A red-hot, M&A market offers opportunities—and pitfalls—for central Ohio businesses.
MedVet Medical & Cancer Centers for Pets has added 30 affiliates since 2008, with about 20 of those acquisitions coming in just the past five years. The Columbus-based group of emergency and specialty veterinary hospitals is finding growth by acquisition to be a successful strategy. As long as there is a cultural fit between the combining organizations, the buying spree is an effective way to broaden MedVet's range of services and venture into new geographic markets.
MedVet is far from the only company employing the tactic. Global mergers and acquisitions volume totaled $1.12 trillion in the first quarter of 2018, marking the busiest start to a year since $1.08 trillion was recorded in 2007, according to deal-tracking company Dealogic.
Businesses are combining at a record pace across a number of industries, as buyers are spurred by a robust economy and streams of cash from private equity, family funds or their own coffers. Sellers, many looking to retire, find themselves commanding higher valuations from eager buyers.
“It might be the best I've ever seen for sellers of companies,” says Rob Ouellette, a partner with Ice Miller in Columbus and vice chair of the firm's Business Group.
Dr. Eric Schertel, MedVet's president and CEO, oversees the company's acquisitions as part of his duties to manage strategic direction and growth. “There is massive interest in our market,” says Schertel, who has been a managing partner since 1999 and previously served as chief medical officer and head of surgery. “Veterinary medicine has really boomed, and there's massive amount of money pouring into the space. The value of practices has at least doubled in the last five to 10 years.”
It is unclear exactly how central Ohio's M&A environment has trended over the years, because of the nature of unannounced transactions and undisclosed financial details. Dealmakers, though, suggest it's as active as ever, due in part to central Ohio's many family-owned businesses with original ownership in place. On top of those small-scale retirement-driven deals, a few mega deals involving publicly traded companies have been sprinkled in, such as CoverMyMeds' $1.1 billion sale to McKesson Corp. last year.
“It's at least as hot as the rest of the country, if not hotter,” says Ouellette, who has advised MedVet in its acquisitions of specialty and emergency animal hospitals in more than a half-dozen states.
He suggests another factor driving deal volume is the growing popularity of representations and warranty insurance, which allows buyers to guard against a deal collapsing due to bad information from a seller.
Josh Curtis, managing partner at Footprint Capital, a Columbus-based M&A consultancy, agrees the environment is as active as he's ever seen. But, knowing M&A cycles typically don't extend beyond seven years, how long will the dealmakinggo on? Last year was the eighth year of the current cycle.
“I think the broader economy is, to some degree, going to drive that,” says Curtis, whose firm recently served as buy-side advisor to Columbus-based Stonehenge Partners in its acquisition of Queen City Hospice and Capital City Hospice. “The cycle has gone a long time.” Of course, business owners nearing retirement may not want to work through another dip in the economic cycle.
It's unclear whether the recent U.S. tax law overhaul will boost activity. Local deal watchers say they haven't seen a spike yet. But, according to a survey by accounting giant Ernst & Young, nearly three-quarters of companies with $500 million or more in annual revenue plan to accelerate dealmaking strategies because of the law.
Regardless of the potential short-term boost, the perfect storm of conditions leading to so many business combinations won't last forever. Ouellette suggests business owners shouldn't worry about a sudden collapse in the market for buyers and sellers.
“When the slowdown comes,” he says, “my guess is it will not be nearly as hard as it was in 2008-09, because the banks are much more disciplined right now in how they lend.”
The frenzied buying spree doesn't mean deals are being put together any less diligently. Preparation remains critical to a successful merger or acquisition—having all the relevant information ahead of time, as well as a specific plan for seamless integration. Otherwise, deal value can erode, and there could even be negative impacts beyond the close of a deal.
Business owners and management teams sometimes plan for years before actually integrating two businesses. This can be a surprise, especially for the owners of family businesses who are looking for a quick, clean sale into retirement and may not have done their research. They'll often have unrealistic expectations of their company's value. “Generally speaking, sellers just wait too long to decide they want to exit,” Curtis says. “It limits the pool of buyers.”
In addition to substantial due diligence on the front end, sellers should expect to commit months or years to ensure successful integration on the back end.
For MedVet, which has acquired four different practices this year alone, successful deals begin with cultural alignment. Because of strict industry standards, there isn't much variation in medical operations from practice to practice. Often the challenge comes with trying to align employee handbooks.
“The worst experiences have been culture-related,” Schertel says. “Culture alignment, I think, leads to much quicker wins and much quicker integration.” Upon finding a cultural fit, it's much easier to integrate business functions such as human resources and accounting.
After a deal is inked and companies are being integrated, businesses should not underestimate the disruption it can cause to day-to-day operations. Executives shouldn't take their attention away from running their company, ensuring revenue and earnings continue on their trajectory.
“We can tell how well it's going to go post-close based on how much integration discussion there is pre-close,” Curtis says.
Next to preparation and culture, financials tend to be a significant threat to successful dealmaking. Sometimes, a seller will have cash-basis operations. Perhaps they've never had an audit. Some companies, especially privately held and family-owned ones, don't have contracts in place with their big customers.
To ensure a company lives up to its billing, accounting firms will analyze quality of earnings. If financials hold up, Ouellette says, there's very little, apart from seller's remorse, that will derail a deal.
The most acquisitive companies hire accountants, attorneys and investment bankers to ensure there are realistic expectations upfront and that everything goes smoothly through negotiations and full integration.
“We like having a consistent team,” Schertel says. “A consistent team means they understand our value space and what we're looking for in a relationship, and what we're expecting in a transaction.”
Evan Weese is a freelance writer.