January 14, 2014

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Buying Spree

The Recovering Economy has Unleashed Acquisition Activity

By Spencer Sutherland

January 14, 2014

Much like the economy, mergers and acquisitions in Utah plummeted during the Great Recession. After several years of stagnation, however, the state saw a major spike in deals in 2012. The question is whether this was just a result of pent-up demand or sign of things to come for the state’s business community.

2012: A Record-setting Year

In 2012, there were 110 mergers and acquisitions in the state, according to the 2012 Utah Deal Flow Report produced by MountainWest Capital Network. That’s a major jump above both 2011 and 2010, which delivered just 24 and 27 mergers and acquisitions, respectively.

So what was different about 2012? Reed Chase, president-elect at MountainWest Capital Network and audit partner at Tanner LLC, says there were a few important factors.

The first was simply the natural result of a recovering economy. “A lot of the slowdown came from banks not lending,” Chase explains.  “As debt has been more available, deals have been able to close.”

The second factor had more to do with politics. In 2012, there was a lot of uncertainty around what would happen with the tax code. “The fourth quarter of 2012 was really driven by a fear that tax rates would change significantly,” Chase says. “[Groups] wanted to get the deal done and lock in the taxes at 2012 rates.”

He adds, “I’ve never seen so many deals packed into the month of December—a month where you usually can’t get anything done because everyone’s on holiday. If it wasn’t for those tax fears, those deals might have been pushed back to 2013 or may not have happened at all.”

The result of all of the last-minute negotiation was more than $10 billion in mergers and acquisitions. Acquisitions of Ancestry.com, Schiff Nutrition International Inc. and CHG Healthcare Services each topped $1 billion; and the $2 billion acquisition of Vivint set a record for the highest payout in the Utah tech industry.

Out-of-state Acquisitions

Of the 110 mergers and acquisitions in 2012, 71 were the result of out-of-state entities acquiring Utah companies. Though the deals were spread across a wide range of industries, each of these Utah companies had one thing in common: innovation.

“It’s easier to be maneuverable and innovative in a small company than it is in a larger, bureaucratic company,” Chase says, and many of these larger companies were drawn to the agility and innovation of the entrepreneurial startups in Utah.

The recent success of Utah entrepreneurs has been contagious. “It creates a culture,” Chase says. “When an entrepreneur sees somebody come up with a great idea, build a strong company, and get a nice exit out of it, they say, ‘I have a good idea, too.’”

Support for these entrepreneurs is also strengthening in Utah, Chase says. Among other services, mentoring programs at the state’s universities are giving entrepreneurs the tools they need to succeed, and collegiate tech-transfer programs are commercializing those ideas in the private sector.

While it’s great to see a Utah company have a great exit, it’s tough to see those companies leave the state. Jason Watson, director of business development at Wells Fargo bank and chairman of MountainWest Capital Network, says that doesn’t always have to be the case.

“In the more distant past, you’d build a great company, it would get acquired and disappear,” Watson says. “More recently, there have been great deals like Omniture’s [acquisition by Adobe], that actually netted Utah jobs. It brought Adobe here and has been a great thing. We’re starting to see more of that, where an acquisition doesn’t have to mean an exit from the state.”

Local Players

There are also plenty of deals where Utah companies do the acquiring. In 2012, the 39 Utah-based deals totaled more than $1 billion. That momentum is carrying forward into 2013.

The Larry H. Miller Group of Companies is one of the organizations leading the charge, with three of its divisions recently acquiring new businesses. Its Fanzz sports apparel brand recently added 28 stores in the Northwest by acquiring the Just Sports chain.

“Like everyone, Fanzz was impacted by the drop in retail sales [during the recession],” says Steve Starks, executive vice president of Larry H. Miller Management Corporation, “but we’ve actually doubled our size in the last four years.” Fanzz used the recession years to grow, taking advantage of the opportunity to move into a number of new mall locations at very favorable terms.

The Larry H. Miller Group also recently acquired seven auto dealerships in Arizona and 11 movie theaters in Utah and Nevada. Starks says that all these out-of-state acquisitions help boost Utah’s economy. “It helps from a jobs standpoint, a tax standpoint and from a philanthropic standpoint,” he explains. “We’ve grown the size of the management team in Utah to support all that growth and we added a new warehouse to support Fanzz. The more money we generate also means more philanthropic efforts that the Millers can take part in, which also benefits the state.”

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