Filling the Growth Gap

Strong balance sheets plus weak organic growth equals demand for acquisitions.
Vincent RyanOctober 11, 2011

Japanese buyers of middle-market companies in the United States have accounted for only about 1% of all deals in the last decade. But so far in 2011, M&A advisory Harris Williams has already completed the sale of three companies to Japanese buyers.

Why? Japanese markets are not growing much. Gross domestic product contracted half a percentage point in the second quarter, after dropping 0.9% in the first quarter. In addition, a strong yen makes U.S. acquisitions more attractive on a relative basis, says Chris Williams, co-founder and managing director of Harris Williams.

On October 3, Toyo Seikan Kaisha, a Japanese maker of cans and bottles, agreed to buy Stolle Machinery Co. of Sidney, Ohio, for $775 million. The seller was GSO Capital Partners, a hedge-fund arm of the Blackstone Group. Harris Williams acted as the adviser to Stolle.

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“Growth in the buyer’s core markets was not significant, so it is looking overseas for that growth element,” Williams says.

The growth problem is not just in Japan. The balance sheets of acquirers are strong right now, but in many cases the “organic growth of their operations is going to be a little lower [than they] had hoped,” says Williams. “They need to plug the growth gap.”

So both financial and strategic acquirers are still actively looking for transactions, says Williams, “even though debt markets are not cooperating quite like they were six or seven weeks ago.”

In the week ending October 7, 61 deals were announced in North America, according to data supplied to CFO by mergermarket. Forty-three of those deals had a total combined value of $11.7 billion. (In 18 of the deals, terms were not disclosed.) Those totals were up slightly from the prior week, in which 45 deals were announced, with a total value of $10.9 billion.

Among the deals last week, overseas buyers and sellers were active. Two transactions tied for the largest cross-border acquisition of the week. First was Japan-based Miraca Holdings’s announced purchase of Caris Diagnostics for $725 million. Miraca is in the medical diagnostic–products space, and Caris Diagnostics is a unit of Irving, Texas-based Caris Life Sciences. Miraca plans to use the acquisition as a springboard into U.S. markets. The second deal was the purchase by Brazil-based Iochpe-Maxion of Akron, Ohio-based Hayes Lemmerz International. Both manufacture wheels for commercial vehicles.

Continuing the inbound theme was Getinge AB’s deal to acquire Atrium Medical, a maker of devices for cardiovascular disease. Sweden-based Getinge AB provides equipment to the extended-care and pharmaceutical industries. The deal is valued at $680 million and is being financed through existing credit facilities and a $300 million bridge loan.

Another inbound deal was Spectris plc’s purchase of Sixnet, a Ballston Lake, New York company that designs equipment for industrial networks. U.K.-based Spectris bought the firm from American Capital and Riverside Partners, two U.S.-based private-equity firms.

There were mergers pointed outbound from the United States, too. Beverage company Constellation Brands bought a 50.1% stake in wine producer Ruffino S.r.l. of Italy for $140 million. Constellation assumed $75 million of debt, denominated in euros, as part of the transaction. Constellation had previously acquired 40% of Ruffino in 2004 for $80 million.

In addition, RPM Performance Coatings purchased Group P&V companies of Spain for an undisclosed sum, in a merger of industrial-products companies; biotech firm Akorn purchased India-based Kilitch Drugs for $52 million; Sunquest Information Systems acquired the anatomic-pathology information system business from Sweden’s Elekta AB for $33 million; and LKQ, a provider of aftermarket collision products to the automotive industry, bought Euro Car Parts Ltd. of the United Kingdom for $337 million. LKQ wants to expand its existing businesses in the United Kingdom.