Interview – Ian Wooden on Cross Border M&A & Industry Themes
I recently spoke to Ian Wooden with the investment bank IJW in Montreal, Canada. With some minor edits, the text below captures our conversation surrounding middle market investment banking, cross border M&A and recent trends he sees in the M&A industry.
Tell us about IJW
IJW & Co is a boutique investment bank headquartered out of Montreal with offices in Toronto, Antigua and Hong Kong. We are in the process of opening an office in Singapore. We provide three tiers of services: buy-side & sell-side M&A advisory, independent valuation services and corporate finance advisory through IJW Capital.
Does your firm do capital raises?
IJW Capital will assist a variety of issuers’ capital raises. We are currently in the process of registering with the AMF and OSC in Canada. We are also looking to obtain a similar exempt market dealer license in Hong Kong to focus on raising capital across Asia and Canada. That is going to be the focus of the firm – representing top tier VCs and private equity funds in Canada – raising funds for them in Asia and vice versa.
How many buy-side / sell-side deals does your firm typically do in a year?
It ranges. Our target is 10 transactions per annum. That’s our goal. We are currently a team of 15. We have very small offices in each of the regions. Our goal is to look to do 10 transactions across those teams.
Typical transaction size?
It depends on the location. Our Canadian clients range between $5 – $50 million in enterprise value. In certain industries, we have larger clients. For example, our US-based clients are typically larger. We work on U.S. deals that go up to the $350 million end of the range.
In the Hong Kong market, we work within a much broader deal size range. We have some transactions ~$250 million and some are $2 million. So really, it’s all over the place.
Historically, we have focused our efforts on the $5 – $50 million range, but we have been trying to move our way up. In the Canada, $5 – $50 million was our sweet spot in the SME market, but because the deal sizes have come down, the very large investment banks in Canada have also come down. Consequently, they are bidding against us… so we basically just said, “Well, if you are going to bid up against smaller firms, then we will move our way up into your realm.” And that’s what we have been doing. We are going into the larger segments targeting deals $100 – $150 million. We are landing these clients, in part, because of our Asian practice.
Big investment banks sell prospective clients on the fact that they have offices all around the world, but the reality is, those offices don’t communicate with each other. Whereas our firm is very much focused on the cross-border aspect of transactions. More than 90% of our deals are cross-border. We established a fantastic network in Asia that we leverage for North American companies. So, any North American company looking to find an Asian buyer, we are a good match to help them do that.
How does your firm go about marketing its services and creating deal flow?
90% of it is referral based. Most of our deals come in from lawyers, accountants, private equity firms and VCs.
We have now started becoming active in going after clients. We have a couple of industry lines that we have fantastic experience with and some benchmark deals. We have a deal origination team out of our Toronto office to leverage our experience and expertise in these industries. Some of the clients we are landing today originate from relationships we started developing a couple of years ago. It’s a long process.
We also pick up M&A mandates from our valuation practice. We do a lot of valuations. We get referred in, typically by lawyers. The moment we develop a relationship with a client, we do a valuation on their company. For those clients where we’ve done a valuation, it could be a year or two years later, but we end up generating ideas for those clients to do M&A transactions.
You mentioned that you send potential clients your pitchbook before you meet face-to-face.
Yes, because that’s the world we live in today. You don’t really need to be face-to-face to do things. Typically, we will do an initial phone call with them. If there’s interest, we get to learn about the company. Then our team will prepare a pitchbook based upon the identified needs of the client, whether its buy-side or sell-side. We’ll either pitch them via GoToMeeting calls or I will fly to wherever they are and I’ll do a face-to-face meeting.
As you think about the deals you’ve done in recent years, are there some thematic issues that you see resurfacing that make transactions more difficult to close?
The reality is that we live in volatile times. You never really know what is going to happen. One thing that I see as an interesting trend on some of our transactions is that the private equity bidders on our deals are coming in at higher valuations than the strategics. We have never seen this before. That’s a trend that is maybe not prevalent, but it’s recent and we are seeing a lot of it. I don’t know if it’s because there so much capital on the sidelines that needs to be deployed or because the private equity players are looking to tie up a transaction and then negotiate down the price. We’ve seen that happen a couple of times. There is a lot of competition in the private equity market and the private equity guys are having to be more and more creative in terms of getting the deal and closing the deal.
In terms of other themes that I’m seeing, the non-refundable deposit is back. In some of our transactions, we are getting non-refundable deposits. This was an extinct practice until recently. It just didn’t exist. And now it seems to be a trend, at least for our firm. We are getting this for a lot of our clients. The deposits range in value, but it could be anywhere from 5 – 7% of the transaction value.
The other thing that we are seeing is the level of interest from Asian buyers in North American companies. There was a hold on M&A activity coming out of China that came in November of last year. Now, we are starting to see the level of interest from Chinese buyers coming back. The valuations that they are paying are unbelievable. The main reason, we assume, is that the discount rates that they apply to the cash flow of the companies that they are looking to buy are much lower than their North American counterparts. I guess they assume less risk associated with a North American target. They are also very patient investors, meaning, if they buy a business here, they don’t need an immediate return. They have a very long-term view. They are looking for businesses that they can take their products, services and brands and bring them to the Asian market and get a lot of synergies.
What can companies do better prepare for an exit?
There is a lot of tax planning items that firms need to do, but effectively, when we meet them, we see it as a long process. We just finished an 8-month mandate with a client to figure out the appropriate approach to selling their business and the tax planning issues, etc. A lot of clients when they come to us looking to sell their business, they are very disorganized. They don’t have all their financial information in order. They don’t have agreements, shareholders agreements, all their minutes, and year-end filings done. In many cases there is a lot of administrative work that needs to be done to prepare them for the sale.
The other thing that really needs to be hashed through by the entrepreneur is thinking about the valuation prior to entering the transaction. And thinking about where they are in their life and what it is they want to do post transaction. We’ve had clients where they want to sell their business and after doing the valuation we realize, hey you know what you are 49 years old and based on the valuation and based on your expectations of what you want to do post transaction, you aren’t going to have enough capital. It’s not like you can say, I need X amount of dollars for my retirement so that what I going to ask for as my price. Value is value. There is only so much you can get for your business. It’s not like if you need $10 million and your company is only worth $5 million – you’ll get $10 million. That’s not how it works.
We also work with entrepreneurs to determine an accurate valuation of the business prior to working on M&A preparations. Is it a good time to sell? What is their expectation post transaction? Figuring out if there are some fundamental problems with the business that need to be fixed prior to selling the company.
Another thing that we see is that a lot of entrepreneurs are really hands on. They haven’t developed the appropriate systems to manage their business. Because of that, the business is extremely dependent on them. They have created something called personal goodwill. Personal goodwill is non-transferrable. No buyer will pay for personal goodwill. So, developing the systems to ensure that the customers are the customers of the business and not customers of the entrepreneur is really, really important.
Another fundamental issue… we work with the entrepreneurs to ensure there is not a client concentration. A lot of entrepreneurs that make a lot of money say my business is worth $100 million because I do $10 million in EBITDA and it’s a 10x multiple. But when you look deep into the financial statements and the fundamentals of the company – they have two clients. One of which brings in 80% of the revenue. If that client is gone, the value is gone. Looking at client diversification is important. Making sure the entrepreneur understands that the buyer is going to assess risk very differently if there are high levels of client concentration. That will have fundamental effects on valuation. It’s important that entrepreneurs know that and they work toward diversifying their client base.
We look at all these issues and sometimes it’s a couple of years before we take a client to market because they weren’t ready to transact. Sometimes there are fundamental issues that needed to be resolved first.
Any recent deals where you learned something unusual that might be helpful to investment bankers?
There are probably two situations that stick out in my mind.
One of them being a deal that is still being negotiated that relates to cultural differences. Basically, this Chinese buyer had initially submitted a bid that was really a low-ball offer. It was really below where we had pegged the valuation. Our client was a luxury branded product and already international in scope with operations in China and all over the world. The Chinese buyer really wanted the deal so that had increased their offer four-fold by the time it was accepted. Which is unbelievable. Obviously, they really wanted the deal. From a valuation standpoint, it was a great deal for our client. We had negotiated it for hours and it got heated. Finally, the deal got accepted. The Chinese buyer and our client shook hands – it was a deal. There was a fundamental understanding but no LOI was signed. The lawyers had to draft the LOI and get that part going.
I have been active in Asia for quite some time and I understand your word is your word… if you say you are going to do something, then the deal is done. Obviously, I’m still North American so I’m used to the agreements, but in this Chinese buyer’s mind, the deal was done. That night, he had invited our client over to his house in the city where this company was located. He invited them over to dinner to celebrate and the next day the accountants and lawyers showed up for due diligence acting as if the company was theirs. They began putting together trade shows in Asia and picking up products for the tradeshows, as if the deal was done. Our client was so taken aback and so freaked out that they were like, “Hold on, we don’t have an LOI signed.”. Then again, the Chinese buyer thought they had an agreement from the handshake. It was a big cultural gap that had to be traversed by our client.
Right now, we are in the process of negotiating out the LOI and its funny because the Chinese buyer is thinking, “Why are we doing this? I’m ready to write you a check for millions of dollars. I don’t understand.”. It’s quite an interesting cultural difference that we are seeing between these two parties and that makes things difficult to close. I have no clue whether or not we will actually close that transaction, but I can tell you, if it fails, it won’t be from the lack of willingness of the parties. It’s going to be because of the cultural differences. If they can’t surpass those cultural differences, then the transaction is going to be very difficult to consummate. This is quite common.
We operate very differently in our Asian operations. We don’t do pitchbooks in China and in Asia. We might present the proposal eventually, but we first invest months on end developing relationships with clients in that market. We will do dinners, lunches, biking, go to their club and the race track. We will do all kinds of things to develop a relationship. And we don’t bring up business until they say, “Okay, let’s talk terms.”. It’s very, very relationship driven in terms of deal making. It’s the relationship first before you start putting together the deal. That’s something North Americans need to understand if you want to transact with an Asian party – you need to have a very strong relationship before you get into business. It’s not as economical and it’s not as efficient. That is 100% for sure, but it is a good way of getting deals done.
The second thing that I thought was quite interesting was from the perspective of dealing with some private equity players. It comes back to what I was describing before, the private equity player coming in with an offer higher than the strategic parties. It wasn’t just a bit higher, it was fundamentally higher than what we valued the business intrinsically by probably 30%.
I think it’s because there are not a lot of fantastic deals out there and it is extremely competitive. Good deals don’t stay on the market very long. Once you bring it to market, you don’t even get to canvas the full market. People come in to the bidding process very early on and try to force a vendor to sign with them prior to whole market being canvased. That is a smart move in the sense that they lock up the deal. They ask for exclusivity and cut out a lot of other players from the bidding process giving them a better opportunity to get a lower valuation to do the transaction. They do this by putting in small time frames and offers contingent on due diligence. If they want exclusivity, they typically use the variable of the short time frame. We have had one deal where it was 21 days. Which is insane to consummate due diligence, but that’s what we have managed on negotiating. Typically, the due diligence period we are seeing is 45 – 60 days. Our clients are willing to give them the exclusivity period based on the attractiveness of the offers they are receiving.
Valuation are high right now. How are you managing your client’s expectations?
It’s problematic. It definitely skews the vendors perception of what they can achieve for their business. So what we always tell our clients is: Phase 1 – we are going to do a valuation of your business. Based on my background being a business valuator, we include this as part of our service and it gives them a clear view of what the value of their business is and why that is the value. We provide a very in-depth, thorough understanding to our clients of their company’s valuation. We always explain to them that value and price are two different concepts. They differ for various reasons. One is the buyers may be willing to pay for synergies. There might be asymmetric information. One party might be a better negotiator than the other party at the table. There are all kinds of different reasons why prices differ from valuation, but understanding the valuation is first and foremost an important element because this needs to be the client’s expectation.
We try and toss out all the comparable transaction that are out there or at least take those comps and try to make them meaningful for the client so they understand why is my valuation at this and theirs at that. We are very well positioned to do that.
In certain circumstances, we will go through the motions of explaining what their valuation is, and they’ll decide not to take the company to market because it’s not where they want it to be. In other cases, we will take it to market and we will get pleasantly surprised. Different scenarios may happen, but it’s important to us to educate the client prior to taking on the mandate.
Another thing that we have been looking to bridge gaps on valuation is on the contingent remuneration that they would be receiving in the deals. It could be earn-outs, it could be hold-outs, it could also be them receiving stock in the acquirer. We go through the process of valuing that contingency as well. We also try to explain to them that they may receive an offer for $6 million, but it’s not really a $6 million offer because it’s $3 million in cash and $3 million in stock of a public company. They need to understand the metrics of value behind these different consideration points that are part of the deal. We try to manage those expectations very carefully because ultimately it could lead to a bad experience for our client.
I look at bringing clients to market who understand their valuation and are accepting of it. If the potential client is not willing to except it, I will typical reject the client.
Do you run into instances where your competitors are inflating the numbers to win the client?
That happens a lot. We have lost deals because of it. Ultimately, the clients sell their business but they aren’t happy. The guy that represented him is happy because he got paid.
Another thing that we find very interesting in the competitive landscape – we are a boutique investment bank with low overhead and we can be very cost competitive when we want to be. We are finding the major investment banks in the Canadian market place, without mentioning names, are coming in lower than us (on fees). And why is that? Because they have certain schemes where they are not providing the same level of services and if the client ends up needing those services, they’ll add them on with additional fees. The way they structure the offerings is really manipulative. They’ll say, “If we get you above $100 million, then we will want a kicker.”.
The reality is, they’ll never get that kicker, but just by putting that language in there, it makes the vendor believe they might actually get that kind of price because these guys are going to get extremely well compensated if they get that price. It will never happen. The market is the market. There is only so much that people are willing to pay. We see that it is extremely competitive and there aren’t a lot of great deals in the Canadian marketplace.
I’m seeing a deal from a competitor that was never in my space and now they are taking on deals we never would because they need to keep their staff paid. I find it has come to this point where people need to be creative.
If you want to land clients on the sell-side, you need to be able to have a differentiated offering. The bulge bracket investment banks are going to say we have offices all over the world, but they don’t talk. They don’t leverage those relationships. Their office in London is working on deals in London and their office in Toronto is working on deals in Toronto. Whereas we really leverage our platforms. We are traveling back and forth. We are finding Chinese buyers for our Canadian clients and bringing them to the table. We are bringing those Chinese buyers to bid. Ultimately, that’s what is allowing us to beat them on some mandates. Some of them we win, some of them we lose. That’s the way it goes. That’s the trend we are seeing in the competitive landscape – the bigger firms are willing to take smaller transactions to keep their operations going.
An interesting thing to note, in Quebec, you are seeing how bad the market is. The heads of all the corporate finance divisions of all the major accounting firms, whether it be Deliotte, KPMG, etc. are leaving. M&A practitioners are leaving to go into industry. In fact, in other M&A boutiques, named partners of the firms are actually leaving to go work in corporate development and CFO level positions at corporations.
Do you think it’s because deal flow is drying up or is because there are more lucrative opportunities?
I’m not sure. Obviously, if the deal sizes are coming down, so is the fee pool. I think that it’s a mix of things. From the M&A firm’s perspective, you might have a firm say we did 20 deals last year and there are 13 – 16 people. But really, they didn’t do 20 deals because some of them were clients of their accounting firm or they worked on due diligence. They weren’t pure M&A mandates where they had a sell-side engagement.