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Chances to grab assets on the cheap prove elusive

RBJ 75
Rochester Business Journal
July 23, 2010

In a weak economy, stronger companies often see opportunities to grab assets at cheaper-than-normal prices.

Yet while there are more sellers than buyers in the market right now, a persistent gap between buyer and seller expectations and a paucity of available financing have prevented an upswing in acquisition deals.

Companies such as O'Connell Electric Co. Inc. and Optimation Technology Inc. frequently are approached by prospective sellers and buyers alike. But making a good acquisition, officials at both companies agree, depends on more than a low price. A strong strategic fit also is necessary.

O'Connell's last two acquisitions, in 2007 and 2003, deepened the electrical contractor's renewable energy division with companies that specialized in solar and wind energy.

Today, despite more opportunities in the marketplace, O'Connell's strong financial position and its desire to expand, the company is not necessarily going to find the right business and the right terms to make a good deal, CEO Victor Salerno said.

The Victor company, which is looking at opening an office in Albany to serve an expanding customer base, recently evaluated a local contractor as an acquisition, but the price, Salerno said, did not make sense. O'Connell walked away from the deal and instead may focus on growing organically.

Salerno said he has not seen prices come down yet, except in extreme circumstances.

"Usually, where you get your opportunity is when something happens to the ownership or the company has fallen on tough times," he said.

For the most part, the degree of desperation determines price, at least until demand kicks in. Right now, demand is following close behind.

Rush-based Optimation, a multidisciplinary builder and designer of industrial operations, sees a lot of buyers on the prowl right now.

"There are also a lot of owners looking for an exit strategy or a new partner," President William Pollock said.

"I went to a conference recently, and I had two companies approach me asking if I was interested in selling all or part of my business, and five companies approached me asking if I was interested in buying all or part of their business," he said. "I didn't follow up on any of those offers."

Business values typically move in tandem with the economy, and that goes for sellers and buyers both, said Daniel Tessoni, assistant professor of accounting at Rochester Institute of Technology's E. Philip Saunders College of Business.

"Firms may be worth less, but buyers are willing to pay less still," he said. "It's a fascinating thought, though. You would think, 'OK, it's a downturn; somebody will be out there scooping up businesses.' But when times are tough, there aren't a lot of firms in a good cash position.

"And, of course, typical financing to support acquisition strategies is still difficult to come by," he added. "Lenders aren't still, from what we can observe, highly supportive of what we call leveraged transactions where you acquire with debt."

The exceptions to the status quo are companies in industries such as finance and real estate that took an especially tough recessionary beating.

Companies in either of those industries with a strong cash position, such as Home Properties Inc., can take advantage of new opportunities.

A Rochester-based real estate investment trust that develops, acquires and operates apartment communities primarily on the East Coast, Home Properties has picked up three complexes this year alone in deals totaling roughly $55 million.

It is good news for a company that drives revenues by acquiring properties, upgrading and repositioning them.

"Last year was the first year we made no acquisitions because of the tough market," said Charis Warshof, vice president of investor relations.

In 2008, Home Properties did $100 million in acquisitions; in 2007, $162 million; and in 2006, $360 million. This year Home Properties is projecting deals worth $150 million to $200 million, but Warshof said the company hopes it will be able to do more.

"We think we're seeing more deals because of the historically low level of interest rates on loans that buyers are able to secure, which is driving prices higher and closer to sellers' expectations," Warshof said. "Last year there was a wider gap between buyers' and sellers' expectations. Also, there is pent-up demand for properties due to the sizable amount of capital that was sitting on the sidelines the last year or so due to the recessionary environment."

Now that there are more sellers, there is high demand from buyers who want to put their capital to work, Warshof explained. Buyers are beginning to see improvement in the economy, which gives them more confidence in projecting fu

ture rental rates, she said, and some sellers have mortgages coming due, so they see a window of opportunity to get cash out of their properties at an optimum price.

So while the company now sees more opportunities than last year, it also is facing more competition.

That only stands to reason, said Tessoni, who cited home values as an example.

"Just because the value of your house has dropped does not necessarily mean you're going to have a bunch of buyers knocking at your door; it just doesn't work like that," he said. "In the case of Home Properties, it can. But if everybody knocks on your door when the value of your house goes down, then the value will go up."

That scale could start to tip soon as companies are forced to consider selling more seriously.

"The number of acquisition opportunities is increasing as some organizations become distressed financially," said Anthony Mazzullo, president and CEO of telecommunications expense management company Veramark Technologies Inc. "In addition, an organization may not be distressed yet, but the owners reach the point where they lack capital or can no longer grow and make acceptable profits."

The owners, he added, become more willing to negotiate an acceptable price because they have reduced expectations for the future potential of the business.

"This is an important variable that often is an emotional one for the owners," Mazzullo said.

Patrick White, CEO of anti-counterfeit technology firm Document Security Systems Inc., expects to see a wave of selling activity between now and the end of the year.

"We think the selling pressure is building rapidly as we are hearing from a variety of businesspeople that client payables are just now reaching 90 days and higher," he said. "That says we are now entering a critical milestone, which makes the selling decision rise to the No. 1 consideration for many businesses."

White added: "Another major element that will create selling activity, in our opinion, is that the current lower capital gains tax rate is scheduled to expire at the end of 2010, so owners will want to cash out prior to the expiration to optimize their take from a sale of their assets."

On the other side of the fence, buyers will be very exacting when it comes to negotiating the right price and selecting the best fit.

For every dozen acquisition candidates Veramark evaluates, only one is worth the investment, Mazzullo said.

In June, the Pittsford company acquired Source Loop LLC to deepen and expand its own offerings.

The acquisition of the Georgia-based firm was tactical, adding a significant amount of telecom expense management expertise for professional services, particularly in telecom sourcing and contract negotiations, Mazzullo said.

In addition, Veramark picked up the Source Loop customer base and revenue stream.

The deal hinged on Source Loop's strategic benefit. For companies taking the long view, that is the case regardless of the state of the economy.

7/23/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail

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