Acquisitions By MicroCaps Aren’t The Problem…

Acquisitions By MicroCaps Aren't The Problem...

I recently read a blog post titled “Why Do Most Acquisitions by Microcaps Destroy Shareholder Value?“. The author points out that “50-90% of all mergers and acquisitions fail to meet financial expectations” (a statistic some considered to be skewed by unrealistic expectations, billion dollar M&A blunders, and a lack of data on lower market M&A).While it’s very true that many M&A transactions fall short, I disagree with the author’s implication that most microcap acquisitions directly destroy shareholder value.  

I would argue that M&A actually increases a microcap’s chance of success. In fact, the author writes “Even though M&A is rarely successful, the irony is that some of the biggest microcap success stories had disciplined acquisition strategies“.

A few examples of successful microcap acquirers include; 1. Middleby Corporation, 2. MTY Food Group, 3. WPP plc, and 4. Cisco Systems. While the list goes on, and I don’t know the exact statistic, I would guess that over 50% of public companies that grew from a valuation of less than $50M to over $1bn grew through M&A. 

Those familiar with microcaps, or small businesses/startups in general, know success is extremely rare. While M&A failure is pegged at 50-90%, we can’t forget that the rate of failure for startups is very high and it’s even higher for microcaps!

There is no absolute formula for value creation (or destruction). Saying most acquisitions by microcaps destroy shareholder value is akin to saying most microcaps in a specific industry or with management teams of a certain pedigree destroy shareholder value. 

So what reason does the author give for his statement that “Most Acquisitions by Microcaps Destroy Shareholder Value”? Well, he lists 5; 1. Quality, 2. Equity Dilution, 3. Acquisitive Management Teams Using Equity, 4. Large “Transformational” Acquisitions Using Equity, and 5. Too many Too Fast Using Equity. 

In short, the author is saying that most acquisitions made by microcaps fail because most microcap management teams are unqualified and lack the discipline required to execute an M&A strategy (or any strategy). And on that point, I couldn’t agree more! 

What do you think? Is “Most Acquisitions by Microcaps Destroy Shareholder Value” a fair statement? Are there better ways to grow a microcap than M&A? 

Keep an eye out for my next post on this topic where I will discuss ways to overcome the 5 reasons most acquisitions by microcaps destroy shareholder value.  


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.
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Where Do M&A Valuations Come From?

Where Do M&A Valuations Come From?

When speaking with acquirers I often ask, “how did you determine the purchase price?” Answers range from “that’s what the seller was asking” to complex valuation models and analysis.

I see a lot of M&A transactions. More often than you might think, I come across very similar deals with very different valuations. For example, two acquirers can be looking at manufacturing companies with nearly identical financials and business models but one buyer is valuing a target at 10 times the other. How is it that two nearly identical companies can have extremely different valuations?

Sometimes the higher valuation is derived from the value of future synergies or growth potential but more often the higher valuation is a result of an underqualified buyer.

In previous posts, I have discussed how to properly value acquisitions with a focus on smaller M&A transactions. For those of you working on larger acquisitions (or looking for more detail), I want to share the Pepperdine University Private Capital Markets Project.

“The Pepperdine private cost of capital (PCOC) survey was originally launched in 2007 and is the first comprehensive and simultaneous investigation of the major private capital market segments. This year’s survey deployed in January 2016, specifically examined the behavior of senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately-held businesses, investment bankers, business brokers, limited partners, and business appraisers.”

While the 2016 report has a lot of great information, the parts I find most interesting are the sections where industry professionals are surveyed about valuation. Private equity firms and public companies usually acquire private companies and do so with the help of investment bankers, lenders, business brokers, and others, all of whom were surveyed.

So, according to the dealmakers of 2016, where do M&A valuations come from?

Well, investment bankers say the average EBITDA multiple for companies with $1MM to $4.9 MM in EBITDA is 5.3X,

Average M&A EBITDA multiples.

adjusted EBITDA is the preferred multiple for private equity buyers when valuing targets,

Private Equity Acquisition Multiples.

and revenue multiple is the preferred multiple valuation method of venture capitalists.

Venture Capital Valuation Methods

That’s just a quick glimpse of the treasure trove of information included in the 125-page report. With all kinds of great information for companies growing through M&A or raising capital, I suggest most of my readers check it out.

You can download the full report HERE.

 


About Ben Kotch:

Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.

For more, please follow on Twitter.


NOTE: THIS BLOG AND ALL OF ITS CONTENTS (THE “SITE”) ARE FOR GENERAL INFORMATION PURPOSES ONLY. THE VIEWS EXPRESSED ARE SOLELY THOSE OF THE AUTHOR. THIS SITE SHOULD NOT BE CONSTRUED AS AN OFFER TO BUY OR SELL ANY SECURITIES OR AS AN OFFER TO TRANSACT. NOTHING ON THIS SITE SHOULD BE CONSIDERED FINANCIAL, LEGAL, OR TAX ADVICE.