done so long as all parties take a “partnership approach” and a PE investor has deep understanding of a business and its operating domain!
Dealing with a PE investor who has deep understanding of a domain and its business operations allows a seller to get the well deserved full value of a business, to get the deal done quickly and to sustain a long-term relationship with all parties involved.
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