Middle Market Mergers and Acquisitions:
A Primer
Insights
O
ver the past few years, we have provided regular anal-
ysis of the maritime and offshore industry mergers
and acquisitions (M&A) markets. But what goes into
those decisions and transactions? This quarter, an overview of
the basics of mergers and acquisitions – the players, the pro-
cess and the terminology – will simplify the language of M&A.
Buyers
In simple terms, there are really two types of buyers in the
M&A world: Financial Buyers and Strategic Buyers. A ‘stra-
tegic’ is generally a larger company with operations that are
similar to those of the ‘target’ company, and the acquisition is
intended to capitalize on the synergies between the two enti-
ties. The prototypical financial buyer is a private equity group,
which is likely to buy and hold the target for some period of
time before pursuing another sale or IPO.
Strategic buyers tend to employ internal ‘corporate develop-
ment’ staff members to seek out, evaluate and execute transac-
tions. Acquisitions are funded both through cash on hand as
well as credit lines and other debt instruments, and publicly-
traded companies have the additional advantage of offering
company shares as transaction currency. Two examples of
prolific public company acquirers in the maritime and offshore
industries are Kirby Corporation (NYSE: KEX), and more re-
cently Teledyne Technologies (NYSE: TDY). Kirby made a
number of strategic acquisitions in the liquid tug and barge
transport market, particularly between 2010 and 2012, while
Teledyne has added a number of strategic subsea technology
holdings since 2013 including Bowtech and Bolt Technology.
Financial buyers come in many different forms, but the most
common type is called a “Private Equity Group.” PE groups
are formally established investment firms with a full-time staff
and committed capital from several investors, with a mandate
to seek out and acquire companies. Most often, a private eq-
uity group will acquire “platform” companies, followed by
smaller “add-on” acquisitions of companies that complement
the platform. After a period of time, perhaps five years or so,
the fund will pursue a follow-on transaction with the (hope-
fully) larger and more profitable portfolio company. This
transaction will return capital and profits to the fund and its
investors and may be in the form of a fully company sale, a
recapitalization through borrowing against profits, or in rare
cases, an initial public offering (IPO) on a stock exchange.
Private equity investors have proliferated in the past couple
of decades and there are now thousands of firms in the U.S.
which vary widely in terms of fund size, staffing and formal
commitment of capital. According to the private equity data-
base provider PitchBook, there are more than 17,000 formal-
ly-established private buyout and venture funds in the United
States – this doesn’t include thousands of “angel” investors
and small, highly-focused acquisition funds.
Sellers
For every buyer in an M&A transaction, there must be a
seller. Companies enter the M&A market from a number of
ownership structures including closely held family businesses,
divisions and subsidiaries of larger companies, and of course
from the portfolios of private equity firms. Perhaps even more
diverse than types of sellers in the market is the variety of mo-
tivations and goals of owners entering into M&A transactions.
Owners of smaller, closely-held companies will often con-
template a transaction for many years prior to reaching a deci-
sion to pursue a transaction, but very few actually develop a
formal transition plan for their company. This dynamic is of-
ten a result of the same entrepreneurial qualities that made the
owner successful in the first place: he or she is too consumed
with managing a successful business every day, and may not
be too biased toward giving up control to others. Sometimes
owners are pushed toward a transaction process due to outside
forces, such as health issues, divorce or lack of a clear succes-
sor when retirement becomes imminent.
Larger corporate and financial sellers tend to be more cal-
culating in their decisions to go to market with a business en-
tity. Corporations may divest subsidiaries and divisions that
no longer fit within their strategic plan, and the capital raised
in a sale process can be redeployed for a higher long-term
return. In the case of private equity sellers, the impetus to
go to market is ideally driven by the fund’s investment goals
and desired holding period, though outside market forces may
sometimes dictate the timing of a sale. Alternatively, in an
economic climate such as today with favorable debt terms,
owners of cash-flowing companies may prefer to recapitalize
rather than sell outright, thus taking cash “out” of the business
and shifting some risk to one or more lenders.
The M&A Process
Regardless of the type of business ownership, most sophisti-
cated sellers in the middle market will seek out knowledgeable
By Harry Ward
10
I
Maritime Professional
I
1Q 2015
