Top Mergers and Acquisitions Trends In 2021, With Roland Frasier

You're listening to Business Lunch with Roland Fraser. This is your seat at the table. Welcome to Business Lunch with Roland Fraser. I'm Darren Clark, the producer and first off, I just want to thank you for tuning in with us today. In this episode, Roland takes a bird's eye look at the trends he is seeing in mergers and acquisition strategies in 2021. Things have definitely been changing and as an entrepreneur, it's always smart to understand what the big dogs are doing. So listen in as Roland acts as your guide and gives you the lay of the land. But before I hand you over, be sure to hit follow on your podcast platform and head over to businesslunchpodcast.com for show notes and to sign up for our newsletter. And if you want to go deeper with Roland, check out his epic challenge, which is the next step if you want to dive into really growing and scaling your business. All right, let's get stuck in.

I'm excited to hang out with you guys today because I have a lot to share. So here are some things that are pretty cool that are going on. This is just kind of of all the things that I've gotten from the deals that I've been working on, on all of the things that I subscribe to and read the people that I talk to. This is kind of an amalgam of all of those things. So hopefully it'll give you some, some pretty cool insights and help you see some things that we can do some Trends first in MA for 2021. It's really interesting because for sellers now there are more options in the bigger markets and these things kind of trickle down to smaller markets over time. But it's definitely something for us to keep in mind as we think about taking any of the companies that we've put together and exiting. There are more exit paths now. It used to either be you sell to PE Private Equity or you do an IPO. SPACs, which are the SP EV is the special purpose vehicle. A SPAC is a special purpose acquisition company. So I did a lot of these back in the 1990s. At the time it was called a blank check company, which you filed an S18 for. You basically take a company public in advance, fund it up, and it has no business. It's just basically a public shell. So what we used to do is build those and sell them. I did a whole bunch of them and, and it's a really interesting way to get your company public. It's kind of like a reverse merger. And a reverse merger is where you have a company that is a public shell from somebody that filed it sometime before. And you fold your company into that and then you go forward and you're public and it's faster than going through the registration process. The problem with those is that you usually have all these challenges with float, the number of shares that are out there in other hands and short sellers and things like that. So when you take it public yourself, you're not stuck with all those problems. So the SPAC is kind of a comeback of the blank check company. And there were I think 180 of them that raised $65 billion in 2020, which is kind of crazy given that before that I think it was like 4 billion, maybe it was 12 in 2019. So these are really, really on trend and they're getting a lot of play from investment bankers and banks and pension funds and companies like looking to invest in those. So the SPAC is kind of interesting. Not really something that you would be likely to do unless you were pretty sophisticated. But here's what's cool. The SPACs are like private equity, so they're looking for companies to fold in to them. So now we have not only the thousands and thousands of private equity companies and the thousands and thousands of companies that are buyers, but we also have this new group of funds that are called SPACs. So just something for you, you know, to kind of keep on your radar, you know, as something to kind of just keep track of what's going on with it. We're seeing a lot more companies that are doing joint ventures and alliances as a precursor to an M and A deal. So one of the things that I think would be really smart for you guys to think about, and I think it's always good anyway, is to really think about with the companies that you've got, how can you partner with other people that might be potential acquirers? Because there's a lot of activity there right now. Also more virtual deals. So this is really cool. We knew that there was a lot less travel, of course, because of the pandemic. But it was kind of a challenge going into management interviews and site inspections and things like that. But one thing that was really cool, that they did a survey of a lot of dealmakers and 55% of them said that even once things come back to normal, they are going to go much, much more towards virtual for that. Now there's nothing like an in person meeting. But when you're buying something that's not nearby and you don't want to travel or in, particularly in the early Phases of the deal, virtual deals are definitely working not only for people like us that are doing smaller M and A deals, but for the big guys too. A lot more cross border deals now because of the post Trump presidency with Biden coming in and an expectation that things will recede from the isolationism that Trump kind of had put in place internationally, there is a lot more interest in those. So if you, if you're looking for deals to do, don't be afraid to look out of the country. I know we talked about several of the ones that we've done with companies that range from China to, you know, to Europe to Africa and South America. So those deals are coming back and there's a lot more interest in them right now too. So if you are not in the United States, then that's good news for doing deals with US Companies, particularly with all the capital that's here to do deals. Now. If you are in the United States, then it's good in that it really opens up the rest of the world a whole lot more than it has been for the last several years to doing deals that are international. The other thing is, is that a lot of sellers are looking at dual tracking plans right now, which is rather than picking an IPO or a sale to a public company or a sale to a spac that they're running those in tandem and bringing all those people in, but in separate tracks. So basically they've got a track where they're talking to PE funds, they've got a track where they're talking to SPACs and then they just pick the one that's best. You have to be careful when you're in the contracting phase that that's okay. But that is something that is becoming more okay because more and more people are doing it. And that's partially because of the increased competition for deals. So just some like kind of macro trends in the M and A world. The other is that a lot of companies now are divesting, meaning that they're larger companies that are selling off parts of themselves or they're private equity funds that are kind of everybody's looking at the new administration in the United States and the expectation that the pandemic is going to end sometime in second or third quarter and they're getting ready for that. And part of the get ready is that they're saying in acquisition deals they're doing more carve outs. We've been doing carve outs forever. Right. But it's coming back. So what's cool about that is that means that if you start networking with people who are doing deals that are private equity people or corporate biz dev departments or M and A departments, then you may find that you get some deal flow because there are bits of businesses that they're acquiring that they're not going to want. They're doing carve outs there or they're divesting. They're just basically selling off parts of businesses or entire brands that they have acquired that they don't meet their plans going forward for 2021. So a lot of opportunities there and then earnouts. I know, I think it was Leslie and I were talking about that. How do you deal with this valuation gap between Covid bump for lots of businesses that received a significant bump because of COVID 19 and Covid trough for the people who got hit adversely impacted because they had local businesses or you know, or location specific, gotta visit kind of businesses. So one of the tools and I'll talk about a couple of other creative things here in a minute that you're seeing used a whole lot more that's a traditional tool is earnouts. So if you had sellers that were previously not really open to that, a whole lot more use and acceptance of that is coming in right now. So a couple of things to think about there also. You guys are always asking me about what are the hottest sectors. I'm going to give you these, but don't let this. This is kind of like if you didn't have anything else that you were going to do and you're just confused and you want a place to start, then here are some of the places to start. Some of these are kind of frothy valuation wise. So I, you know, you have to take that into consideration that they may be more fully priced and they may be less open to creative deals. But there's always outliers. There's always outliers. So here' some of those. Travel is definitely big because it's coming back strong. It's expected to come back strong. So now's a really great time to buy ahead of the demand that will come third, fourth quarter and first quarter of 22 because they know that people want to travel. There is pent up demand. Same thing for entertainment. Software continues to be super, super strong. Remote work. A lot of companies that went remote are not going back. We are one of those at Digital Marketer. My two business partners there who never absolutely wanted to go remote. We went remote and they're like this is the best move we've ever done. It allows us to get talent from all over. So any companies that are involved in supporting remote work, the customer journey with respect to remote work, software with respect to remote work, tech enablement, supply of remote workers, all of those would be worth looking at right now. Retail, both in terms of physical retail to consumer and E commerce. Super, super strong comeback for retail as we're going into the next few quarters and people are expected back in stores. Insurance is really strong. Financial services, those have been strong for a while. Manufacturing, particularly in the US and particularly under the expected Biden administration changes and support is coming back really strong. Supply chain problems that companies experienced with getting goods from China and Vietnam and other places that they were sourcing before have created a strong desire to have localized manufacturing in the country that they're located in. So in the United States this applies and internationally move towards trying to reduce that supply chain risk and acquire a diverse manufacturing supply chain means that there's going to be a lot of activity, there's going to be consolidation, there are going to be funds that are looking for these. So I think that's a really strong area that suffered as Covid hit and a lot of factories got shut down. This is a great place to think about buying businesses right now. Tech still strong as always. Media, we talk about media as the very first upper left thing on Our Acquisition Wheel 2.0. Media and media companies valuations are strong and trending up. They'll definitely be important as these companies are looking for more leads. So definitely focus on your lead and media acquisitions. Telecom, strong, more difficult to get into, but not for small support companies. A lot of these industries that are bigger that you might think of having challenges going into, like I can't buy a telecom company. How do you do that? You know, well, you can actually buy telecom companies. There's a whole bunch of them. There are the big infrastructure players. That's going to be harder because it takes a lot of cash to do and there's a lot of sunk cost investments. But there are also a lot of service companies, a lot of support companies, a lot of sales companies. Look at all the companies that are peppered around supporting telecom and that's, that's a good place to look IoT. Internet of Things companies that's continuing to be strong demand. Automobile tech is really, really hot. As you see Apple, I think recently announced that they were going to go in partnership with Kia, I believe it was to produce cars that, that are the Apple car. And as you see more and more tech in moving into automobiles, that's a huge opportunity. So again the little companies that are peppered around the big companies be looking at those. I know that in the airline aerospace industry we found, we just went on and googled and found a list of all of the approved contractors for Boeing. So an approved contractor list is a great place to find potential companies to get to know, to network with and to acquire because they are already selling to the big company. And it might be hard if you were just to Google try to individually find companies that do aerospace support. But if you can go to the big companies like an Apple or a General Motors or Boeing and find who are their approved contractors and it's a publicly available list, then that gives you a total cool hit list to focus on and start campaigns for communicating, getting in touch with them. And it's a great way to source deals there. It's also a great way to become an influencer in that area, be the authority by providing information, interviewing those people. There aren't a lot of people that are gathering those lists. And while it might be small, I forget, I think it might have been like 12 or 1300 people, it might have even been more on that list for Boeing. But think about that. If you could be the dominant information provider for that small group of 1000 companies, then you are so well positioned for deals and even to be getting finder's fees on deals or brokers fees or option a company and flip it to somebody else. Like a lot of great opportunities there. But tech enabled companies are companies that have designed, acquired or otherwise developed and implemented technology that supports them in their business. It's something that we also call defensible ip. So defensible IP you'll hear us talking about a lot as something that is a good thing for valuation in a company when you're looking to sell. We like when we go to buy a company to see one that's got defensible ip. Well now the buzzword is as we call those companies, tech enabled. If the defensible IP is tech. So there's an agency client that I've got a private client that has developed a technology for helping their agency do certain things for their clients. That's a tech enabled company. The valuations on those are almost double, double to triple what the valuations are for regular agencies. So this is another great arbitrage play is acquire your target with an eye towards how can you tech enable it so that maybe you acquire the tech company or a dev team or whatever through an acquihire and then you acquire the company that can be tech enabled by that company or vice versa, and then you'll get the multiple bump on the company that you acquired. So let's say that we acquire a tech enabled agency to start with and we pay the ridiculous multiple or, and then we just go and acquire other agencies to bolt onto that and we're at a 15 and they're at a 4. Right. Multiple or a 3. We're going to 5x the minute that we own that company because we can imbue it with the magic of our tech enablement. Now couple this with a strategic partnership or joint venture where you figure out how can you license for your group of companies the tech that someone else has. It's not generally made available to the public, so it's still an advantage. And then you've got, maybe you could white label that or otherwise acquire it without having to acquire the provider who's got a huge valuation. And then you sprinkle that tech enablement on your portfolio of digital marketing agencies or other companies and now you get this valuation boost. That's a really interesting play I think right now as well. Telehealth, and they call it tele, which is kind of interesting. I guess it's because you use what we are, we still call these telephones, but they're really not anymore. Right? I mean I use mine way more for other stuff than telephones. But that mobile health, telehealth, Internet based health, app based health, that's all doing really, really well right now. And terms of valuations and acquisitions, health care full of complications and risks in the United States, not so much in other countries. So international health plays could be interesting. Fintech continues to be hot, AI continues to be hot data centers because there's been so much demand on the online support network infrastructure right now because of everybody being stuck at home and because of much more rapid adoption of things like grocery delivery and restaurant delivery and things like that, it's become very important to control data centers. So data centers are, and I did a, there's a $120 million data center deal a couple years ago and that would probably sell it two, three times that now. So data center is something I would look at basically just boxes of computers in rooms with sandbags and generators, alternative energy across the board, very hot, solar, wind, all of those things. Cybersecurity is very, very hot because of the increase of all the things that are going on online. The demand for security in those transactions is going through the roof. And so cybersecurity companies are experiencing good valuations now. That's likely to go up during 21, 22, 23. I think you got a good multi year run there. So that would be one that I would look at as well. So there's a lot here for you guys to focus on. I think that's all of them. But I wanted to get because you know, people ask what should I do? I have no idea where to start. If you're looking to start or you're looking to evolve or reposition something that you've already got, these are definitely some very strong places to do that. Now one thing that's also interesting I think as an opportunity is we're going to start back up like the world is going to start back up in 21 and it might take till 22 to really get there. But looking down the road, we have a bit of a crystal ball because if you look at what were the fastest growing sectors in the United States in 2019 and 2020 pre Covid, those are all likely to return very strong and they've been hit really hard valuation wise and even survivability wise because of everything that's happened. So you'll find them in a very weakened state right now that you can come in and acquire at very favorable multiples and very favorable profit numbers and they're very likely to bounce back, particularly if you've got a plan for them. So this was interesting. These are the fastest growing so growth for musical groups and artists in 2019, 2020, 169.9% movie theaters, same thing, almost 147% growth. Also a lot of things that you'll see that got hit really hard. Right. People can't go and listen to go and see musical groups and artists right now. Well, those are brands that you can actually acquire and they have royalties and copyrights and catalogs of music movie theaters. I haven't been to a week. Used to go to a movie theater once, twice a week just for kind of a change of pace with the whole family and hang out. We haven't been for over a year. Right. Those are going to come back. Airport operations support. Now you might not want to buy an airport or be able to, but all of those businesses that are there supporting the airport are definitely something that I would look to return. And a lot of the people that were doing it before, especially if you look at these industries like mom and pop movie theaters, musical artists, I can say because I'm a recovering musical person, airport companies like there are a lot of not terribly sophisticated business owners that didn't know what to do during this time. And so there's a lot of opportunities there. Casino hotels might not be able again to buy a casino hotel, but support services, very strong. US tour operators, those you definitely can buy, they were experiencing 50% year over year over growth prior to them getting slammed with this sightseeing, transportation. This is all from Ibis World by the way. This is just like straight out data if you look at these things. Travel agencies and international airlines and chain restaurants. So our chain restaurant, we have a chain restaurant called Everbowl in our portfolio and Ever bowl got shut down. Then we started serving our food out of the restaurants to go. Then we went online to QVC and had some of the best selling products they've ever had. And then we started a clothing and lifestyle brand called Evolve and so on and so forth. And now franchise sales are taking off, right? A good restaurant that's got a couple locations to think about acquiring, pivoting into those things that they're not doing right now and then going into franchise. Huge, huge, huge opportunity there. And then last but not least, hotels and motels, lot of hotels and motels that are having a hard time right now. You can acquire for a lot less than you could back in 2019, 2020 when they were growing at 40 some percent per year. And they're going to come back, right? So lots of opportunity to me in the what was hot wasn't and then will be again category. So that's a good place for you to look. Some of the biggest opportunities I think that exist in 2021, digital enablement I mentioned. So what can you take digital to that doesn't have it right now that you can acquire and then slap on your digital component. The other thing that's a very hot buzzword or set of buzzwords right now in the M and A community is complementary capability acquisition or CCAs. Those are bolt ons. We talk about those, right? So they're looking for how can we get the ability to do more stuff for our people by buying a business. Now that also means that the opportunity for bolt on partnerships, which I'm a huge advocate of, exist at a greater level than they have in a long time as well. Because these companies might be looking for acquisitions or they might looking to bolt on. But here's the connection that we love is your business bolt on that you can bolt on and bolt on is take a service that you or a product that you offer and provide it to a company that has your ideal customer profile but doesn't provide that product or service that's a bolt on, right? So now there's a huge opportunity to do bolt ons. But then the bolt ons for people. For companies that are looking for CCAs, those complimentary capability acquisitions could be a great first step in getting noticed by your ideal acquisition partner who then you bolt on and they say this is really cool, this is a great CCA deal. And then they come and they either buy that as a division and you start split it off or divest or carve out yourself, or they buy the whole company that you've got. And that's a really cool kind of Trojan horse into a company. New markets, expansions. Companies are very focused on the opportunity to expand into new markets, particularly geographically. So geo cloning, Geo acquisitions of companies that are not where you are right now, if you see that you're in a particular market that is, let's say that you're in just a few markets like in major cities, the company that you have acquired and you're in San Francisco, New York and Texas, well, even in the United States. Look at the other companies that are in different areas who are looking to Geo acquire an infill. They will be very likely acquisition partners for you. Same thing for you as an acquirer, right? If you want to get into an area and you want to play the Geo acquisition game, then look at companies that have a few key locations that have a good diversely dispersed ideal customer profile from a geographic standpoint. And then think about acquiring those companies with a goal of Geo expansion, or what Clarion calls geo cloning, where you just basically take what you've got and you plop it down in the new area and it does well. There's a lot of opportunities for acquisitions. Acquisition, partner identification, acquisition sales, purchases, divestitures, all in that new markets expansion. Same thing for market penetration. Market expansion and penetration. Very, very, very high on the list of acquisition reasons for companies right now. Also, one of the things that's on the acquisition wheel for improving margin is vertical integration. That's where you're acquiring up and down the supply chain. But the supply chain can be broadly defined. Usually traditionally, vertical integration is thought of in a manufacturing environment so that you're a company that is a wholesaler and you can buy your manufacturer or the supplier of the component parts to the manufacturer or the ingredients. And then downstream you can buy your dealers and your physical stores and things. But in the new world that we've got, they call this, I think the fourth industrial revolution. 4 IR is a buzzword right now. Fourth industrial revolution, which is AI and IoT and tech enablement and all those things. So what's cool now though is that we should look broader for vertical integration. We should think about who are all of our suppliers right now and can we acquire them. Because our suppliers might not be manufacturers and ingredient providers of raw materials. They might be content creators, digital marketing agencies, software that we are subscribing to. Right. Those are all suppliers as well, content producers. And then down on the distribution chain, it's not just retail stores, it's virtual stores, it's shopify stores, it's affiliates. Who's selling our stuff? Right. If you're a service provider, let's say that you're a consultant, well, are you able to provide all of the services that your clients need or are you outsourcing to somebody else? If you're outsourcing to somebody else, they're in your supply chain. Right. So you could think about acquiring them. And same thing when you think about distribution. Where are your customers coming from? Those are distribution channels as well. So this kind of goes a little bit up, back up in the acquisition wheel to media. But if you think about this, it's a really good opportunity to increase your margin by looking very broadly at what is my supply chain, where is money going out from my company at every single point before and after it comes to me. Right. That's what you want to look at and then say those are all potential acquisition candidates for me and those are all potential buyers for you as well. So the other thing is esg, particularly in support, integration and enablement. This is environmental, social and governance. And ESG is the acronym of the, you know, du jour right now for this. But this is very, very hot because most of the polls and surveys that they're doing of larger companies right now and mid sized companies is showing that there's a very strong desire to be environmentally focused, to be socially responsible and to have proper governance in the company. So what does that mean? It means that that's going to be something that an acquirer is going to look at to place a premium on the deal that you are offering them. If you've got ESG components integrated into your existing company that you want to sell. If you don't, then you might want to think about bringing those in because it will increase the value of your company. Don't ask me how much because I don't know right now. But I know that certainly in comparison of two otherwise equal performers, they would choose the ESG company over the non ESG company. Now in terms of opportunity for acquisition, who is offering support to integrate, implement, create content wise, all of that, enable the ESG integration into companies. So that's a really good place to look right now I think as well. And I don't think you're going to see great values in those smaller companies that do that now. So it's definitely good opportunity for a roll up there. Also new product launches and acquisitions. How can they reinvent? Companies are looking at how, how can they reinvent themselves product and service wise around the things that have changed as a result of the pandemic that are likely to continue. So that's they're always looking for new products and acquisitions, but particularly if you can find something that you feel would really help a larger company to be able to adapt to everything that has changed in a particular industry with respect to that business, that's a really good place for you to think about acquiring. Also, corporations and private equity are doing tail brand dispositions at a greater rate now than they have in a long time. So a tail brand disposition is say Unilever acquires Hellman's Mayonnaise and they've got three other mayonnaise companies as well. They're either going to put all of those in or all of the resources and best recipes and such into their strongest brand. I'm not gonna say they're either gonna do that. They are going to do that and then they're going to just get rid of the others. So these are called tail brands because they're just, they're like trailing. They're not as important as the prime brand that the company wants to prop up. So they're just letting those companies go. So again, getting into whatever industry you're in and finding out who are the private equity companies and the corporate acquirers and the biz dev and M and A departments of those and the consultants within those industries, that's a really good networking opportunity for you in a specific niche to get tail brand disposition opportunities. Right. So that's a place that I think there's a lot of opportunity right now as well.

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