April 9, 2009

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A Crop of Opportunity

Utah’s Economic Climate Ripe for Mergers and Acquisitions

By Tom Haraldsen

April 9, 2009

It wasn’t long ago that two of Utah’s greatest business resources—its work-force and the material supplies to keep that workforce busy—were more in demand than in supply. Construction was at an all-time high, particularly residential construction, and contractors struggled to find the experienced and qualified labor force to keep projects moving forward. Ditto for light industry and professional services. Not anymore. The economic down-turn has led to decreasing demands, a glut of talent and raw materials and a financial obstacle with another rippling effect: large companies aren’t acquiring smaller ones, even those struggling businesses considered “bottom basement” bargains. It’s a cyclical pattern that repeats itself in almost all economies, particularly those in recession. As financial crises arise, consumer confidence weakens. Spending decreases, which in turn means businesses have to charge more for their goods and services. That often leads to a further decrease in sales. And so on and so on. It affects a lot more than just retail sales. It also affects the sales of businesses. “I’d say on the merger side of the equation, activity is at least 50 percent lower than it’s been over the past few years,” says Dean Dinas, economist for United Mergers and Acquisitions in Salt Lake City. “American-based companies are less able to finance these kinds of deals, bank credit is harder and harder to get and even those businesses with long-standing relationships with their lenders are finding things tight.” Dinas says Utah has always been a prime candidate for merging businesses, a state where 98 percent of companies have 50 or fewer employees. With a strong entrepreneurial spirit, it’s been a common practice for two businesses to pool their resources and efforts, until recently. “I believe there are fewer deals because of the economic slowdown,” says Devon Thorpe, chief financial officer for Mona Vie, a South Jordan-based network marketing company, and chairman of the Mountain West Capital Network. “What drives all of this is the credit market,” Thorpe says. “What it really means is that if you want to borrow more than $1 million, you have to look hard. Some banks just aren’t lending the way they were in, say, last July.” Thorpe sees one silver lining: Utah is traditionally one of the last states affected by an economic downturn and usually one of the first to emerge when things change. “Our state is less likely to milk unemployment and take advantage of it,” he says. “We are very entrepreneurial and more likely to start a business. The work ethic here tends to provide some natural fuel to work our way out of [an economic downturn].” Michael Drury, chairman of United Business Brokers of Salt Lake, says, “Now is a better time to pick out a company [to merge with or to acquire] than ever before. It’s very similar to the situation we had after 9/11. Banks have discovered again that if they don’t lend money they don’t make interest. That works well for companies looking to acquire others, but not so much for those wishing to merge.” After receiving his annual Economic Report to the Governor in January, Governor Jon Huntsman encouraged “innovation and creativity” to deal with the state’s losses in construction and manufacturing. “Utah has a strong foundation and is better suited to face this turmoil than many other states in the region and country,” Huntsman said of the report in a news release. “It is times like this that we can be prepared to continue our progress by positioning ourselves to flourish when our economy rebounds.” Dinas agrees, saying that Utah and Colorado businesses are still attractive to other companies because of labor dynamics and supply chain relationships. “We are still vibrant and everyone knows each other,” he says. “Take a state like Idaho, which is dependent on agri-business and semiconductor, or Nevada that depends on gambling and tourism, they are much more seriously affected by the downturn and will have a harder time emerging from it.” M&As Cropping Up While mergers and acquisitions are down, they’re still happening in the Beehive State. Last December, Clearfield-based Lifetime Products made its first-ever acquisition, buying locally-owned Jumping Jack Trailers. Jumping Jack’s Jump Up tent trailers were the perfect embellishment to Lifetime’s line of utility trailers. “We had encountered Jumping Jack when we discussed helping them with manufacturing,” says Lifetime spokesperson Philip Mickey. “They were a small company with 18 employees, and offered an innovative product, and we were excited about the possibility of adding it to our line.” Demand for Jumping Jack’s product, along with Lifetime’s large workforce and 2.6 million-square-foot manufacturing facility, made the deal a natural for both companies. “Everything you read makes you think it’s a bad time to do this type of thing,” Mickey says. “Like everyone does, we have challenges. But those times create opportunities.” Also, The Park City Group acquired Prescient Applied Intelligence late last year, and Salt Lake-based Montana Mining Corporation acquired Produced Water Solutions as a wholly-owned subsidiary in December. “Our acquisition of PWS comes at an opportune time within the oil and gas industry,” says Ruairidh Campbell, chief executive officer of Montana Mining Corporation in a company release. “Energy producing companies are facing new challenges brought on by the dramatic fall in prices over the last six months. The fall in revenue has forced many within the industry to evaluate cost efficiencies as a necessary tool to staying in business. The ability to purify water produced from oil and gas wells onsite will help companies add back net revenue to their bottom line.” “The great thing about Utah is that people don’t want to move,” Drury says. “People want to stay here, and they’ll do innovative things to help their businesses succeed so they can stay. If a company has six to 12 months worth of cash, this is a great time to buy or merge with another Utah company. We’re still a very attractive place to do business.”
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