Much like the M&A climate nationally, Greater Cleveland had a strong year for dealmaking in 2017, as evidenced by the number and value of the transactions completed, says William C. Mulligan, managing partner at Primus Capital.
“It was certainly a good year for sellers given the level of activity and valuations,” Mulligan says. “We’ll know in five years or so whether it was a good time to be a buyer. That’s when many of the companies invested in over the past year will be back in the market and priced.”
At Primus, two of three liquidity events in the past year were related to investments in Cleveland-based companies. CardinalCommerce sold to Visa and PartsSource sold to Great Hill Partners.
“PartsSource is led by an exceptional CEO, Phil Settimi,” Mulligan says. “It has an attractive, technology-based product offering and is very well-positioned in an increasingly cost-focused health care market. Keep an eye on PartsSource.”
We recently spoke with some of Cleveland’s M&A experts and gathered their perspective on the year that was in dealmaking.
How would you describe the M&A climate in Greater Cleveland in 2017?
John Saada Jr., partner, Jones Day:It was definitely a seller’s market with high multiples and diverse buyers. A deal that just closed is an example of a growing trend — the sale of Cleveland HeartLab Inc. to Quest Diagnostics. You now have a large public company like Quest establishing a significant presence in Cleveland. It’s keeping Cleveland HeartLab and the facility and it’s bringing in more employees to continue to grow the business. It’s very similar to when Explorys was sold to IBM. A local smaller technology company is bought by a large public company and now has a division in Cleveland. I think we will see a lot more of that.
Jim Klessel, partner, EY’s Transaction Advisory Services Practice: There are both strong corporate and private equity acquirers, as well as very attractive target companies in the Northeast Ohio region that have driven activity on both the buy and sell side for the area. It remains a seller’s market largely due to the high amount of corporate and financial buyers in the market looking for quality assets and driving up valuations. In the Greater Cleveland area, diversified industrial and specialty chemical companies dominate the market as both buyers and sellers.
Jeffrey Kadlic, co-founder and managing partner, Evolution Capital Partners LLC: The national economic climate certainly has helped a great deal because Cleveland’s M&A market participants are national in scope and sophistication. All of the investment banks, private equity funds and commercial lenders appear to be increasing staff in anticipation for the current market to continue. It was a better year for sellers simply because the amount of capital available to invest is at historic levels. This fact has driven business valuations to record highs and terms are aggressive too.
David D. Dunstan, president and managing director at Western Reserve Partners LLC:Each month, Dunstan analyzes M&A activity during the previous month. Here are a few of the deals that stood out to him this year:
- In April, Linsalata Capital Partners announced the sale of The Whitcraft Group to Greenbriar Equity Group. “Linsalata acquired Whitcraft in 2010 and partnered with management on various strategic initiatives, including the acquisition of Dell Manufacturing, evidence of the value an experienced private equity firm can provide during its investment period,” Dunstan says.
- Sherwin-Williams Co.’s completion of the acquisition of Valspar in June “creates a world-class brand portfolio, expanded product range, premier technology and innovation platforms and an extensive global footprint,” Dunstan says.
- ABM Industries acquired GCA Services Group, providing an attractive opportunity to cross-sell its services as a leading provider of facilities solutions to GCA clients, Dunstan says. “This exemplifies the willingness of strategic buyers to be aggressive when pursuing highly complementary acquisitions.”
What lessons were learned this year by investors and private equity firms that could prove helpful going forward?
Stewart Kohl, co-CEO, The Riverside Co.:There’s simply so much money sloshing around that it’s increased the price of every asset. This has made it tougher to buy, but delightful to sell. Operating talent is more important than ever when you’re paying high prices for assets. You’ve got to approach every investment with a sense of urgency and maintain strong returns given the high purchase price multiples. That approach takes committed operating talent with the right expertise to move the needle from Day 1.
Mulligan:We need some time to pass before we know what lessons were learned. One lesson that is likely to emerge is firms that maintained discipline in putting money to work in this hyper deal environment will show better investment results.
Saada: Most deals now – even with public companies –are closed with rep and warranty insurance. This is something private equity funds have been using for several years, but now we are seeing public company buyers using it more regularly. So for the seller, it makes the deal a lot cleaner. There is a smaller escrow/holdback and a smaller risk after closing that sellers will have to return money. Yet another reason 2017 was good for sellers.