Tampa Bay firms, dealmakers find their niche as M&A goes global

By September 5, 2014 News, Skyway Capital No Comments

In a classic “man bites dog” twist, a Tampa company has taken a bite out of Silicon Valley.

Health Insurance Innovations Inc. in Tampa bought HealthPocket in Sunnyvale, Calif. for $32 million.

The July 14 acquisition — among the largest in the Tampa Bay area in the past 18 months — is representative of the deals local attorneys and investment bankers are seeing now, said Curt Creely, partner at Foley & Lardner in Tampa.

“There rarely is a Tampa group buying a Tampa company. It’s virtually always one of the parties — either our party or the counterparty — are somewhere else. A lot of times it’s a foreign country that they’re located — either as a buyer or a seller. Just the flattening of the world we’re seeing activity all over the place,” said Creely, who is president of the Tampa Bay chapter of the Association for Corporate Growth.

Overseas companies investing in Tampa Bay firms include Linde Group of Germany, which bought Lincare Holdings in Clearwater for $3.8 billion in 2012, and Essilor International, a French firm that last year took sole ownership ofTransitions Optical in Pinellas Park after spending $1.7 billion to buy the 51 percent of Transitions previously owned by PPG Industries.

Creely was among a half-dozen dealmakers who discussed current trends in mergers and acquisitions at a Tampa Bay Business Journal roundtable. Deal volume is up, banks and financiers are willing to lend money to get transactions done, and Tampa Bay is the center of a lot of attention, roundtable participants said.

“This is such a dynamic market,” said Penny Larsen, president of Links Financial LLC, a Tampa firm that arranges debt financing. “Some people will tell you Tampa is a second-tier market, but I think we’re going to get more than our fair share of looks because it’s a vibrant market.”

‘Definite uptick’ in activity

By many measures, the pace of worldwide M&A activity is on the ascent, said S&P Capital IQ in a July report. While deal activity still lags the go-go years of a decade or so ago, the number of global deals in the first half of 2014 was up 10 percent compared to the first six months of 2013.

Eighty-seven percent of the economic growth in the next three years is expected to be outside of the United States, said M.E. Betsy Bennett, chief operating officer and chief financial officer at IC Intracom, an Oldsmar company that develops, manufactures and distributes computer components and operates worldwide. “We are seeing that in our company,” she said. “Florida companies are getting much more comfortable with going overseas.”

Creely has seen “a definite uptick” in activity.

“Even if it’s not necessarily deals getting done, it’s people talking about deals,” he said.

Increasingly, many lower-market or middle-market companies — the type of companies that predominate in Tampa Bay — that are looking at deals are turning to attorneys, accountants, valuation experts and financiers in their own markets, instead of New York firms. That didn’t use to happen at those big deals, what Creely called “bet the company” deals, but online document sharing has made it possible.

“We’re using the same data and the same forms, and it makes the deals happen faster,” Creely said in a post-roundtable interview. “Acquisitions are done in two weeks when they used to be done in two months because all the due diligence materials are online.”

Credit market opens up

There’s lots of demand on the part of buyers, including private equity firms that collectively have about $1 trillion in capital to deploy, said Kyle Schroeder, an investment banking vice president at Skyway Capital Partners in Tampa. Schroeder said he gets lots of calls from private equity firms looking for good deals in the Tampa area.

At the same time, the credit market is opening up and lenders are OK with using borrowed money for a bigger share of a purchase, said Scott Heberlein, principal at HealthEdge Investment Partners, a Tampa-based private equity firm. Since Heberlein joined HealthEdge earlier this year, about half of the deals the company has looked at are in Florida, and its largest investment to date is Formulated Solutions, a Largo company that develops and manufactures topical aerosol and semi-solid formulations for prescription and consumer health care products.

“Leveraged multiples are in a very nice place for a buyer. Pricing is in a nice place and covenants are relatively light,” both for traditional bank sources and specialty finance companies, Heberlein said.

There is a downside to easier credit, cautioned Steven Schuetz, managing director at Valuation Research Corp. in Tampa.

“One reason we see so much deal activity is because normal everyday growth from developing new customers is still pretty slow. The economy at a baseline is still pretty weak,” Schuetz said. “The way people are growing, the way private equity is pushing growth, is to make acquisitions and then cut costs. What ends up happening is you go out, you lever up and that deal doesn’t turn out the way you thought it would, the way they priced it, and now all of sudden, there’s no cushion.”

New financing avenue

Links Financial has gotten a lot of deals done through the Small Business Administration, which recently expanded loans under the 7(a) program to up to $5 million. While buyers who use SBA financing have to be willing to be “all in,” personally guaranteeing the debt, “it’s also the cheapest form of financing,” Larsen said.

“The banks love it because they’ve got an SBA guarantee and some banks actually sell that guarantee — there’s a secondary market to sell that — so there’s a fee income pop they’ll get from that from that,” Larsen said.

“Community banks are trying to figure out where they are going to live in the world today,” she said. “It can’t be on investment real estate any longer. They can’t just be making investor real estate loans, because the regulators aren’t going to let them do that. This is a really good place for them to lend because if they keep these loans on their balance sheets they are considered less risky loans, they are commercial and industrial loans with a SBA guarantee. For a small to regional community bank, it’s a good fit.”

Emotions at play in M&A

For many deals, dollars are just part of the equation.

“I think that sometimes people forget the emotional aspects of the deal,” said Penny Larsen, president at Links Financial. “You are selling your baby.”

Entrepreneurs who sell their firms should have a good understanding of where they will fit in once the sale closes. There also has to be a cultural fit, especially for companies in the lower- and middle-market level.

“The mojo needs to be there,” said Kyle Schroeder, vice president at Skyway Capital Partners. “These deals are like a marriage and it is very tough once you get into it, to get out of it.”

Betsy Bennett, chief operating officer and chief financial officer at IC Intracom, has seen a cultural misfit kill deals that looked good on paper.

“I’ve been on the inside when we walked away from a deal because we decided the culture was not going to work,” Bennett said. “If the fit is not there, ultimately the numbers you see on paper won’t work out.”

What you need to know as you prepare to sell your company

  • Contact a trusted advisor, an attorney, accountant or an investment banker, who has been through a deal before.
  • Outline specific goals for a sale, and listen to the feedback provided.
  • Listen to all the options beyond a sale, including taking on a capital partner.
  • Provide audited financial statements and track metrics that are key to buyers.
  • Be prepared to wait for the best time for a sale, which could take up to a year or two.

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