Keeping It Local

If you follow business headlines for the Pacific Northwest, you might read that the region has an established trend of losing some of its most promising midsize companies to out-of-state acquirers. While the economic downturn of 2008- 2009 has made it more challenging for even good companies to sell or raise capital at attractive valuations, the silver lining is that the prevailing market uncertainty has made it an opportune time for wellcapitalized companies to go on the M&A offensive, and Pacific Northwest companies are catching on in a big way.

Historically speaking, the Pacific Northwest, defined in this case as Washington state and Oregon, has developed a reputation as a sellers market for midsize traditional

businesses. That is not to say that our local companies sell cheaply or easily; in fact, it is just the opposite. However, the ratio of regional middle market companiesmaterials, industrials, consumer discretionary and consumer durablesthat have sold at $100 million valuations versus those that have gone public since 2006 is nearly four to one. Household names in the Pacific Northwest, including American Seafoods Group, Cobalt Group Inc., Kettle Foods Inc., Razorfish and R.W. Beck Inc., have also chosen to sell rather than pursue a path of independence. Recent activity tells us that change is afoot.

As an example, Bensussen Deutsch & Associates (BDA), the nations premier promotional marketing company, headquartered in Woodinville, recently acquired Evigna Inc., a Detroit-based merchandise distributor. The transaction gave BDA access to numerous accounts in the automotive industry, which is a leading buyer of promotional merchandise. The company continues to look for other acquisitions that will expand its client base and geographic footprint.

BDA is not alone. Additional Northwest companies on the acquisition path include pet products distributor Animal Supply, sharpened tool manufacturer Benchmade Knife Company Inc., glass manufacturer and distributor Hartung Glass Industries, process automation system designer and manufacturer Key Technology Inc., insulated products manufacturer Pacific Market International and technology distributor Zones Inc. What these companies have in common is an established market position, a known core competency and the financial resources necessary to be a proactive buyer.

More important is that Pacific Northwest companies have a tangible story to tell potential sellers, one based on stewardship, future potential and strong management. Our experience is that in a choppy market, sellers are seeking buyers who will leverage their assets as opposed to synergizing them away. With our local economic outlook exceeding the national forecast, selling to a middle market buyer in the Pacific Northwest is an attractive exit option.

If we look at the landscape, deals are getting done in markets where consolidation is logical. Sellers feel more certain that a deal will close when buyers are from the same or a similar industry and can understand the business they are purchasing. Moreover, a knowledgeable buyer is better positioned to provide that seller assurance about the viability of the combination, and where there are more synergies, the ability to pay a premium is greater.

While selling a large private business in a recovering market or taking on equity in a valuation challenged environment may be unattractive to most, other financial instruments have emerged to facilitate smaller deals. Mezzanine debt financing gives companies with strong cash flow access to funds for acquisitions, without the risk for excessive equity dilution or a change in governance. Many companies are looking at buy-side acquisitions in light of their access to additional funds now that interest rates on this type of financing have fallen dramatically during the past 12 months.

The Pacific Northwest is home to some of the most interesting and operationally compelling private companies in the nation. Instead of looking for a path to exit, these businesses are doubling down, and betting on growth. Todays companies in Washington and Oregon are not selling out.

Christian Schiller is a managing director at Cascadia Capital, a Seattle-based boutique investment bank, and leads the firms middle market practice. Bryan Jaffe, a senior vice president at Cascadia Capital, helps build client relationships and is a senior execution resource for the middle market practice.