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NY Firms Shop for Bargains to Grow

By Elaine Pofeldt

Starpoint Solutions weathered a sales slump recently, but that hasn’t stopped Chief Executive Jeff Najarian from pulling the trigger on growth plans for his full-service staffing firm. The Manhattan company is ready to close two deals to purchase small staffing outfits in other cities, in addition to doing some hiring

“It’s a good time to pick off these companies,” Mr. Najarian says. “I believe I’m getting in at a great price right now, because the market isn’t that great from a valuation standpoint.”

In a relationship-driven field, he believes, making acquisitions is smarter than trying to build offices in new markets from the ground up.

Starpoint, which is No. 179 on this year’s Crain’s list of the region’s largest privately held companies, expects about $70 million in sales for 2009. It’s not the only private firm ready to snap up other businesses. Bethpage, L.I.-based mattress company Sleepy’s (No. 39 on this year’s list) recently acquired the assets of Dial-A-Mattress Operating Corp. (No. 180 last year) after the Queens company filed for bankruptcy protection.

“There’s a buy-and-build trend going on,” says Paul L. Schaye, a managing director at private equity firm Chestnut Hill Partners.

Companies with strong balance sheets often see buying other firms as a cost-effective way to expand capacity, he observes: “You get a whole infrastructure and the business surrounding it.”

Businesses in health care, financial services, professional services, transportation, manufacturing, distribution and information technology are especially popular acquisition targets nationally for middle-market firms, says Thomas D. Farrell, executive vice president of Generational Equity, an advisory firm that represents sellers in M&A transactions.

“IT has been very hot,” he says, noting that Generational Equity considers the New York region one of the strongest markets in the country for IT. “We can’t find these businesses fast enough to sell.”

Of course, given the dreary state of the economy and the credit markets, M&A isn’t going full speed ahead just now. Many potential buyers are only at the “thinking about it” stage. But that represents a dramatic change from the recent past.

“Buyers were not doing anything for about 12 to 18 months,” says Michael Goodman, managing director of Pharus Advisors, a boutique investment bank. “Then around two to three months ago, CEOs and boards figured out the world isn’t coming to an end.”

Burning up the phone lines

Now, Mr. Goodman reports, his phones are “ringing off the hook” as private equity firms and middle-market companies look for deals.

“If you’re flat this year and still making a reasonable profit,” he says, “it’s a great time to figure out what adjacent spaces or complementary firms are out there that can expand your capabilities—and go buy them.”

Given the current difficulties of extracting loans or capital from banks or lenders, it doesn’t hurt that sellers are increasingly willing to partner with buyers in structuring deals.

One option, suggests Pete Rozsa, senior managing director of investment banking firm HT Capital Advisors, is to arrange the purchase so that the seller receives part of the payment at a future date.

Mr. Rozsa points out that sellers have a big incentive to help make deals happen sooner rather than later: If they don’t close transactions by the end of 2010, when the reduced capital-gains tax rate is expected to expire, higher taxes could cut into the proceeds of a sale.

With or without a helping hand from the target company, not every would-be buyer can get in on the action. Since lenders aren’t rushing to finance these deals, the cash-poor are left on the sidelines. “You need to have capital,” Mr. Rozsa says.

While Starpoint Solutions did structure its two deals so that the sellers will receive part of their payments in the future, it paid for the rest with cash, Mr. Najarian says.

Even middle-market firms with ample cash reserves may find that it’s hard to pull off some acquisitions because the targets are, essentially, underwater.

“A lot of companies that want to take advantage of cheap assets are finding that the market value is less than what the [target company’s] stakeholders have invested in this asset,” says Michael Epstein, managing partner with CRG Partners, a financial advisory and turnaround firm. Sometimes, potential sellers are concluding that it would be better to wait until valuations improve, he says.

Adding talent another option

For some middle-market businesses, it makes more sense to add talent—an abundant commodity right now—than to bet on acquisitions. Mr. Schaye of Chestnut Hill says many companies are looking to bring on consultants in 2010, a relatively low-cost way to add manpower. Other enterprises have started hiring additional employees.

“The companies we finance are really taking advantage of the downturn to bring in higher-quality people than they had access to a couple of years ago,” says Charles Garoklanian, senior vice president of PNC, which runs asset-based lender PNCBusiness Credit.

But it’s a good bet that more prospective buyers will enter the market, fearing that competition will heat up and bargains won’t last, says Robert Brown, managing director at investment bank Lincoln International.

“This window,” he says, “could go away in 12 months.”