M&A Special Circumstances

Strategic buyers are buying firms that can give them better distribution, an expanded geographical footprint, or a product that dovetails with their existing offerings. That’s particularly true in the medical and pharmaceutical market, Sorensen says. “The big medical-device companies in substantial part rely on smaller companies to bring them the next great idea or product. They don’t do fundamental research at that level anymore—they’d rather pay for a little company that’s taken the risk, time, and trouble to develop a product, take it through clinical trials, and get FDA approval,” Sorensen says.

“Buyers want to bolt something onto their existing company, or they want to diversify,” Allen agrees. “We’re working with a client who has a dying product line, an old technology, and they desperately want to diversify. They want to buy something new and build on that.” Another client, he says, has a specialized manufacturing capability, and “they’re looking to acquire a customer base,” Allen says. Buying a firm in a related field might give them that new audience.

Firms based overseas are also looking for new audiences, often in American markets. “Even as screwed up as this economy is, it’s still where everyone goes when they want to expand,” Sorensen says. “You can’t be a global player without being a meaningful player in the U.S. market.” He adds that large international companies from developing countries, including India and China, are interested in U.S. acquisitions. “They’re competitive and they have the capital,” he says.

Where the Action Is

Buyers look for appropriate acquisitions in every industry, but some sectors are particularly resistant to the downturn. The list, according to local experts, includes:

• Health care, including home health care, rehabilitation, and assisted living. “The aging of baby boomers is fueling that,” Sorensen says. “There’s plenty of necessary stuff going on in health care, even when folks put off optional care.”

• Engineering, including environmental engineering. This sector includes many smaller regional firms with niche capabilities or scarce technical expertise that a buyer could move to a broader geographic market, Sorensen says.

• Medical device and drug development. Sorensen’s company is working with a drug development company that hopes to sell to a larger firm after completing clinical trials. “These guys have been doing this on a hand-to-mouth basis for many, many years,” Sorensen says. For the seller, acquisitions in this sector represents the long-sought payday, one that they may not be able to defer until better economic times. “Somebody else might be working on the same brilliant idea,” Sorensen says. A buyer gets to cherry pick the devices and drugs that work with their existing platform in a way that the equity markets typically like. “It’s 10 years of expenses versus one capital purchase, and the markets like the capital purchase better,” Sorensen says.