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HMA CAWA Presentation 2017


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How has aftermarket mergers & acquisitions changed since early 2016? Understanding your company's unique proposition and how that will change.

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HMA CAWA Presentation 2017

  1. 1. Driving Smarter Mergers & Acquisitions FEBRUARY 3, 2017
  2. 2. © 2017 Hart Marx Advisors | 2 Presenters Devin Hart Tom Marx Managing Partner Partner
  3. 3. PART 1: THE MARKETPLACE What has changed in a-ermarket Mergers and Acquisi5ons since early 2016?
  4. 4. © 2017 Hart Marx Advisors | 4 Larger companies acquire smaller companies using affordable capital to spur inorganic growth •  Economies of Scale –  Goods/services purchased rela5vely more efficiently and at lower cost –  Success aHracts addi5onal investment •  Consolidators Will Con?nue to Acquire for These Main Reasons –  Furthers their compe55ve advantage –  More transac5ons = beHer processes = lessens cost of acquisi5on Consolida5on will con5nue because it is a virtuous cycle Aftermarket Consolidation Source: Brad Mewes, Sep 2015
  5. 5. © 2017 Hart Marx Advisors | 5 AEermarket now at high level of consolida?on and this results in a changing compe??ve landscape •  Creates opportunity and risk for your business Aftermarket Consolidation
  6. 6. © 2017 Hart Marx Advisors | 6 What was driving the strong M&A activity levels? •  Supply vs. Demand •  Revenue strong across value chain •  Smaller M&A transac5ons had become more aHrac5ve •  Growth cycle was 4th largest expansion ever
  7. 7. © 2017 Hart Marx Advisors | 7 Supply Side •  Number of jobber, service, repair, and maintenance facili5es across the US have been in decline Aftermarket Supply & Demand Demand Side •  Shi- in favor of DIFM segment •  Industry financials were improving •  Inexpensive cost of capital
  8. 8. © 2017 Hart Marx Advisors | 8 Market Dynamics Number of Vehicles in Opera?on Average Age of Vehicles Driven Miles Driven Per Vehicle Overall State of the Economy Macro Factors
  9. 9. © 2017 Hart Marx Advisors | 9 2015 Sales price mul?ples - mid/large cap Source: Capital IQ
  10. 10. © 2017 Hart Marx Advisors | 10 2016 Sales price mul?ples - mid/large cap
  11. 11. © 2017 Hart Marx Advisors | 11 What multiples are we seeing for Micro/Small Cap? Mul?ples depend on many factors: •  Financial vs Strategic buyers •  Company Performance and Trends •  AHributes Unique to the Business Wholesale/Retail Distribu?on Was 5 to 9X , now 4 to 8X Suppliers/Manufacturers Was 4 to 7X , now 4 to 6X
  12. 12. © 2017 Hart Marx Advisors | 12 Small/Micro Cap Items to think about when looking at valua?on mul?ples: •  Don’t get fooled by the higher mul5ples paid by large consolidators of mul5-loca5on companies –  It takes as much (some5mes more) effort to close a small deal, hence they are much less aHrac5ve •  Delays happen because small deals get put off or placed at the back of the line •  Lack of knowledge of the seller makes small deals more challenging to a buyer •  Smaller deals are o-en “behind the scenes” and details are rarely known outside of the buyer and seller
  14. 14. © 2017 Hart Marx Advisors | 14 What’s Hot Now? “While automo5ve M&A ac5vity is off to a slow start in 2016, we believe disrup5ve trends will con5nue to drive M&A headlines. The increased pace of investment around the Smart Car, electric and autonomous vehicles, and ride sharing will drive deal ac5vity in the next 12 to 24 months.” –Jeff Zaleski, US Automo5ve Deals Leader
  15. 15. PART 2: CAWA MEMBERS Understanding Your Company’s Unique Proposi5on and How That Will Change
  16. 16. © 2017 Hart Marx Advisors | 16 What type of buyers are most active?
  17. 17. © 2017 Hart Marx Advisors | 17 What are the main differences between strategic, Kinancial & hybrid buyers? •  Why is it important to know the key differences? •  What are their objec5ves and how do they evaluate an acquisi5on? •  What is their “end game” with respect to their shareholders? •  What are their investment horizons? •  What is a “plamorm” acquisi5on versus a “stand-alone or one-off?”
  18. 18. © 2017 Hart Marx Advisors | 18 Strategic •  Opera5ng companies •  O-en compe5tors, suppliers, or customers •  Looking to build “long term” shareholder value •  Looking to capitalize on synergies: –  Cost –  Revenue –  Financial
  19. 19. © 2017 Hart Marx Advisors | 19 Financial •  PE firms, venture capital firms, hedge funds, family investment offices, and ultra high net worth individuals –  Buyers have deep pockets and must expand faster than economy to sa5sfy Return on Investment (ROI) demands from their equity partners –  ALL about return on investment •  Looking to iden5fy companies with aHrac5ve growth opportuni5es •  Looking for companies with: –  Compe55ve advantage –  Rela5vely short (avg. 3-5 year) return on capital invested •  Strong management team in place (not operators)
  20. 20. © 2017 Hart Marx Advisors | 20 Hybrid •  Achieves the goals of Financial & Strategic Buyers •  O-en a bolt-on to an owned plamorm company •  Incrementally increases revenue and value of combined en5ty •  May jus5fy an increased valua5on of the acquisi5on candidate, especially if strategic products and/or customers are acquired
  21. 21. © 2017 Hart Marx Advisors | 21 What’s the difference between a “Platform” acquisition and a “Bolt-On?” Plaaorm Common when a company enters a new region or market: •  Exis5ng business with sizeable base of opera5ons •  Usually “market leaders” or at least considered a “top player” •  Does not need to be largest, but exerts influence in opera5ng area •  Experienced management with solid opera5ng procedures Likely result: Can command a higher price at sale
  22. 22. © 2017 Hart Marx Advisors | 22 What’s the difference between a “platform” acquisition and “Bolt-on?” Bolt-On Typically medium to smaller “me-too” companies •  May have aHrac5ve customer base for acquirer •  Management/ownership may be looking to cash out •  May lack formal opera5ng procedures and may not have the ability to grow much beyond current size Likely result: Value will o-en come from synergies formed with the plamorm post acquisi5on
  23. 23. © 2017 Hart Marx Advisors | 23 What are the characteristics of a “Stand-Alone or One-off” acquisition? •  O-en smaller than a plamorm and larger than a bolt-on •  Operates on its own merits •  May fulfill needed diversifica5on of the owner or fulfill some strategic need or financial/market balance for the pormolio •  May sell products or services to another member of the pormolio, enhancing the margins or profits of the other member
  24. 24. © 2017 Hart Marx Advisors | 24 What do acquirers really care about? •  Leadership and succession (a-er YOU) •  12-15% profit and 15-18% adjusted EBITDA •  3-6% annual growth over past 3-5 years •  Facili5es and opera5ons (maybe) •  Cash flow to pay for the deal (YOU are paying for the deal!) …acquirers do not care about non-aligned inventory, machine-shop capability/equipment, and IT that doesn’t adapt to their plamorm
  25. 25. © 2017 Hart Marx Advisors | 25 What does the future hold? •  The industry will see more innova5on in the next 10 years than it has for the past 50 •  By 2030, consumers may not be choosing which car to buy, but whether to buy at all –  Shared or fleet ownership will be the norm •  Cars of the future will be internet connected and most baHery operated •  Self-driving cars will become the norm •  Focus on customers will shi- away from individual car owners to fleets
  26. 26. © 2017 Hart Marx Advisors | 26 So what are the right moves for your business? Are you going to be ready to make the huge changes your business will require in the future? •  Investment in technology? •  Learning new ways of doing business in a digital world? •  Training millennials that may have limited auto experience? •  Declining number of repair shops; and selling to larger and more successful shops? •  Compe5ng against the aggressive new OE dealer programs? •  Compe5ng against the new LCC Amazon direct model? •  Changing customer base to fleets and shared maintenance management companies?
  27. 27. © 2017 Hart Marx Advisors | 27 So what are the right moves for your business? If you ARE excited – then grow organically and inorganically If you are NOT excited – then build a succession plan or sell the business
  28. 28. © 2017 Hart Marx Advisors | 28 The M&A Journey... ...Is a process © 2017 Hart Marx Advisors | 28
  29. 29. © 2017 Hart Marx Advisors | 29 Buy-Side Establish Acquisi?on Criteria 1 Leverage Networks 2 Iden?fy & Qualify Prospects 3 Review & Approve Candidates 4 LOI & Due Diligence 5 6 Close Transac?on Process
  30. 30. © 2017 Hart Marx Advisors | 30 Sell-Side Valua?on/ Due Diligence 1 Offering Package 2 Iden?fy & Qualify Prospects 3 Facilitate LOI 4 Site Visits & Due Diligence 5 Sale Agreement & Close 6 Process
  31. 31. © 2017 Hart Marx Advisors | 31 Aftermarket Experts Mergers & Acquisi?ons Specialists A-ermarket, Tier 1 and Tier 2 AUTOMOTIVE PERFORMANCE SPECIALTY PRODUCTS MOTORSPORTS COMMERCIAL VEHICLES & HEAVY DUTY
  33. 33. Driving Smarter Mergers & Acquisitions 2175 Francisco Blvd. East, Suite F San Rafael, CA 94901