July 2010 Newsletter Acquisition Diligence

July 2010 Newsletter Acquisition Diligence

The deal environment is heating up (it’s all relative). Recently Buyouts reported that U.S. based firms closed 147 change of control transactions in the first quarter of 2010 compared to 121 in the fourth quarter of 2009 and 120 in the first quarter of 2009. There are a number of factors contributing to this current upswing. While the economy is by no means completely out of the woods, businesses are in better shape to come to market as trailing twelve month results continue to improve, with many seeing bottom last summer. As a result, intermediaries are finally talking about new deals rather than recycled old deals and, just as importantly, lenders seem to be serious about lending again. Based on recent work that IGS has done, limited partners, an important constituency for PE funds, appear to remain committed to the alternative asset class and are once again actively seeking to commit capital and have it deployed. With this backdrop in mind, we wanted to share some of the ways that we have recently provided an information advantage to our clients in their consideration of investment opportunities and as they work to improve performance.

Acquisition Diligence

Whether validating investment assumptions or testing management team assertions, our clients benefit from increased insight and clarification regarding addressable market size and growth, market share and share of wallet, and competitive landscape, positioning and performance. Coming out of the downturn into a slow recovery, buyers and lenders alike are seeking greater certainty before pulling the trigger on new investments. IGS has worked on nearly 50 diligence engagements so far in 2010 and it is encouraging to see that the pace of new diligence projects and the quality of those businesses continued to improve within this period. We are currently working with clients both seeking to take advantage of favorable timing in cyclical businesses, as well as investing in less cyclical industries. Some examples of markets where we have been active so far in 2010 are shown to the right and a couple of illustrative examples follow:

Diligence Examples

Commercial Repossession Services (Cyclical) Key Focus:

  • Cyclical risk / revenue outlook

On behalf of a PE sponsor, IGS conducted market diligence on a company that competes in the market for the repossession of commercial equipment. The business was thriving in the wake of a deep recession, and the consequential drop in construction activity and tightening of business credit. Our client understood that it was potentially buying at the “peak,” and it needed an independent evaluation of both the industry cycle as well as the company’s specific revenue outlook in light of not only market conditions, but its specific customer base, its opportunity to penetrate additional accounts and, the competitive landscape. Our diligence provided clarity about these risks, enabling our client to make a better informed investment decision. Sleep Disorder Services (Non-cyclical) Key Focus:

  • Growth outlook
  • Reimbursement environment
  • Competitive Dynamics

IGS analyzed the market for sleep disorder diagnostic services and related durable medical equipment for a private equity client. IGS evaluated the future growth prospects and goals of the business within the context of various factors affecting this such as historic growth patterns and saturation considerations, changes in reimbursement rates, Medicare reform, and competitive landscape. The IGS team also analyzed the expectations of the contribution from existing sleep disorder facilities and the need for new facilities in order to achieve these goals. Our work gave the client additional insight and perspective with which to consider their acquisition.

Strategic Support

All companies are grappling with a multitude of uncertainty and change in their marketplace today as they seek to find additional avenues of achievable growth or clarify current competitive positioning. As a result, as in previous cycles, IGS has seen an increase in projects working directly with senior management of companies tackling issues unrelated to a transaction. A few illustrative examples follow:

Strategic Support Examples

Contract Office Furniture Key Focus

  • Core business assessment against growth targets
  • Growth strategy development

IGS helped to develop a long-term growth strategy for a major global contract office furniture manufacturer. Over a period of several months, IGS evaluated the company’s current strategy as well as analyzed new market opportunities that leveraged the company’s core assets and competencies. The team assessed growth opportunities and profit pools associated with these opportunities and worked alongside the company’s executive officer team to prioritize options and identify profitable strategic pathways for the company. This project covered all the major facets of the company including products, distribution, customers, pricing, competition and other channel partners. The final deliverable presented to the Board of Directors was a comprehensive strategic growth plan that highlighted specific action steps, organic and inorganic, with acquisition targets (where relevant). Imaging Services Key Focus

  • Core business assessment
  • Expansion market evaluation

IGS assisted a client in contextualizing its performance in the advanced imaging industry. On behalf of the company’s management team, IGS evaluated the short and long term trends in MRI and PET/CT, including procedure volumes, technology disruption, outsourcing behavior and healthcare reform. The output of this work helped our client refine its business strategy in its core imaging services unit. For this same client, IGS subsequently evaluated a potential expansion using a combination of public data, direct market feedback from hospitals, and regression analysis. IGS quantified the investment opportunity and identified / prioritized the various target markets.

Firm Background

Investor Group Services is a consulting firm with over a decade of experience serving private equity and corporate clients. Over this time period we have worked on behalf of our clients in over 1,000 engagements across almost all sectors of industry. Over the past twelve months we have worked on over 100 engagements on behalf of corporations, private equity firms, hedge funds, and lenders. Our lineage is rooted in classic strategic management consulting, and our senior management team is comprised of professionals with backgrounds in strategic management consulting, public accounting, and private equity. Our staff is comprised of full-time professionals from leading MBA and undergraduate programs with varied professional backgrounds.

Services

IGS provides three core services to clients:

  • Buy-side and Sell-side Market Due Diligence: provides clients with critical market information and insight on key market and strategic issues regarding a transaction; e.g., the potential size of a market opportunity, how customers view a target company versus competitors, the impact of a market recession, which segments of the market will experience the highest growth…
  • Strategic Support: help clients to evaluate market trends and opportunities to define strategic goals, to choose among strategic alternatives, and/or to clarify an existing strategy.
  • Industry Assessments: help clients that have an interest in a particular industry to evaluate whether a potential market or industry (or segment), are more or less attractive, and what opportunities or threats might exist, e.g., industry consolidation, obsolescence, pending regulation…

Should you have an interest in learning more about IGS, our services and experience, please feel free to call: Mindy Berman - (617) 371-4002 Rob Lordi - (617) 371-4029 Ashley Shih - (617) 371-4004 Ken Beausang - (617) 371-4035 Drew D’Amaro - (617) 371-4013 Pat Donahue - (617) 371-4010 Jenn O’Hara - (617) 371-4062 Amit Rao - (617) 371-4042 Bill Sones - (617) 371-4036

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