How to Win the Selling Game

Medical Device & Diagnostic Industry MagazineMDDI Article IndexSmaller medical device companies can successfully sell their businesses with the help of an expert and an understanding of the value that they offer larger firms.

April 1, 2000

8 Min Read
How               to Win the Selling Game

Medical Device & Diagnostic Industry Magazine
MDDI Article Index

Smaller medical device companies can successfully sell their businesses with the help of an expert and an understanding of the value that they offer larger firms.

As medical device industry consolidation continues (see Figure 1 and Table I), more small and middle-sized companies will be weighing offers and deciding whether or not to throw their hats into the sales ring. When the owners of such businesses decide whether or not to sell, they should understand that buyers do not hold all the cards in this industry's sales game. Many smaller medical device companies are facing a capital squeeze, lacking the money they need to develop products and getting turned down by public and private capital sources alike. Meanwhile, many large public medical device companies continue to enjoy good earnings, high valuations, and relatively cheap capital with which to make acquisitions. But smaller medical device companies continue to hold considerable strategic value for larger firms, and they should be aware that opportunities are available and owners are walking away happy with their selling prices.

1994

Number of acquisitions

68

88

85

63

81

Volume (in $ millions)

5479

5223

9748

23,897

32,338

Average acquisition price (in $ millions)

81

59

115

379

399

Figure 1. Dollar volume of 1998 transactions (in millions) by industry segment. Includes only transactions completed or definitively agreed to in 1998. Several transactions are double-coded for more than one industry segment. (Source: Windhover's Strategic Transactions Database.)

The keys to successfully selling a small company include understanding where the company fits within the industry's "big picture," as well as what value that particular company can contribute to a specific buyer. It is also helpful to partner with an expert who can manage the sales process and ensure that the company obtains the best price.

THE INDUSTRY PICTURE

Traditionally, small medical device companies have created innovative products while large medical device companies have bought and distributed them. Medical device product development is typically a long, difficult, and expensive proposition. If a larger company can buy a smaller company to gain product innovations instead of building this capacity in-house, it may gain a significant strategic advantage.

Larger companies also need smaller companies for scale. When an industry consolidates, it creates fewer companies that must become larger and stronger in order to continue competing, like the "Big Three" auto companies. Companies that have scale—at least theoretically—have numerous cost advantages, such as the ability to leverage overhead across multiple operations, access to cheaper capital, and the ability to secure better, lower-cost contracts from their suppliers. Finally, larger companies that are publicly traded must continue to show growth to their bottom line in order to keep their shareholders happy. Good acquisitions help them realize this goal.

On the other hand, many small medical device companies that need capital up front to fuel R&D are facing a capital squeeze. Some of these companies went public a few years ago on the strength of potential new product innovations and failed to meet Wall Street's performance expectations. Small-cap stock has been depressed, and it has become increasingly difficult to obtain either public or private capital solely on the basis of good product ideas.

The market is thus ripe for sales. Buyers are looking for targets, and sellers are looking for a way out of a greatly changed business climate in which it is becoming more difficult for them to survive and prosper. But these are not fire sales. Smaller businesses can move thoughtfully and carefully, taking the time to complete the sales process correctly and leverage their companies' value.

In addition to product innovation and scale, large medical device companies have shown a preference for acquiring certain types of companies. These include small companies that are not overvalued as well as those with a track record of sales and earnings, although these are harder to come by.

STEPS FOR THE SUCCESSFUL SALE

One of the most important business transactions that owners will ever take on is the sale of their company. Strategies for a successful sale include making a careful analysis of the company's value and sales potential, creatively identifying and marketing to prospective buyers, and partnering with experts who can add value to the process— including ensuring a fair sales price.

Analysis. Owners should obtain a valuation of their company to get a baseline amount for the ultimate sale price. The valuation will determine the company's worth based on the value of comparable companies, projections of future cash flow, market or growth potential, etc.

Creative Targeting and Marketing. If the valuation is favorable for a sale, the next step is to identify appropriate buyers. The best prospects are those most likely to find strategic value in the company. Strategic value is the economic value that a company derives from its long-term competitive positioning. In the context of mergers and acquisitions, strategic value refers to the seller's business and financial attributes that will make the buyer more competitive. An expert in buying and selling companies can help the seller company identify prospective buyers who are most likely to derive competitive value from the seller company. The next section provides more information on finding a partner to help conduct the sale.

Whether the prospective pool of buyers is large or small, it is not necessary or advisable to share confidential information about the seller—such as sensitive financial information—with everyone. Such information should be reserved only for those companies deemed by the seller as the most serious prospective buyers, and it should only be given to those companies late in the sales process.

After identifying prospective buyers, the next step is to position the selling company appropriately for these buyers and market to them creatively. The goal is to highlight aspects of the selling company most likely to appeal to these particular buyers. Seller companies should create a document describing their potential strategic value to these buyers. Prospective buyers will study the document, visit the company's facilities, talk with senior management, and perform other due diligence before making an offer.

Finding the Right Partners. Some company owners have a difficult time assessing their own company objectively. They can't see the forest for the trees, and they find it difficult to discern how their company fits into the medical device industry or what value it might hold for a buyer. While it is easy to understand this myopia, it can be detrimental when an owner is ready to sell. By hiring an expert adviser, sellers will also be able to focus on running their companies and making sure conditions don't deteriorate during the merger or acquisition. Owners should seek assistance from an expert, such as a business broker or an investment banker, at this critical point in the company's life cycle. The right partner will be experienced, knowledgeable, and interested in working with the company, and have a track record for successfully selling or recapitalizing businesses.

There are a number of ways in which a professional advisor can help small-company owners avoid or overcome some of the complexities of a sale. Following are just a few of these:

  • Tax Implications. Selling to the highest bidder does not guarantee that the owner will get the best after-tax price. Sellers should work with knowledgeable financial advisors to maximize after-tax proceeds.

  • Buffer. Sometimes the original owners will continue to run a company after the sale and will therefore need to be on good terms with the management of the acquiring company; however, maintaining cordial, productive relationships can be difficult if the seller handles the negotiations and needs to play hardball to ensure a fair purchase price. In this situation, using an intermediary during mergers and acquisitions negotiations can deflect the impact of tough negotiating.

  • Fairness Opinions. Public companies normally obtain a fairness opinion to ensure that the transaction is fair to all parties. Private companies may not realize that they too can benefit from a fairness opinion, particularly if there are family ownership issues, large numbers of shareholders with divergent interests, and/or lack of outside board members. Fairness opinions help protect owners against claims that the transaction is not fair to an interested party. Should such a challenge go to court, the deal could be stalled or killed, and the owner could face multimillion-dollar litigation.

  • Contacts. Hiring a specialist who is knowledgeable about specific markets and has contacts among the key players can help both buyer and seller. Sellers gain a much greater pool of potential buyers and the opportunity to maximize their sale price. Buyers can locate acquisition targets nationwide that, in many cases, they would not have been able to identify on their own.

CONCLUSION

Although today's business climate may not be ideal for smaller medical device companies, owners should not assume that this is the wrong time to sell or they may lose opportunities. Even a less-than-stellar performer may offer significant strategic value to buyers. Owners who realistically analyze their company's opportunity, creatively identify and market to appropriate buyers, and call upon the assistance of experts as needed will find they can make a successful sale.

George E. Thomassy III is a managing director of Duff & Phelps LLC (New York City), a national investment bank and financial advisor. He has more than 20 years of experience in merger and acquisition transactions and in raising capital for businesses.


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