The NCMM discusses M&A in the middle market with special guest George Calfo, Managing Director at SunTrust Robinson Humphrey.


M&A in the middle market. How big is it? How important is it to companies? And how well prepared are they for making deals?


Welcome to "The Market That Moves America," a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities.


Today's podcast is about buying and selling not goods and services, but companies. What's the role of M&A in the middle market? And how good are middle market companies at making deals? Let's find out.

I'm Tom Stewart, the executive director of the National Center for the Middle Market at the Ohio State University Fisher College of Business. We're the nation's leading research center focused on mid-sized companies, which account for a third of private sector GDP and employment and the greater part of economic growth. It is indeed the market that moves America. The National Center for the Middle Market is a partnership between Ohio State and SunTrust banks, Grant Thornton LLP, and Cisco Systems.

I have a guest with me today, a special guest from SunTrust, George Calfo, who's managing director at SunTrust Robinson Humphrey, which is one of the center sponsors. And Robinson Humphrey is the investment banking arm of SunTrust, and that's what George does. He works out of the Atlanta office and focuses particularly on M&A in the middle market. George was a key advisor to the center's brand new report, "Middle Market M&A," released at the start of January. George, it's good to have you.

Thanks for having me Tom.

I'd like to sort of open up three topics today, and the first is about the importance of mergers and acquisitions for middle market companies. Second is about how companies can become deal ready even before they're actually engaged in a deal, but what it means to be deal ready so that you can do an organic growth better. and the third is what executives can do-- where they can go for help so that they become sharper and smarter when they are playing a deal making game. George, set the stage a bit. How much merger and acquisition activity is going on in the middle market?

I would say that the M&A market today as we sit here in close 2017 is very, very healthy I think if you look at just strictly the numbers of closed transactions. So what we usually use as a proxy for deal activity are deals that are $500 million in value or less or undisclosed.

And if you look at just the volume of transactions, it's been relatively stable over the last several years. Again, these are closed transactions. And we've sort of been on a sort of an upward trajectory, but it's about 2,000 to 2,500 transactions a quarter. And that's a pace that we've been seeing over the last several years. So it's down a little bit from last year, but but these are-- if you look in a historical context-- these are sort of elevated, I would say very healthy levels of activity.

Every quarter in our middle market indicator, we survey 1,000 companies and one of the questions we ask them is, "Did you buy all or part of the company last year? Or did you sell all or part of your company last year?" And we usually get about a 20% number that say they bought something, and about a 5% number that say that they sold something. And that sort of fits with your-- the numbers that you see looking at the overall deal flow, is that right?

It is right, and I would say it's really driven by a couple of dimensions here. So as we look across the middle market, we see statistics that indicate a very high degree of confidence not only in their local economies and the broader US economy, but in their individual companies and their company positions. So we think confidence definitely plays a role in M&A activity. I would also say that the availability of capital is a dimension that is certainly playing, has played, and is playing in today's sort of market environment. You layer on top of that that the general economic growth has been modest.

And so M&A is a way to realize value and also to grow, which is very attractive. And something that's not really a statistic, but but certainly it's a sentiment that we have observed increasingly is more and more companies really do see the benefits of scale. And I think that's also driving a lot of discussion, and ultimately, I think will show in the actual deal count numbers. But certainly those dimensions really are driving a lot of activity.

There is a lot of money out there. I mean, one of the things that I think is astounding is how much investor money is parked in funds looking for something to buy. It's a couple hundred billion dollars. Is that the correct number?

Yeah, actually, I think that may be low. The--


If you think about the advent of private equity and institutional investors, there's been a real proliferation. It's been an asset class that has done very, very well over the last 10 years or so, which has driven more and more investors into the asset class, private equity. And with the proliferation of private equity and private equity funds and family offices, I mean, it does really represent a significant pool of capital specifically looking for transactions.

And so what we've seen develop is sort of an increasing degree of competition for quality assets. As people-- or as our middle market clients are looking to grow through acquisition, they find themselves no longer the only logical pool of capital for sellers to consider. So there's a tremendous amount of competition for quality assets in particular.

And then you're also seeing private equity firms become increasingly more flexible in their approaches. Historically, they were relatively rigid on their return requirements and the structure of their transaction, primarily control positions, LBO style transactions. Increasingly today, because of competition, more and more firms are looking at taking minority stakes in businesses that they really like. They are being much more flexible around timing. And ultimately return expectations have come down, and I'd expect them to continue to come down when today's investments get realized two to five years from now.

So the portrait you're drawing here is of a very large and growing amount of money seeking more or less the same number of deals, which sounds like a seller's market to me. But it also puts the pressure on what you might call the strategic buyer. I was talking to a guy who is the CEO of a company near here in Columbus in the food processing business who was saying-- who has done a number of acquisitions, and who was saying that his search for acquisitions at an affordable price and that he can fit in his company's-- that add a capability that he needs-- is complicated by the fact that there are these private equity funds there with lots of money, and it's making it harder for him to find the right deal. What do you do to help out? I mean, put yourself in the position of that CEO who is looking for a strategic acquisition. What can he or she do to find better targets and to compete with those deep pockets?

It's-- I mean, it is-- the story that you just told, Tom, is absolutely consistent with what we've observed from our chairs. And it is-- the competition has really caused people to really think hard about their-- whether they are positioned well to prevail in whatever their alternatives are. I do think that it has driven a number of folks who had really no intentions of thinking about selling their business-- I think it has caused them to really think differently about that. So there are a number of situations where we've been involved where clients are operating very good businesses, but they have been approached. And that has caused them-- approached in a credible way, and that has really caused them to maybe rethink their strategic priorities, re-evaluate the risks and rewards available to them for keeping their business versus selling their business.

We have a stat that showed up in the research that 45% of companies that had sold something in the last three years, all or part, 45% were not expecting to sell. Which meant the doorbell rang, and outside is somebody saying, "Hey, you want to buy your company?" And they said, "Yeah, maybe so." And presumably, there's a larger number that were approached and said, "No."

Oh, well, that's right. And I mean, I think too, a person-- whenever I speak to business owners, and I ask the question about the velocity of inbound calls, I think to a person, they all agree that the velocity has only increased. Now for people that want to grow inorganically or want to buy for growth face a more competitive environment. And so really thinking through how to best prepare their company to be successful in employing that strategy has certainly gotten more difficult over the last five years.

And I do think that one of the benefits that strategic companies have over financial folks is generally speaking, they have the benefit of more time. And so the ability to realize that investment over a longer period of time enables them to perhaps look at the mathematics of a transaction in a different way than a strictly financial buyer who has a definitionally limited time frame. And so that is one dimension that we have seen people really sort of employ.

I also think having a having real clarity on the strategic objective of the company and being able to articulate that to potential sellers. Because contrary to what people maybe instinctively believe, not all sellers are looking strictly for the top tick dollar value. Many, many, many sellers that we deal with are looking-- I mean, value is important, but there are other dimensions that factor in. Some of which speak to the legacy of the business they created, some of which is the treatment of employees, some of which is the reputation of the potential buyer. And so these are all sort of dimensions that factor into the transaction. Which for buyers, being able to articulate the strategic logic and merit of combining with a potential seller is an important sales element to successful acquisitions.

Which means also understanding the motive of the seller because as a seller, I might just want top dollar. But as you said, if it's a family business, or if it's any business, I might think about the fate of this thing that I've spent my life building, or that my family is involved with, or that my buddies-- together we've taken this company for 30 years together, and we want it to end up in the right hands. So that's a key element.

One thing that I'm struck by, George, in some of the stats we saw-- and I want to know how it plays out in your experience. In all of this, when you think about private equity buyers, these are people who do this for a living. When you think about some Fortune 500 companies, they may make a deal a week, a deal a month. Many of these people are buying and selling bits and pieces of companies often. But in the middle market, you have a large number of relatively inexperienced deal makers.

And I think that the data that we got from our survey showed that of those companies that had bought something in the last three years, 30% had never made another deal, it was the first one they ever did. And 40% had occasionally made a deal, but not often. So 7 out of 10 buyers were inexperienced, and sellers, the number was even higher. I think it was 46% who had never sold anything before.

So I think one of the interesting questions-- you've got a bunch of relatively inexperienced buyers and sellers. What can they do to be deal ready so that when the doorbell rings or when an opportunity presents itself in one way or the other, they can move with both speed and professionalism to take advantage of what might be in front of them or to fulfill that strategic objective?

So I think that there are some similarities in the question between buyers and sellers, but there are also some very different dimensions depending on whether a company is looking to sell or buy. And deal readiness from a seller's perspective perhaps in a simplistic way, I would say it's really sort of the professionalization of business practices. And so that is the books and records of the company and the ability to capture, monitor, track, project the financial performance of the business, the performance of its customers, suppliers. So I think sort of the books and records of the professionalization of a business is a very important dimension to deal readiness.

Probably pays for itself and just running the business better whether or not you're looking for a deal.

Correct. Correct. And by the way, all of these apply to just better operating principles, I'll just say. But it becomes accentuated when you're talking about it in a transaction environment. Having a management continuity, management infrastructure is a pretty important dimension to deal readiness, in my opinion.

And then lastly-- and these are obviously broad buckets here that I'm talking about. But lastly, from a seller's perspective, I would say having a developed strategy or at least an articulated strategy on sort of the business, its competitive position, and a sort of a thoughtful sort of review of its position, strengths, weaknesses, what have you. Sort of a clinical view on the business. So I think those are all aspects that speak to deal readiness.

They also speak to well-run businesses, by the way. And from an acquirer's perspective, it's interesting. Depending on the depth-- and this in many cases has to do with size of the company and the amount of infrastructure that a company may have.

But we have a client of ours that we deal with quite regularly. And it's not it's not a huge company. It's certainly a middle market company as we've defined it for the purposes of the National Center. But they have an articulated integration SWAT team, so whenever they do a transaction and acquisition-- these are people that have day jobs, so to speak, but they have a team of people that they have identified. And they've frankly augmented them with training where they will pull them one person out of operations, one person out of HR, one person out of finance. And they will-- whenever there's a transaction, they sort of pull them into this, they call it a SWAT team.

It's kind of like activating the National Guard, isn't it?

It really is. And then they have a finite period where they focus on integration, and then that sort of melds into the business. And so they have a pretty prescriptive approach. And so that's something that we have seen. This company does it in a very prescriptive way. Most companies that we deal with are not that formal in their approach, but they have some dimension of that.

But you've actually articulated something really interesting. You sort of said-- I mean, first of all, I love this idea as a best practice. And even if I'm making my one deal in a decade, recognizing that I'm going to want somebody from HR whom I have trained in this, or who is trained in this, somebody from finance, somebody in marketing, somebody in supply chain, somebody in each of these areas to whom I've-- I make sure that they've got some of the skills and probably some access to outside expertise too.

So it's not just sort of the student body left in a scrum to try to figure out what we're going to. Do but we actually have identified the individuals and the advisory capabilities that we're going to need to call on, as I said, like activating the National Guard when this thing happens. And then if we do that in advance, we're going to make a much better deal.

Well, that's right. And in addition to identifying the individuals within the company who would be activated, companies that do this well mostly have a list of targets. So who are the ideal targets that help them realize their strategic vision? What are the attributes of those targets? And so they had this active sort of list not only of people that will get activated, but they have sort of a list of targets and the attributes of those target companies and why they would be good fits. And then the other dimension is they have a process in cultivating those companies, those targets.

Uh-huh. So I'm always out there. I'm Talking to the CEO. I see them at trade shows.



--effort. Not unlike the salesperson that wants to activate that large potential customer prospect. They have relationship development strategy in place, and they work at it. We have a client of ours that-- it's really interesting. They have made a-- they've become a large business through buying competitors, and it is one of their core competencies.

And part of their strategic plan is to be a very good acquirer such that, as they're cultivating these relationships with prospective sellers, they can point to transactions. And they use as their referral network people that they have bought businesses from. And so they have this sort of systematic approach to-- and the CEO and the president-- which are two different people in this company-- they each have a list, and they compare the list.

But they each go out individually and cultivate these relationships. And they've strung together many, many transactions, and they've built a resume of transactions. And when they're cultivating these relationships, they encourage the prospective sellers to speak to the people that they bought businesses from to get comfort with their approach, what they've done, that they actually will do what they say, and follow through, et cetera.

We're just about out of time, but I want to-- but what you've hit on here I think is an important dimension. Which is this is a relationship sale. It's relationship selling, whether you're on both sides of the transaction. And that also involves the advisors that you might want to bring in.

One of the things that we learned in this study I think is that these companies to whom inorganic growth is important, who are relatively inexperienced at it, do a less than good job about sort of pre-developing, you might say, some of the relationships with people whom they might want to call on when the doorbell rings or when they want to ring the doorbell. That they're a little bit late in building up the advisor relationships, whether it's investment bankers, or tax advisors, or consultants, or lawyers with M&A experience. And that they probably can and should. Again, whether or not a deal is in the immediate prospect, make sure that they are building those relationships so that they can call on them for advice, whether it's strategic advice or reactive advice in an M&A situation.

Well, I think that's fair. I mean, I think this is such an intimate topic for many, many companies, and so the cone of trust is pretty tight. And your point is a very good one that because of the trust dimension, there's a relationship required. And so when I think about people that do this well, companies that do this well, they have put forth the effort. They've made it-- they've sort of elevated the priority to inventory what they want to do, and then what resources they need in order to do what it is they want to do.

And that usually includes a combination of internal expertise and external expertise that's sort of on call, which means there's already been a relationship. And I would say that includes attorneys for sure. It includes accountants, it includes financial advisors, it includes consultants. And in many cases particularly for smaller companies, it includes their commercial banker. And so these are all folks with expertise that companies that do this well have really cultivated over time in sort of a deliberate way.

So-- I think that's a wonderful way-- that idea of deliberation and cultivation is a wonderful note on which to close what has been a terrific conversation. I mean, if I can try to sum it up, it's just-- the first thing is that M&A matters in the middle market. About a quarter-- between a fifth and a quarter of companies in any one year will make a deal of some kind.

It's also the middle market is a highly sought after desirable target for hundreds of billions of dollars that is looking to be invested. And that chance favors the prepared mind. That whether you're buying or selling a company, the more you can do to prepare the capabilities, the relationships.

And I think the strategic focus that helps you think about, what am I trying to accomplish? And how will a deal help me accomplish that? And what kind of deal will help accomplish that? The more you can do that, the better off you'll be when the opportunity presents itself, or you decide to go after that opportunity.

So George Calfo, managing director of SunTrust Robinson Humphrey, has been our guide through some of these thickets of middle market M&A. You can learn more about that at our new study of mergers and acquisitions in the middle market on our website, middlemarketcenter.org. And so, George, I want to thank you very much for joining us.

And I want to thank all of you who are listening to-- for listening to "The Market That Moves America," never miss a new episode. You can subscribe to the podcast on iTunes, Google Play, Stitcher, or wherever fine pod casts can be found. Or you can subscribe and learn more about us at our website which, again, is middlemarketcenter.org. Thanks very much.