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April 24, 2007 

 Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market Firms 4/24/2007
The mission of Going Global, which appears on MidwestBusiness.com on most Tuesdays, is to educate and inform Midwest technology companies on what local technology companies are doing internationally so other firms can learn from the successes of like-minded peers.

CHICAGO Ė Scott H. Lang is the founder and CEO of S.H. Lang & Co., which is a new middle-market investment banking firm located in Chicago.

He was also the co-founder and the former CEO of Brown Gibbons Lang & Co. (BGL), which is a middle-market investment banking firm headquartered in Cleveland. Lang co-founded BGL in 1995 and established its Chicago office. He retired from the firm late in 2006.

Before joining BGL, he was executive vice president and managing director of investment banking at Chicago-based Rodman & Renshaw Capital Group. Prior to that, Lang was a partner specializing in corporate, energy and environmental law at the law firm of Arnold & Porter in Washington, D.C.

He also served as assistant general counsel for the U.S. Department of Energy. Lang began his professional career as Washington counsel for the Environmental Defense Fund in Washington, D.C. He is a graduate of Harvard College and Harvard Law School. Lang serves on the boards of several for-profit and not-for profit organizations.

In part one of a three-part series, Lang sat down with international expert Michael Muth of MidwestBusiness.com to discuss middle-market companies.

Michael Muth: How has investment banking progressed internationally for middle-market companies?
Scott Lang: First, we need to define what we mean by middle-market companies. I generally define them as including companies other than high-tech ones that have a total enterprise value (i.e. the market value of equity plus funded debt less cash on the balance sheet) between $50 million and $500 million.

Next, we need to define what we mean by middle-market investment banking. By this I mean serving as a financial advisor mostly in connection with an acquisition, sale or merger of a middle-market company (usually referred to simply as ďM&AĒ). This is in connection with a private debt and/or equity financing or a financial restructuring for a middle-market company.

Iím not talking about the underwriting of public stock and bond offerings. Middle-market M&A grew up in the 1980s and its growth really accelerated in the 1990s. It reached a recent historical peak in 1999. It came to a sudden stop during the recession of the early 2000s when financial restructurings and sales of distressed businesses became the major preoccupation of middle-market investment banks.

By 2004, middle-market M&A had resumed its strong growth trend. It has returned to and even surpassed its historic peak levels during the past three years.

Cross-border middle-market M&A transactions followed a similar pattern. According to Thomson Financial, U.S. buyers in 1999 completed approximately 260 acquisitions of foreign middle-market companies (worth about $35 billion in the aggregate). By 2003, however, transaction volume had dropped to 135 acquisitions and only about $15 billion in the aggregate. Most of these deals involved acquisitions of European businesses by U.S. buyers.

Asian and South American countries were still just developing as cross-border M&A markets for middle-market companies. Japanese middle-market companies mostly remained out of the M&A markets during the past decade. All of this appears to be changing today.

MM commentary: Middle-market investment banking seems to have mirrored Wall Street since 1980 and reflects the value of international equity markets today.

MM: How can middle-market investment banks compete globally against the big-name investment banks?
SL: The large investment banks have mostly abandoned the middle market since the beginning of this decade. They prefer to work on much larger transactions with much larger fees.

They donít really compete with middle-market investment bankers. While they occasionally will accommodate one of their larger clients by taking on a middle-market M&A deal, they usually donít put their best or most experienced professionals on them. They are less likely to get the best results for middle-market clients.

The middle market is therefore really dominated today by middle-market investment banks. This also applies to the international arena. Many of them remain relatively unknown and difficult for the typical private business owner to find and assess (unless you already know about them).

MM commentary: It sounds like middle-market investment banks need to promote themselves more so they can be easier to find.

MM: How does the argument for M&A versus organic growth differ internationally?
SL: When a company makes a cross-border acquisition, itís usually for a specific strategic reason. Either the company wants to enter a new geographic market or procure a new product line or technology. The company may want to buy another business because it has a superior management team.

A companyís customers might leave it little choice but to grow internationally with them or be left behind. This is particularly true today. With the increasing globalization of most industries, many middle-market companies are expanding internationally to keep up with their larger customers that are globalizing.

Many are also seeking lower-cost suppliers and outsourcing manufacturing and many of their services to lower labor cost countries like China and India. Just like larger corporations, middle-market companies must decide whether to undertake this geographic expansion and outsourcing by themselves through organic means or do it through strategic acquisitions (i.e. joint ventures and the like).

To expand internationally, you need people with knowledge of the local language and culture, the local legal and accounting regimes, the local markets, etc. It is often far more expedient to accomplish this through an acquisition, merger or joint venture. However, sometimes there is no acquisition target that fits the requirements or if there is one itís too expensive.

Sometimes there is no choice but to grow organically in overseas markets even though it may be slower and possibly much more risky.

MM commentary: Though the perceived risk is higher for M&A growth rather than organic growth, there is risk and reward with whatever option you choose. There are simply different costs and tradeoffs with each option.

Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at muth@midwestbusiness.com.
Click here for Muthís full biography.

Previous Columns in 2007:
Q&A: George Filley of NAVTEQ in Chicago on Data Localization, Reach (3/27/2007)
Q&A: George Filley of NAVTEQ in Chicago on Partners, Personal Privacy (3/20/2007)
Q&A: George Filley of NAVTEQ in Chicago on Digital Mapping (3/7/2007)
Click for 2006 column archive.
Click for 2005 column archive.
Click for 2004 column archive.

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