Sylvie Gadant is not affiliated with S&P Capital IQ or any of its affiliates. Opinions and statements offered by Ms. Gadant are her own or that of Rothstein Kass and do not necessarily represent the views of S&P Capital IQ or any of its affiliates.
Abhaya Menon: Can you start by telling us about your role at Rothstein Kass?
Sylvie Gadant: I’m the partner-in-charge of the Transaction Advisory Services Group. We have a dedicated team of transaction professionals who provide buy-side and sell-side due diligence, tax structuring and M&A advisory services primarily to private equity funds and their portfolio companies. Our client base also includes several strategic buyers that have kept us pretty busy for the past two years. Because we have a significant middle-market audit practice, we also help out what I call “one-timers” – companies that will do just one opportunistic acquisition. They usually require a little more hand holding from us, but it’s rewarding. As an M&A advisor, you feel that you’re truly helping a company go through a process they might not be accustomed to.
Over the last seven years, have you seen any major trends emerging?
When you look at the level of activity recently, there’s been a larger number of buyout funds looking at growth equity investments. Buyout funds usually take a control investment in a company, but because of the limited amount of quality acquisition targets, they’re also considering minority investments. That’s another way to put capital to work and get to your targeted rate of return.
Do you see strategic buyers doing anything different in the last few years?
We found that strategics are always active because they have a long-term view, compared to sponsors that have a five- to seven-year investment period, so whether it rains or shines, strategics are always doing transactions. They made a decision to perhaps roll up an industry or target a geography. They gathered a list of prospective targets, and they are constantly meeting with potential sellers and doing deals.
“Good-quality companies survived the recession, and some came out stronger or even prospered through it. These are the companies that command high multiples today.”
In what ways do you see financial sponsors impacting the way in which deals are sourced and located?
Financial sponsors have a mandate. They are managing somebody else’s money, and there’s a short timeline to generate returns, so there’s a little more pressure on the sponsors to make things happen quickly. Sponsors usually focus on expanding both the top line and the bottom line. Many find some type of an angle and build a preliminary strategic plan during the early stages of the diligence process. Some even will start to identify potential add-on’s during the diligence process. Many of our clients literally have a 100-day plan in place by the time the deal closes along with their mid-term and long-term plan. Time is of the essence.
Over the last few years, we have seen some fluctuations in the average EBITDA multiples. What trends are you seeing with multiples, and what do you think may be driving the changes?
Multiples in the past five years have been all over the place. In 2009, for example, multiples for non-distressed investments were actually very high. There was not a lot of activity that year, but for the deals that closed in 2009, valuation multiples were higher than anyone had expected. Valuation multiples actually dropped off in 2012, which I believe was linked to tax planning since sellers wanted to take advantage of the lower capital gains tax rates. They were willing to accept lower valuation multiples because at the end of the day, the after-tax proceeds were higher than if they had sold in 2013. When you look at the M&A activity and deal flow in 2012, the last quarter was off the charts.
So in 2012, valuation levels actually were down slightly, but they are back with a vengeance in 2013. Actually, a lot of our PE clients are staying put because valuation multiples are just too high. That tells you the story about how resilient the U.S. economy is; good-quality companies survived the recession, and some came out stronger or even prospered through it. These are the companies that command high multiples today. There’s a limited amount of them out there, and the demand is high. There are also a lot of funds with aging dry powder, and they need to put that money to work sooner rather than later. The combination of low supply and high demand is driving prices up. But again, a lot of our clients or other funds that I’ve talked to are just waiting it out. They are just being very disciplined in their investment approach and want to do the right thing. You make money when you buy; you cash the check when you sell.
I think the data we see in S&P Capital IQ confirms a spike in transaction counts in the fourth quarter of each of the last few years. Jumping back to financial buyers, we hear talk a lot these days about shadow banking. How do you see that and perhaps private funding impacting key firm’s activities?
There is definitely a lot of debt available and a plethora of new debt providers, which is good and bad. It’s a good thing because it’s easier today to leverage deals with generous terms and valuation multiples. At the same time, you want to make sure that you have certainty of close. You want to know that whoever comes to the table – even though their terms might look fantastic on paper – can actually make things happen. Some debt providers are just not used to finance M&A transactions, and could maybe stumble or let you down during the due diligence process, or even unnerve the management team by asking too many questions when they’re supposed to wrap up.
Overall, our clients see this trend as a positive, but they’re still careful. They usually stick to their guns and continue to use a short list of debt providers.
“Financial sponsors have a mandate. They are managing somebody else’s money, and there’s a short timeline to generate returns, so there’s a little more pressure on the sponsors to make things happen quickly.”
Looking at your role in deal execution, how have you seen that change both pre-close and post-close? You already mentioned that you started looking at add-ons earlier; what are some other things that you’ve seen?
One of the trends we noted in the past five years is the increased use of earn-outs, especially whenever there is a valuation gap between what the seller thinks his or her company is worth versus what a sponsor would think it is worth. A good way to bridge the valuation gap is to use an earn-out in the purchase agreement. We usually get involved in the definition and calculation of the earn-out, because the earn-out will usually need to be verified by an accountant after close. We want to be proactive and understand how it is going to be calculated ahead of time to make sure that the buyer and the seller agree on the methodology. We recommend using revenue as a post-closing performance metric, instead of EBITDA or even gross profit. Revenue is easier to track and audit, while earnings can be easily manipulated and harder to define. So we usually advise our clients against it, or if we do, then we try to be as specific as we can. We work with the attorneys to make sure that the earn-out methodology is precisely defined in the purchase documents.
One final question. Based on S&P Capital IQ data, this year, we have already seen approximately $550 billion of announced deals versus $425 last year. Looking into your crystal ball, what do you see happening for the rest of 2014?
I can tell you that our M&A team has been so busy since mid-January, we wouldn’t mind a little bit of a break, but since we all remember 2009-2010, we do not mind being busy. I speak with my competitors fairly regularly, and I can confirm that there’s definitely an uptick in M&A activity this year. We get three or four leads a week for buy-side quality of earnings work. I do expect that 2014 will end with a higher volume of deals.
Abhaya Menon is an Associate Director of Market Development at S&P Capital IQ. He is responsible for business development and strategy for corporations and financial institutions in the Americas. In this role, Abhaya works closely with clients, prospects and market participants to collect feedback and define the product roadmap for the platforms.
Prior to this, Abhaya was the product manager responsible for the creation and delivery of the credit analytics solutions on the S&P Capital IQ platform. Abhaya holds a master’s degree in Mathematics from the University of Nebraska and B.A. in Mathematics and Chinese from Williams College.
Sylvie Gadant is the principal-in-charge of Rothstein Kass’ Transaction Advisory Services practice. She leads buy-side and sell-side due diligence engagements for private equity sponsors, PE-based portfolio companies and strategic buyers.
Sylvie specializes in assessing an acquisition target’s quality and sustainability of earnings, working capital requirements, debt and debt-like items, growth drivers and cost structure analysis and realization of synergies and projections. She also advises clients on post-closing purchase price mechanisms, determination of post-transaction financial reporting and purchase price accounting. Sylvie has advised clients on over 150 middle market transactions including platform investments, add-on acquisitions, leveraged recapitalizations, carve-outs and minority investments.
Prior to forming the firm’s TAS practice, Sylvie spent more than 10 years with the audit practices of Rothstein Kass and another public accounting firm where she served mid-market private and public companies across a wide variety of industries.
Sylvie is a French native and received a bachelor’s degree in business administration from the Graduate School of Business in Bordeaux, France. She is a Certified Public Accountant in New York and New Jersey and a member of the American Institute of Certified Public Accountants (AICPA). Sylvie is an active member of the Association for Corporate Growth (ACG) and one of the founding members of the ACG New Jersey Women of Leadership Series. Sylvie received the 2013 M&A Advisor “40 Under 40” Award, which recognizes emerging leaders in the M&A, financing and turnaround industries.