This post was contributed by Capstone Senior Vice President Wes Teague:

Lockheed Martin (LM), one of the country’s largest government contractors, recently announced its intention to sell or spin off one of its oldest and profitable units, the Enterprise Integration Group.  The EIG,  a unit of LM for 42 years and with revenues of over $1.3B (out of LM’s $45.2B overall revenues) would no longer fit in LM’s long-term strategic plan, due to potential conflicts-of-interest with other, larger units of the parent organization that were significantly more important to the future of LM.

The decision to shed a long-standing, profitable unit or division or product is a hard one to make, especially in uncertain economic times.  With a proper strategic plan in place that maps out the organization’s longer-term growth plans, the decision can be made objectively, based on clear criteria and priorities that help remove the emotionalism of losing a “favorite child”.  Facilitated (to remove emotions) planning sessions can help companies make these decisions that at first glance seem counter-intuitive.  Intuition has its place, but a strong, well-thought out plan is usually a better bet for long-term success.

Technorati Tags: Acquisition Strategy, acquisitions, Capstone, divestiture, Enterprise Integration Group, External Growth, Lockheed Martin, M&A, M&A News, mergers, Mergers and Acquisitions, wes teague

Private equity fundraising from 82 closed funds totaled only $41 Billion in the second quarter - the lowest level since 2003, according to the Private Equity Professional Digest. This is important news for strategic buyers because it continues to demonstrate that financial buyers will remain limited in their M&A activity - but that the clock is still ticking to take advantage of this environment

PE funds will have to do smaller deals or take less equity in order to make the most of their funds.  On the other hand, strategic investors with cash will have the upper hand and should be able to close more transactions – if they are willing to take action.

If a strategic firm will not make investments in their industry in this market, I question their resolve for the industry and also would ask the executives why their wouldn’t use their strong balance sheet in this depressed market?  With tongue firmly in cheek — are you waiting for prices to go up before buying?!

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, David Braun, External Growth, M&A, M&A News, private equity

Caterpillar announced it is acquiring Electro-Motive Diesel for $820 Million.  The company, which has revenues of about $1.8 billion is currently owned by two private equity firms who acquired it from General Motors in 2005 for around $200 million (read my other post about PE divesting before tax rates increase). Caterpillar already owns a railcar maintenance and repair business and this puts it into the manufacturing business (backward integration).

“This acquisition represents the latest step in our strategic plan to aggressively grow our presence in the global rail industry”  stated Doug Oberhelman, CEO-elect of Caterpillar.  They are betting on the US economy coming back with the demand for railcars to grow, as well as continued growth in emerging markets like India and China.  It seems to me Caterpillar is being market-driven and buying when the market it down (buy low/sell high).   Although GE is their major competitor in this space, I predict Caterpillar will do well with this investment.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, Caterpillar, David Braun, External Growth, GE, M&A, M&A News, mergers, Mergers and Acquisitions, private equity

Congress is close to taxing “carried-interest” income on fund managers at 30% in 2011 from the current 15% capital gains rate. The rate is likely to go to 33% in 2013.  Congress may exclude the first 25% of income from this higher tax rate (which doesn’t really make sense to me) but the real story is the opportunity this presents for strategic buyers.

First, private equity firms are now motivated to divest businesses in 2010 to preempt the higher taxes - look for companies they acquired pre-2006 or post 2008 as more likely candidates.  Second, I believe these fund managers will find a way to structure deals to avoid the higher taxes, for example using calls and puts. In the meantime this distraction will limit their deal making.  So once again strategic buyers have an advantage over financial buyers.

The long-term question is: how will this change impact investments in growing companies?  I don’t see how it helps.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, capital gains, Capstone, carried interest, Congress, David Braun, External Growth, M&A, M&A News, mergers, Mergers and Acquisitions, taxes

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Technorati Tags: Acquisition Strategy, External Growth, Integration, m-and-a, Mergers and Acquisitions

Nothing like today’s considerable drop in the market to remind everyone that the economy remains on shaky ground.  I stand by my past prediction that the market will not improve dramatically for another 12 months.

This turmoil does two things.  It makes sellers more fearful that the bottom could fall out again and it may be time to hitch their wagon to another team of horses.  It also adds fear to buyers who aren’t convinced they want to plunk down a bunch of dough when the market may not make it rise and bake into something meaningful.

So I contend we continue to have parity among buyers and sellers, but I also contend for those with strong stomachs and solid strategic plans, this could turn out to be a great time to be a bold buyer.  Remember the adage “buy low, sell high.”  The market is low for many buyers.  So do you really believe the saying  or it just sounds nice for other people?

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, David Braun, External Growth, M&A, M&A News, mergers, Mergers and Acquisitions, stock market

H-P is acquiring Palm for $1B and they say it is to position them further into the smartphone market which reportedly grew by over 60% last year.  H-P’s head of strategy, Shane Robison said “It’s an opportunity for us to get into a very big market”.   Understandable?  It is to me.  I’m not saying it’s a good strategy, but they have ONE reason for the acquisition and from my experience H-P is more likely to be successful because people get it.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, David Braun, H-P, M&A, M&A News, Mergers and Acquisitions, one reason, Palm

Although it almost dipped back below today, the Dow broke the 11,000 mark earlier this week.  This psychological barrier will impact the M&A market since there is a strong correlation between the equities market and M&A, with M&A lagging a bit.

I continue to expect an increase in deal making, with the biggest growth to be hitting in mid-2011.  Companies are now gearing up for deals which take some time to get into place, but with a strong stock market, burgeoning balance sheets, and historically low costs for debt, I see the market starting to brew.  I still maintain you should keep your seat belt on because I fully expected non-participants of the M&A market are going to be shocked at how their competitors radically change over the next 12-24 months.  Many companies will be left eating dust while others blaze a new growth path.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, capital markets, Capstone, David Braun, Dow, External Growth, M&A, M&A News, mergers, Mergers and Acquisitions, stock market

Cerberus Capital Management agreed to acquire DynCorp for $1 Billion on April 12.  DynCorp is a Virginia-based defense contractor who focuses on low-technology, high people-centric government contracts in hostile areas like Afghanistan.  Cerberus, probably best known for its acquisition of Chrysler, sees this as a way to expand its government business. There were four things that I found interesting about this acquisition:

• This takes a public company private which should provide savings, but also means it will likely go public again in a few years when Cerberus wants a liquidity event
• The deal is a leveraged buyout (LBO) and a big one.  The WSJ reports the structure will be 2/3 debt and 1/3 equity, which is much lower than the more recent levels of 50% equity.
• There is a “go-shop” clause.  This provision gives DynCorp a month to find a better deal, which should quash a shareholders suits that it wasn’t a fair price.
• This is essentially one private equity firm selling to another.  So this is financial engineering more than strategic fit.

All in all this deal is another sign of the thaw of the investment communities involvement in M&A deals.   I still contend there is about another 12 months of unique balance in the market between buyers and sellers and I still expect a frothy M&A market starting in mid-2011.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, Cerebus, David Braun, DynCorp, External Growth, Integration, M&A, M&A News, mergers, Mergers and Acquisitions, private equity

PWC reported recently that 46% of CEO’s in their survey indicate they plan to sell their company, and of these 66% said they plan to sell within the next five years.  The primary reason cited in the report is to diversify and create liquidity.

My experience with CEO’s of privately held firms is they typically have most of their net worth in tied up in their company. They’ve seen the drastic drop in their stock portfolios, missed opportunities to sell at the market peak in 2007 and are getting closer to retirement age.  I had one CEO tell me he didn’t think he could last until the next big upturn in the M&A market and he can’t chance more downturns.

I think you will see a record number of owners looking to sell starting in the next 12 months (perhaps sooner if the capital gains tax debate resurfaces) and you have record amounts of cash sitting on the sidelines which will start moving into the market in the next 12-15 months.  Put on your seatbelt because I think we are preparing for a very exciting ride in the M&A market.

Technorati Tags: Acquisition Strategy, acquisitions, business acquisitions, Capstone, David Braun, divestiture, External Growth, M&A, M&A News, mergers, Mergers and Acquisitions, PWC