Vol. 10, No. 1, January 2012
FOCUS Represents Henkel Corrosion Engineering in Acquisition by Ergon Asphalt & Emulsions
Substantially all of the assets of Henkel Corporation’s Corrosion Engineering business have been acquired by the ErgonArmor division of Ergon Asphalt & Emulsions, Inc., part of Ergon, Inc, in Jackson, MS. FOCUS initiated this transaction, assisted in the negotiations, and acted as financial advisor to Henkel Corporation in the transaction.
Henkel Corrosion Engineering is a leading provider of sophisticated materials systems for corrosive environments. The business has operated for over 70 years, offering a diverse line of corrosion protection products and materials for coal fired power plants, chemical plants, and food and beverage manufacturers. Existing Corrosion Engineering sales and support staff will remain in place.
According to Gerald Turner, Managing Director, FOCUS Investment Banking, “We were pleased with the final outcome of our process in which we contacted many potential buyers, both in the US and abroad. Several letters of intent were received and ultimately the best decision was made.”
Ergon Asphalt & Emulsions, Inc. operates as an asphalt and emulsion producer and marketer. The company specializes in the development of superior engineered paving and preservation products.
Doug Rodgers, FOCUS CEO, commented, “We sincerely enjoyed the opportunity to advise Henkel, one of the largest and most respected companies in Germany, with more than a century of experience providing high quality products worldwide.”
Active FOCUS Deals
Operating nationally and internationally, FOCUS currently is working with buy- and sell-side corporate clients, private equity groups, holding companies, and late stage venture capital firms in 23 areas:
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We have executed dozens of transactions in a range of market segments, but the same fundamentals apply across all of them. Our on-going transaction process provides us with up-to-the-minute market knowledge in these sectors that may be of corporate development interest to you.
When Growth Resumes an Asset Based Loan May be the Answer
By John Slater, FOCUS Partner and Team Leader of the FOCUS Capital Financing Team, and Bob Beard, FOCUS Managing Director
Call us delusional but FOCUS sees signs that the pace of economic growth may pick up significantly in the coming year. First reaction – That’s great news for business! However, based on our experience through multiple business cycles, that’s much too simplistic an assumption. While the recession was extraordinarily painful, it held a silver lining for many businesses: decreased sales and slashed expenses reduced the need for working capital, leaving many companies flush with cash.
As sales increase, the liquidity cycle can turn very quickly, leaving businesses that have not prepared flatfooted or worse. In fact, over the years we have seen bankruptcies actually increase in an improving economy as banks finally feel like they can afford to jettison their marginal borrowers.
What Causes An Improving Economy to Put the Squeeze on Unsuspecting Businesses?
So what’s the dynamic that causes an improving economy to put the squeeze on unsuspecting businesses? During the downturn, many companies have dramatically pared inventory and their workforce. In an upturn, they will have to scramble to acquire raw materials, often at increased costs, while adding new, untrained employees to pick up the suddenly expanding workload. They may not be able to depend on their suppliers to fund the growth because the suppliers will be feeling similar pressures. As sales increase, they also will need to carry additional receivables from customers facing a liquidity squeeze of their own.
To add to this perfect storm, many companies will discover that their traditional source of capital funding is no longer what it once was. Throughout the recession, many banks made dramatic cuts in their commercial lending capacity. In many cases, there is literally no one left to take the calls when commercial loan demand picks up.
For many prospective borrowers, the dramatically tighter underwriting standards now in place preclude all but the strongest borrower from obtaining a traditional loan package based on a strong balance sheet and income statement. Many smaller private companies have now suffered through three very tough years and do not have the financial strength to support the traditional bank loan profile.
Valuable New Report: 2012 Economic Forecast: Insights from Small and Mid-Sized Business Owners
The Center for Applied Research Private Capital Markets Project at Pepperdine University headed by John Paglia publishes the most comprehensive surveys of the impact of credit availability on private business growth. They have just published a new report, “2012 Economic Forecast: Insights from Small and Mid-Sized Business Owners,” available on the Pepperdine website at this link.
When we asked Dr. Paglia for his views on the current state of commercial lending for small business, he didn’t mince words: “Businesses are scrambling trying to secure growth capital and many are receiving a cold shoulder from their bank.” In fact, the Pepperdine survey indicates that 53 percent of businesses with less than $5 million in revenues and 34 percent of those with revenues between $5 million and $100 million said a lack of bank loan access is restricting growth opportunities!
While some firms will find it appropriate to pursue an equity related financing—as we outlined in a recent article on financing alternatives—for the vast majority of private businesses that is not an option. So where will they find funding for growth? For many, it will come from the asset based lending industry, as it has in past business cycles.
Asset Based Lenders Naturally Focus on the Value of Assets
Just as the name implies, asset based lenders focus on lending to companies based on the liquidation value of the assets being pledged to support the loan. Banks, on the other hand, traditionally lend on the strength of the borrower’s balance sheet and their ability to demonstrate profits and cash flow more than sufficient to amortize the loan over a reasonable period.
Thus, a typical bank loan often will include covenants requiring that the borrower maintain a maximum loan to value ratio (e. g. two times book equity) and minimum levels of profitability. For many companies slammed by the recession, such requirements mean that a traditional bank loan will not be a viable option.
Asset Based Lenders Target Borrowers With High Levels of Pledgable Assets
Asset based lenders (ABL) target borrowers with high levels of pledgable assets. By doing so, the ABL lender can frequently offer a much higher advance rate than would be available from a traditional bank loan. This is particularly important for companies that are required to hold high levels of inventory or fund a significant number of receivables. As we come out of the recession, the need for such funding likely will increase significantly.
Over the past several years, we have observed that even banks that have traditionally been sources of balance sheet or cash flow based commercial loans have moved many of their borrowers into ABL structures, as their underwriting structures became stricter and many borrowers fell out of compliance with covenants. This situation is not likely to reverse as the economy improves. In fact, we expect that an improving economy will provide some banks with “cover” to force marginal borrowers to an ABL structure or to another lender.
While asset based lending originally was an outgrowth of the factoring industry, the days are long gone when ABL was an expensive and cumbersome option to be avoided if at all possible. For many smaller firms, an ABL loan is not just a viable option, often it is the only option because the banks do not have an interest in financing such firms.
ABL Financing Can Be a Preferred Option
For larger middle market companies, an ABL financing may turn out to be the preferred option, representing a lower cost of funds and the most flexible form of financing. This is particularly true for firms in cyclical industries or those with heavy seasonal funding requirements. Equally important, leading ABL shops are staffed with professionals who have been in the ABL market for many years, often for decades. As compared to revolving door commercial banks, this assures the borrower that their lenders will not panic at the first hint of gray clouds on the horizon.
Dr. Paglia believes that “Asset based lending has become a compelling alternative given the recent pullback in bank lending,” and we agree. Any company that suspects it may need additional funding options as economic growth resumes should take a hard look at asset based lending.
FREE: New FOCUS Guide to Preparing for an Asset Based Loan
With so much lending capacity out of the market, it is imperative to begin looking well ahead of the time when funding needs are projected to become critical. To assist companies heading into the ABL market for the first time as well as to provide a detailed checklist for experienced borrowers, we have published the FOCUS Guide to Preparing for an Asset Based Loan. Click here for a free download.
Gerald Turner, FOCUS Managing Director, and Chairman, M&A Europe, Leads Tel Aviv Convention
In late October, 2011, M&A Europe held its sixteenth semi-annual convention in Tel Aviv, Israel. Hosted by Michael Avnimelech of Cukierman, a leading Israeli investment bank, the convention included representatives from 32 middle market investment banks in 28 countries with members coming from as far away as India and the U.S.
While historically focused on cross border M&A opportunities in Europe, the group rapidly is establishing a worldwide footprint. New M&A Europe members from Canada, Austria, Spain, and Bulgaria were elected to membership following presentation of credentials.
The Convention included presentations from three growing Israeli companies with international M&A aspirations, and also featured several sessions where group members shared valuable, specific cross border M&A opportunities. Deal sharing aside, the group also enjoyed an instructive trip to Jerusalem, plenty of good food, and a glass of wine or two.
Following the M&A Europe Convention, members had an opportunity to partner with Cukierman in the fourth annual Go4 Europe meeting, a forum to discuss Israeli/Europe investment opportunities, attended this year by 800 local businessmen and 400 of their counterparts from Europe.
The next M&A Europe meeting is scheduled for late April, 2012, and will be hosted by our partner, Peter Feher, Managing Partner of IM&A, Hungary in Budapest, Hungary.
FOCUS Managing Director Jeff Hooke To Educate Thai Investors on Valuations in Emerging Markets
On February 1, 2012, FOCUS Managing Director Jeff Hooke will conduct a seminar called “The Challenges of Valuing Companies and Businesses in an Emerging Market.”
Hosted by the Stock Exchange of Thailand; the Sasin Graduate Institute of Business Administration, Chulalongkorn University; and the CFA Society of Thailand; the seminar will discuss the importance of a proper valuation of a company or business in the fields of equity management, stock brokerage, private equity, and mergers and acquisitions.
According to Hooke, doing the job properly in the developed countries of the United States and Western Europe is very difficult, but in emerging markets such as Thailand, the task has added complexities and challenges.
Download new FOCUS Report:
Telecom U.S. Communications Service Provider Quarterly—Winter 2012
The inaugural issue of this new quarterly report from the FOCUS Telecom Technology and Services Group notes that, in terms of public markets, the FOCUS Communications Service Provider Index (CSPI) remained largely unchanged from where it stood twelve months ago and sub sectors dominated by large companies tended to be the best performers. The M&A market for CSPs in 2011 was relatively consistent with trends from the last several years, and the aggregate statistics point to a solid but not frothy M&A market. Download now
Download the latest FOCUS Report:
Telecom Business Services Quarterly—Winter 2012
Overall, 2011 was a difficult year for stocks in the FOCUS Telecom Business Services Index (TBSI), particularly for those in the Engineering and Construction sub sector. The TBSI did rebound in the final quarter of the year with a gain of 5.7 percent, and the sector declines were by no means across the board. According to the new report, “We would characterize the 2011 Telecom Business Services M&A market as a solid year for small transactions… our belief is that the uncertain macroeconomic environment is a big reason for the scarcity of larger transactions.” Download now
FOCUS Industry Practice Groups
► Capital Financing -- www.focusbankers.com/capitalfinancing
► Education & Human Capital Development -- www.focusbankers.com/education
► Energy Production & Distribution-- www.focusbankers.com/energy
► General Middle Market Businesses
► Government, Aerospace & Defense -- www.focusbankers.com/gad
► Healthcare & Life Sciences -- www.focusbankers.com/health
► Information Technology -- www.focusbankers.com/technology
► Telecom Technologies & Services -- www.focusbankers.com/telecom
About FOCUS, LLC
Founded in 1982 in Washington, D.C., FOCUS, LLC provides a range of investment bank services tailored to the needs of middle market businesses and their executives. Today, we are a national firm serving clients from offices in major cities across the United States. FOCUS specializes in serving business units with revenue or transaction sizes between $5 and $300 million, serving entrepreneurs, corporate owners and various types of investors. FOCUS clients include large corporations and private equity firms that engage the firm for middle market transactions.
FOCUS has achieved a very high close rate on accepted buy side, sell side and corporate finance mandates because of the unique resources, process and perspective that we bring to middle market investment banking. FOCUS has developed a systematic, research driven, open and proven transaction process. It is the driving force of our firm and distinguishes us from other investment banks serving the middle market.
With extensive investment banking transaction experiences and a group of seasoned operating and financial executives, our firm provides a unique value proposition. We bring a strong operating perspective, a wealth of practical experience and a unique research and transaction process to our middle market clients. Our knowledgeable resources include seasoned partners managing directors, principals, research staff, internal databases of national and international contacts and deal experience in a range of industry sectors.