Roundtable: Mergers and Acquisitions
Every month, Utah Business Magazine hosts roundtables on a variety of topics. This month’s topic was mergers & acquisitions. We invited Cheri Waldron of MountainWest Capital Network to moderate, and industry experts to participate in the discussion. Here are a few of the highlights.
Moderator: Cheri Waldron, MountainWest Capital Network
Attendees: Paul Skeen, Mike Bellin, Matt Bartholomew, Rob McGee, Drew Yergensen, Curtis Roberts, Spence Hoole, John Dunn, Steve Keiffer, Greg Lindley
Cheri Waldron: Overall, what has the landscape been like for deals in Utah over the past year, and what is your outlook for the rest of 2018?
Mike Bellin: If you think about the number of the deals over ’17, it’s been significant. Based on our MoneyTree report, we had 56 Utah companies raising $818 million in venture capital during 2017, which is a 30 percent increase over last year just in VC dollars alone. During Q1 2018, that trend has continued. We continue to see a lot of money come in from local companies, as well as outside of Utah.
I think we are going to continue to see that throughout ’18, into ’19. The market here is strong. You’ve got an educated populous. You’ve got a very entrepreneurial spirit here. You’ve seen success. It’s exciting to see.
Spence Hoole: What we’re seeing more is Utah companies that used to be the acquirees are becoming the acquirers and scaling. In the past, it was pretty easy to be a tech company and grow to one hundred million in Utah. It was really difficult, though, to get to 500 million in revenue. We’re seeing some small emerging growth companies becoming true middle-market players, and eventually maturing into true industry leaders. That’s really nice to see in our ecosystem.
Curtis Roberts: One thing that we’ve historically seen is that companies tend to get built differently in Utah. They are not just acquiring users and raising huge amounts of capital and trying to scale as quickly as possible without having yet figured out how to actually make money. Companies here are the real deal.
Rob McGee: For us, deal flow has been very strong this year. We’ve been able to be involved in a number of transactions with companies that are based in Utah acquiring businesses that are outside the state, as well as companies that are based outside of the state acquiring businesses in Utah. So both sides of the transaction. We don’t see any signs of that slowing down.
Drew Yergensen: If you look at the national data on M&A, it shows up about nine or ten percent. If we look at the deal flow data from earlier this week, on M&A alone, we went from 202 transactions to 264. That’s about 30 percent. So you see a faster growth in Utah that supports a lot of the stories we’re hearing.
Ms. Waldron: What sectors are showing the most activity?
Greg Lindley: For us, it’s been the tech side. We’re seeing just an amazing amount of deals that have been going on that are both raising money, and some exits as well.
Mr. Hoole: Tech is doing great, but you know what’s making a resurgence is life science. It’s probably the strongest it’s been since the early ’90s. Companies like Recursion, which has raised a lot of money. Another company is PolarityTE, a public company that relocated here recently. Life sciences is becoming relevant again, beyond just some seed-stage companies that get gobbled up quickly.
Mr. Bellin: We are seeing the most deals in the technology space, but it’s much more diversified than just a “pure-play” software company. It’s health science, with some bread and butter of technology. So, internet cyber security, all of that is hot today.
Matt Bartholomew: Also, industrial. There’s a pretty large company here in Salt Lake City that’s been very active. They’ve been averaging about four or five deals a year, and I’ve been helping them with a variety of buy-side bolt-ons that they have done, as well as carve-outs and exits that they have, and a possible larger deal that’s coming up.
Ms. Waldron: What are the national and local economies impacting M&A activity in Utah, and how so?
Mr. Bellin: I think Utah is disproportionately important to the U.S. economy. You look at venture capital raised; Utah ranks 13th in the U.S., when its national economy’s not even in the first half. So that just shows the importance of Utah.
You see the number of outside investors coming into Utah; private equity, venture capital, corporates, Cafe Rio being acquired by Freeman Spogli & Co., another private equity outside of here. If you look at Utah companies, for example, DigiCert’s acquisition of a carve-out of Symantec, you see big deals both going in and out of Utah. It’s exciting.
Mr. Yergensen: I think another interesting topic that we hear a lot in the state is jobs. I’m looking at the Sentiment Report, too, and it’s talking about, ‘Hey, we have all this capital, we would like to acquire.’ But it’s tough. Most business owners are saying, ‘We want to expand through people,’ and they are saying, ‘We can’t.’
John Dunn: We sold a business in January for that exact reason. We could not get the employees to grow. We’re in traditional businesses, but there is as acute of a shortage of low-tech workers as there are high-tech workers. We could not hire to continue to grow, and we ultimately decided to sell for that reason. It’s a bigger headwind than people think.
Mr. Yergensen: We are trying to bring more diversity into the workforce. You have a strong natural population growth with a high birth rate, which is helpful, but we’ve got to keep working on attracting outside talent and in-migration to our state. Otherwise, we’ll continue to have a real shortage of talent constraining the growth of our state.
Ms. Waldron: Are outside investors increasingly interested in opportunities in Utah? Why or why not?
Mr. Roberts: The answer to this question is a resounding yes, from our perspective. Three years ago, when I joined Kickstart as a partner, we would maybe have an outside fund that was either interested in acquiring a portfolio company we had previously invested in or doing a later-stage financing once every six weeks that would come in. It’s now not uncommon for us to get two a week. And we’re talking about the biggest-named funds in the country, people that regularly are spending time in this market, sourcing deals.
And for the marquee names in our portfolio, those that have kind of broken out and are the most successful, there are times when it will be the tenth fund that comes in talking about the same company and wanting to get introductions and meet with the founders, and I’m like, Get in line. And that would not have been the case here all that long ago. It’s amazing how much we have come onto the radar screen nationally.
Ms. Waldron: How active and impactful are local investors? How much competition is there between local and outside investors for opportunities?
Mr. Roberts: At least we have the funds here. I’m on two boards in Denver of companies we’ve invested in. There are literally no seed-stage funds in Denver. None. There is one that’s just trying to get started right now.
We have three in Utah, in a market that is substantially smaller, that are seed-only focused. And then you add those that are later stage; the Epics, the Pelions, the Sorensons. There is a surprising amount of local capital that’s been focused on Utah for a long time. We are certainly seeing more competition from funds outside of the state, but I actually think that’s really healthy for Utah. It’s bidding valuations up.
Mr. Hoole: If you would go back around the time of the Olympics, when we really started focusing on working with VCs and private equity firms, you could count them on one hand. Not only that, but you could actually, in your mind, name all of their portfolio companies. Now you just look at Kickstart and the number of portfolio companies they have and you look through their list, and there are a lot of names you don’t even recognize because they are so active.
So, it’s been very active in the angel investing, the seed stage, the emerging growth, and there is just a lot of local activity. And, most recently, now we have highly specific funds being raised. If you look at what Savory is doing with Mercato, raising a $250 million fund just for food services businesses, that would have been completely unheard of a few years ago, a significant fund for a very targeted industry.
Ms. Waldron: Is capital available and plentiful to fund growth in Utah? And what can be done to increase the amount of capital available?
Mr. Bartholomew: We had a situation where we got BDO Capital involved. We have an investment banking arm that’s out of New York and L.A. The seller here in Utah was looking at a valuation of $16 million from someone that they knew here within the state, which is good, but because they decided to take a step back, reassess, and open up, they were able to increase their valuation by more than two times by going through a more deliberate process.
When you touch on what can we do to increase the amount of capital available, I would really encourage sellers: let’s get on the horn early on. If you are thinking about selling, let’s talk about a year, year and a half away from when you are looking at exit, not two or three months, which causes everyone to go into a firestorm. A fair amount of companies leave money on the table because they are not willing to do the process they could do otherwise, which isn’t helpful for a buyer, certainly, but from a seller perspective, in this kind of market, there’s a lot of upside if you are willing to be more deliberate than you are probably inclined to be.
Mr. Yergensen: One opportunity for improvement I hear is: ‘I wish there was somebody besides Silicon Valley Bank or Square 1 Bank.’ I think that’s the venture debt space. Mezzanine, sub-debt lenders are mostly out of state still, but we’ve got one or two guys that are setting up shops and trying to solve that problem. I would say that’s an area where there is probably a capital cap still.
Ms. Waldron: What are the challenges or obstacles that our business community must address?
Paul Skeen: Human capital. That, to me, is the number-one problem, I don’t care what sector you’re in.
Mr. Dunn: We hear all the time about the need for our economy to drive high-tech workers. There is just as bad a shortage in trades, blue-collar professionals (that actually are good), and high-paying jobs. We have a huge dearth of people in this community.
Mr. Hoole: As the economy scales and grows bigger, you need an education that scales with it, you need the healthcare system that scales infrastructure. People talk about Lehi being this epicenter of Silicon Slopes. It’s a disaster down there, from an infrastructure standpoint.
Mr. Dunn: In certain areas the infrastructure is really strong. The airport, out on the west side, I think that’s part of the reason we have logistics business. One of the reasons [Amazon] loves to do so much here is because we’re on the leading edge of infrastructure development. But there are pockets where that didn’t happen.
Mr. Roberts: One more on this topic is Utah, I think, has a lot of work to do on leadership opportunities for women. We see substantial underrepresentation both in the STEM-related jobs in our companies, so software developers or CTOs, but also in leadership positions generally.
I know the tech community is really rallying around this cause, but there are cultural factors, that affect it in the state. But it’s something that is well worth a concerted effort to fix.
Mr. Bellin: I think it’s a huge concern. Diversity on boards is a focal point today for activists, and everyone. Look around this table here. There is not a ton of diversity here, and that represents the community. There is no easy fix to that, but thinking about ‘how can we encourage others to get involved, how can we make opportunities for others.’ I think it’s a huge challenge not only for Utah, but the country.
Ms. Waldron: What do you see as some of the most significant emerging national trends? What trends do you see locally? Are they different or the same?
Mr. Hoole: It’s almost cliché to say “blockchain” technology, but if you look at what Medici Ventures is doing as a subsidiary of Overstock, it’s pretty significant. I think that’s an interesting trend that’s going on, where these funds are being very specific in terms of how they are looking at things. But there is a lot of activity in that space. And Utah is actually one of the thought leaders in that. People like Patrick Byrne and Jonathan Johnson are doing a lot in that area, and traveling all over speaking about it, and raising money, investing it, and deploying it in blockchain companies.
Mr. Dunn: I was going to say the same thing. The use of technology in non-technology businesses is revolutionizing those businesses. No question.
Another trend is that two-thirds of private businesses are owned by baby boomers, and 10,000 people hit 65 every single day. 76 percent of those people plan on transitioning their business over the next ten years. So, I think you’ll see lots of opportunities for buyouts. We have an aging population. And whether through M&A or buyouts, I think we’ll see a lot more of that over the next five or 10 years.
Mr. Yergensen: If you start looking at the workforce and consumer behavior. It’s totally different. I mean, we have to get our head around the access that social media creates, the pressure it puts on companies to actually deliver good services. Companies like Kraft, 20 years ago, you didn’t have a lot to worry about. Now they have a lot to worry about. Consumers are willing to pay a premium for a brand that does a better job marketing rather than one that just scales and has access to the shelf.
Ms. Waldron: What signifies a good deal?
Mr. Dunn: I actually think that people put too much emphasis on valuation. It’s an important thing, and if it gets out of hand, you can spend the next five years trying to get your money back in an investment situation. But an increase of one turn on EBITDA or something like that might change your percentage. It’s not going to make a good deal a bad deal or a bad deal a good deal.
Usually it’s, does the business have the underlying growth potential that you think it does? Sometimes you can buy it right and sometimes you can’t, but the business can still grow and be successful.
Mr. McGee: There is a lot of liquidity in the market from lenders as well as investors, and that’s driving terms to be more liberal, more aggressive, and more borrower friendly. We try to be conservative in the deals that we pursue, but sometimes we need to be careful that we’re not allowing the market aggressiveness to drive adverse selection, causing us to select the deals that we can get more conservative structures on because they can’t attract the more aggressive terms from others.
Mr. Bellin: I think preparedness, starting early, especially on the sale side, and make sure you have your advisors in there early to get your diligence done. And that’s not only financial due diligence, that’s tax, that’s operational, commercial. You see a lot more diligence being done these days. So, if you are prepared for that, it can make the exit at the right time more efficient, and you get the right valuation.
Mr. Lindley: There are times when money can get in the way. You get blinded by how much you are going to get paid. All the baby boomers who are retiring, who are going to try to transition out of their businesses, want to have their legacy continue. And if people don’t spend time really looking at the soft part of the deal, I think that there is going to be those hard landings that people are not going to be very excited about.