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 – 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. In part three of a three-part series, Lang sat down with international expert Michael Muth to discuss foreign deal making and international investment banks.
Michael Muth: What was your most successful foreign deal?
Scott Lang: One of the most successful deals was the sale in 2004 of two sister German machine tool manufacturers that were owned by Ingersoll International. It was a U.S. machine tool manufacturer that was going through bankruptcy liquidation. Ingersoll owned the stock of a German corporation that owned the two middle-market German sister operations. That stock was the most valuable asset remaining in the bankrupt company’s estate.
The only chance Ingersoll’s commercial lenders and other creditors had of receiving a substantial recovery was from the sale of those two businesses. While the German businesses were profitable on a pro forma basis, they were still going through a turnaround that was being managed by a restructuring group. Under the U.S. bankruptcy code, the German stock that Ingersoll owned had to be sold to the highest bidder in a court-supervised auction.
This particular deal illustrates a lot of the things I have been talking about here.
First, Ingersoll had previously hired an investment bank (Merrill Lynch) to sell these two middle-market German businesses. When Merrill failed to get the job done at any price, Ingersoll’s creditors and advisors were staring down the barrel of major losses. To their credit, they encouraged the company to hire a middle-market investment bank with cross-border capabilities to take on the assignment.
They learned the hard lesson that a deal valued at less than $100 million would simply not be as important to a bulge-bracket investment bank as it would be to a middle-market investment bank.
When I was approached by Ingersoll’s advisors to pitch for this cross-border sale mandate, I realized we needed investment bankers on the ground in Germany if we were to have any chance of winning. At the time, my former firm was a member of an international affiliation of middle-market investment banks that had a very strong member firm in Germany. I invited them to collaborate on winning the mandate.
We pitched ourselves as two firms that could work together seamlessly as a single cross-border investment banking team. We offered to sign one engagement letter with our client and to identify specific investment bankers from each firm to manage the deal together. This wasn’t much different than an international investment bank that has bankers from two of its offices working together on the same sale mandate.
We conducted due diligence together with our German partners (most of the relevant players spoke English), prepared all of the marketing materials together and religiously conducted weekly international telephonic meetings with our German client’s management team and their many advisors on both continents to keep everyone actively involved in the process. It truly was a seamless, cross-border operation.
Our German partners, however, were not accustomed to managing a broad-sale auction for their clients. Their preferred methodology was to identify four or five of the best buyer candidates (usually buyers already known to their client), get their client’s approval to approach each of them discreetly (usually not with a thick, U.S.-style “offering memorandum”) and conduct a limited and probably not very expedited sale process within this small field of buyers.
Because U.S. bankruptcy law requires assets to be sold to the highest bidder in a court-supervised auction process, our German partners were forced to participate in a U.S.-style auction.
We then divided up the prospective buyers. Our German partners took responsibility for all European strategic and financial buyers. My firm took responsibility for buyers throughout in the rest of the world. This worked extremely well. At the end of the day, 12 buyers submitted proposals that were in or above the valuation range we had targeted for our client. The offers came from three continents: Europe, North America and Asia.
Ultimately, we selected an offer from a German strategic buyer to present as a “stalking horse bid” in the U.S. bankruptcy court. The next closest bidder came to Chicago to participate in the final round of bidding.
The results were exceptional. The German buyer raised its bid to win the deal at approximately 10 times EBITDA, which is the highest multiple paid for any machine tool company in the past several years. Ingersoll’s secured creditors were able to realize a full recovery of their loans – including accrued interest and penalties – even though they had expected to lose 30 percent or more of the principal balances of their loans.
Ingersoll’s unsecured creditors got a very substantial payout. Its owners realized some recovery from the bankruptcy. Also, our German partners learned how the American auction process works and now utilize it routinely. In fact, we completed another deal with them the following year in which our client (U. S. private equity investor Sun Capital) sold a German portfolio company for a record price to a public U.S. strategic buyer.
While I realize this is a long answer to your question, the Ingersoll deal really illustrates the value of matching up experienced and very tenacious middle-market investment bankers with cross-border, middle-market companies.
MM commentary: While I’m not sure Ingersoll qualifies as a middle-market company, the German sister companies seem to. This is a very revealing case study.
MM: Which foreign transaction was your biggest nightmare?
SL: I can’t say I’ve had any specific “nightmare” cross-border deals. Perhaps the closest thing would be when I was working simultaneously on several cross-border transactions for Mexican companies in the early 1990s. In the middle of it all, the peso collapsed and so did all of my deals. That was a nightmare.
MM commentary: It’s interesting to note that even though currency valuations are uncontrollable, they can certainly bring down a deal.
MM: How is Global M&A structured? How does a client know it has the right international investment banks handling its deal?
SL: There are several international investment banking network organizations.
These would include Global M&A, which is a partnership of 30 firms worldwide; M&A International, a similar-sized consortium but one where there may be several firms competing for transactions within the same country; and Mergers Alliance, which is an eight-member organization.
There are also partnerships such as the one that Harris Williams has with Close Brothers to handle the cross-border marketing of deals with European and Asian counterparties.
As a prospective client, you can look at the experience of these organizations on the Internet to see if they’ve done business in your industry. Most of these firms are fairly mature and have been doing sophisticated M&A work for decades. The likelihood is they will know how to handle the challenges of your deal.
In the case of M&A International, they have six firms in the U.S. In some European countries, they have multiple firms as well. How one picks and chooses which firm to involve can be tricky or just random.
Almost all middle-market investment banks put their experience on their Web site for all to see. That’s usually a good starting point. It is imperative, however, that one checks further with clients of the firm and professionals who have worked with it in order to get a clearer picture of who you may be hiring to sell your most precious asset. It also depends on which specific bankers are assigned to manage your transaction.
No one should short cut the process of learning about which investment bankers will be the best to handle a specific deal.
MM commentary: Though I’m sure these international M&A consortia can be valuable, I question how one network can be the best or even qualified in all industries in all countries. I’d be very studious about doing due diligence on prospective foreign partners to make sure their knowledge and experience match up with your needs.
MM: In addition to solid financial ability, what else does it take to become a successful international investment banker?
SL: It takes experience, tenacity, a thick skin, strong communication skills and an ability to see value where others might fail to see it. I have often said an investment banker makes money when he takes on an engagement – not when he completes it – even though we get paid only upon completion.
What I mean by this is that it’s critically important to be able to assess at the outset of a deal whether it can get done and whether the client is really a seller at a realistic price. If you take on the wrong assignments, this can be a terribly frustrating profession.
MM commentary: It’s interesting to note that all of these characteristics apply strictly in a domestic setting and things like language skills and the knowledge of particular geographies are not mentioned. My assumption is the foreign M&A partner handles those, which can be risky if you don’t know them well.
MM: How has the Association for Corporate Growth (ACG) helped your business?
SL: It’s our trade association. It keeps everyone informed.
It does a wonderful job of bringing together all the professionals who source and service middle-market deals. It puts on programs so we can stay up to speed on middle-market deal making and how we do business in our industry. It’s a great networking tool. It’s becoming more international and more important all the time.
MM commentary: ACG held an informative conference at the end of February entitled “Is the World Really Flat? Middle-Market Companies Competing in the Global Economy”.
Michael Muth is managing director of GATA, an international business development consultancy that helps technology companies build international partnerships. He can be reached at email@example.com.
Click here for Muth’s full biography.
Previous Columns in 2007:E-Mail This Article to a Friend or Colleague
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market M&A (5/8/2007)
Q&A: Scott H. Lang of S.H. Lang & Co. in Chicago on Middle-Market Firms (4/24/2007)
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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