With the economy on sure footing both in the U.S. and abroad and valuations at an all-time high, now is the time to consider selling or becoming partners with a private equity firm.
It’s also a good time to borrow money to grow a business, according to a financial roundtable discussion. The panel discussion was lead by Phil Bleser, chief executive officer of mid-corporate banking at J.P. Morgan Securities Inc. Joining Bleser was Steve Raftopoulos, managing director at J.P. Morgan Securities, Aron Schwartz, principal at Fenway Partners Inc., and Joe Scirocco, chief financial officer of the Tommy Hilfiger Group.
With global mergers and acquisitions volume reaching $2.37 trillion in the first ninth months of 2006, the panelists described current conditions as unprecedented. And the momentum of M&A activity is expected to continue, at least through 2007.
“It’s a thumbs up,” Bleser said. “Everything is great right now, including the economy both in the U.S., Asia and Europe.”
Bleser said interest rates are down, and spreads are narrowing. “So, if you are a borrower, the cost of capital for debt is really cheap right now,” Bleser said. “And if you are going to lever up a company, the difference between a levered company and an unlevered company has narrowed dramatically. So it’s a good time to lever up.”
Stock valuations are also at the right price, meaning it’s a good time to launch an initial public offering. Regarding M&As, Bleser said driving the activity has been the record fund-raising by private equity firms as well as low financing costs and strong cash flow, among other things.
Raftopoulos said that to understand what’s driving the M&A market, which is in a bull phase, it is important to look back to 2003. The market was struggling, the tech bubble had burst and “there was a concern that accounting was suspect. Capital was not available, and ceo confidence was at an all-time low. It was as dismal an M&A environment as it could get.”
Today, confidence is up, companies are clean “and capital is abundantly available and at good terms,” Raftopoulos said, adding that current balance sheets are strong, and companies are “perhaps underleveraged.”
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Raftopoulos said M&As have returned as a tool to achieving certain corporate strategies, such as growth or divestiture of assets to focus on core competencies. “Another dynamic is the coming of age of the activist-shareholder,” he said, adding that the movement centers on value creation for shareholders.
Schwartz said there’s a lot of capital raised by private equity, and they are looking at all sectors. “Apparel is clearly a very important industry, not only here in the U.S. but globally,” he said. “The appreciation to what it means to have a brand, to have a direct distribution channel, I think has grown.”
Private equity firms have increasingly focused their attention on the apparel industry, Schwartz said. They look carefully at branded firms and understand why it’s important to keep management in place. This is a bit of a reversal from when investors focused solely on a company’s balance sheet.
Schwartz said his firm looks at industry first, then company and brand. It also studies a firm’s competition and free-cash-flow characteristics. “And we also ask if it is a brand that can be grown,” he said.
Scirocco said the management at Tommy Hilfiger, which was sold to Apax Partners this year, started the process of a sale by asking what they needed to do to deliver value to shareholders. He said several years ago, the trading multiple was “quite depressed relative to the rest of the industry.”
There was a perception on Wall Street of contracting total sales, Scirocco said. Investors didn’t understand the European business and its growth; so, management examined the business and decided to sell the company.
“Ultimately, we thought that selling the company was best for the shareholders,” Scirocco said.
The company looked at strategic buyers as a way to get the best price and ended up reaching out to 24 firms, including private equity, and found a good fit with Apax Partners, he said.