Episode 18: Mark Renzi - M&A, Restructuring, and Financial Services
BRG Managing Director Mark Renzi joins host Eddie Newland to discuss the state of the mergers and acquisitions market and his outlook for 2019 and beyond. Discussion includes the spate of M&A around the world, Mr. Renzi’s experience in bankruptcy engagements, and the potential mistakes companies make when going through restructuring activities.
Well Mark, thank you so much for joining us on ThinkSet podcast today. How are you?
Doing well. Thank you.
Great. Well, let's jump right into it. There has been a frenzy of activity in M&A in 2018. I trust that that's been keeping you pretty busy?
Yes, it has. I've been involved in a couple situations. One that's kept us busy for at least half of the year in the financial services industry, and we’ve been seeing some consolidation there. And companies just trying to get a little bit bigger to leverage some of their fixed cost structure. So definitely in the financial services industry for us. And then we’ve also seen some activity in the pharmacy space and in STRIPS transactions.
Now, we’re in a pretty healthy economy. I think everybody is smiling and holding our breath a little bit. But traditionally, does M&A ebb and flow depending on how the economy is doing? Do we see more of it when the economy is going well, or less of it when the economy is not so good?
Sure. I mean I think right now, the M&A activity is very strong. It is a factor that's attributed in part to the economy doing well. But I will say that even when the economy is doing well, we find in certain situations where there is disruption in a sector of the economy that can at times still be under distress while the rest of the broader economy is doing well.
A lot of the work you do is classified as restructuring. And people have this image of that only happening when things are going poorly, which isn’t always the case. Can you talk a little bit about the range of work that actually fits under the restructuring umbrella?
Sure. I mean we are a little bit broader than restructuring. I think as we've formed a group here at BRG, we really have tried to fit into a bunch of different verticals. And one of them is there is certainly the restructuring where there is distress. But there's often a lot of skill sets that are transferable into performance improvement, and then also what we’ll call CFO solutions where there are issues with companies, but they might not be detrimental to the business. So for example, if a company has a 5% EBITDA margin, and is just making payments to just barely cover their capital structure costs, they may say I need to do a little bit better, try to delever the business through operational improvements. And then we would go in in a situation like that and try to determine can you grow the top line in a different way? And then more often than not are there things operationally on the cost side that we could do better to make improvements?
And then they are also just certain finance departments that under certain circumstances aren’t as developed as they'd like to be. Or in a certain situation that we’re involved now, a company is growing quite quickly, and they are having some issues in terms of managing that growth and growing out of what I'll call a family business into a larger, more commercial business. And they just don’t have the infrastructure there from an analytical standpoint, and that needs to be doled out. And so we also thrive in that environment. I do think that the types of environments that we find more challenging for us, in general, is when there is not a lot of volatility. If the economy is going just plain flat, that is probably the toughest part for our business. But if it's going up or down, I think with those suite of services, we’ve generally been able to be very busy and active.
Now this is something that probably depends on the suite of services, but when you are coming into a new engagement, say like the one you were just talking about where a family business is looking to become a larger corporation, when you walk in the door, what are the first things you are looking to assess? Is it the personnel, the infrastructure? Are you jumping straight into the financials? What is the checklist you run through in determining what tools you need to bring to bear at the beginning of an engagement?
Well usually, we have a little bit of a sense of the situation before we get into a company. Oftentimes we have partners or a relationship in the private equity industry or some financial institutions. Whether or not regulated banks or non-regulated, finance institutions, will give us a sense as to what the situation is in general. But I would say when we do hit the ground, if it's a-- let's call it a non-distress situation, we’ll really spend some time meeting with the key constituents, meeting with the management team, some of the finance providers. And just try to get an overall assessment as to what's making the business tick, what's keeping management up at night. And where are the pressure points that they’re feeling in order to make sure that we understand those, and then address those issues as we dig deeper into the financials. But I would say, really sometimes it's just good to sit back and listen and jot down notes so to speak. Some of the basics that we all learn in elementary school. And then have a thoughtful response. I think that generally goes well.
And as you had mentioned, some of the things that we think about right away in-- let's just use a distress situation for example. We oftentimes will really want to have a strong understanding of where the business is in terms of liquidity. And whether or not that liquidity is sufficient enough for that business to continue to operate in the medium to long-term, and then obviously, the short-term is critical. Oftentimes it's just a company is coming out of a tough situation and just needs a little bit more runway. But there are other times where the capital structure is just too burdensome for the business as is, and then things need to be addressed in a more dramatic way.
So being able to come in at any time and play multiple roles.
Absolutely. I think there is some element of when we’re looking to hire into our business, if you're looking to hire people that are let's say a little less experienced than on the junior level, there is an element of not only do you need to have the finance skill set and you need to have that down pat, but you also need to make sure that you have the ability to interact with people. And oftentimes it's a stressful situation. So you need to have that sort of judgment and innate ability to pick up on the right times to press and the right times not to.
Yeah. Some of those skills just can't be taught, unfortunately. Just kind of either have it or you don’t. Taking a step back though, we were talking earlier about some of the different industries that you work in. Retail is one that if you listen to the news, things are going not quite as well as they'd like. Are things getting better for retail?
We’re still seeing-- last year was very busy in retail. And this year it continues to be busy. I think there are 60 or so distress situations out there in retail. And one of the things that's quoted in the press frequently is the Amazon effect, or some of the further developments and ease and adoption of consumers to online purchases. And that's certainly one of the aspects that has made management teams more concerned, having to be a little bit more efficient with capital. And then obviously, leveraging their leases in retail, physical retail locations. It's certainly been an issue, and they continue to deal with it. And we do believe that it will continue. But there have been pockets or subsectors within retail that had done poorly and now are doing okay. And then there are others that have just adopted a different business model to really be more focused to some of the modern technology and online strategies that are out there.
So it sounds like there are different subsectors that are kind of making a comeback while others struggle. I know, for example, local bookstores are actually making a bit of a comeback. It seems generationally, some of the younger folks are actually getting back into having a hard book in their hands despite all of the information and stuff that's available on Kindles and iPads. And I know also too, younger folks are owning more pets. So places like local pet stores are having better success than you might imagine despite a company like Chewy, which just got an incredible valuation and a ton of money, making options easier for online. Part of this is likely a generational thing, younger consumers. However, it's not all the way across the board. Something like a clothing boutique might not be having the same effects as a local pet food store.
Right. That's true. I do think there is going to be continued pressure from the technologies that are used by Amazon and others that have made things complicated. Obviously, Chewy is an online play and there are others that are out there. So it's just you really have to be on your toes as a management team to think through all of your options. Really understanding what makes the business tick, and then trying new things to make sure that you can keep driving the top line. There's only so much costs you can cut out of a physical locations at times that it really sometimes comes down to driving the top line. And obviously, the top line is key. But it's just adapting and making sure that you maintain your market share or gaining market share is key.
Never want to be stagnant, that's for sure. When you talk about some of these companies and what they can do to grow top-line revenue or work with their various COT structures, what are some of the biggest mistakes companies can make when they go through this sort of restructuring, whether it's in their debt or in the company in general?
Yeah. I mean I would say really some of the times-- one of the things that we would typically say is that it's unfortunate when we’re getting pulled into a situation too late or we’re called too late. I think a lot of times the management teams are juggling many different constituents and many different issues in a business. And they think that they’ve got it under control because they’ve done it before, but many of those things happen all at once, and they’re not able to handle juggling all of those balls all at once. So having an expanded resource or help from the outside and calling them at the right time is critical. Oftentimes if you're in a situation and you get called in too late, the business may not have a sufficient amount of liquidity or runway to restructure the business or turn it around. So calling at the right point in time or calling us too late, we've definitely see that issue. That other thing is sometimes management teams will want to keep continue to mull over ideas while there are still issues. So there is an element of indecision. So that can be difficult.
And then another thing that can be undervalued and is very important is poor communications. I mean I think that it's really important that as management teams are looking at their key constituents and stakeholders, that they’re doing a good job managing whether or not it's their suppliers or vendors, or their capital providers, or even just their shareholders. I think that it's really important that they have really good communications and are straightforward. There are times where management teams continue to put out projections or information where there are holes or gaps or overly aggressive projections. And then at some point, some of the constituents that are providing capital can go tone deaf. So you just want to be careful in situations like that where you're managing your communications very closely. And poor communications is definitely another one of the items that you see in difficult situations.
It's amazing how often something as simple as proper communication and making a decision can actually be what holds some people back. That's interesting that that can go all the way to the top. And I guess not too surprising if you think about it. But kind of one those easy checkboxes that's much easier said than done.
Right. I mean the one case where I would say it's really hard for management teams are commodity-based businesses. So there was a shock in the energy sector before when the price of oil dropped precipitously for a period of time. Those can be very difficult for management teams to adapt quick enough. So sometimes what happens is that you have a good business, but it's based on a certain price point and a commodity. And that your capital structure that you had was really designed for-- let's just call it a $70 a barrel of oil instead of 40, and that can only be sustained for a period of time. So there are macroeconomic factors that sometimes just weigh on a management team too quickly that you can't adapt fast enough to.
And in some instances it's just there is not much that can be done about that. I'd like to sort of wrap up on this though. You mentioned the macroeconomy, and I wanted to ask you something about the economy at large. From your work with companies at various stages of success or struggle, what's your outlook for the next year? For the next five years? Where is your work pointing you guys now?
It's a great question. Certainly, economists are paid well to figure it out. But I do think that it is a bit of a choppy market. So the overall stock market certainly is doing very well, and a very long bull run so to speak. A few things that we’re paying attention to are the yield curve and interest rates. It's clear that interest rates are on the rise. And one of the things that we look at are the differences between the short-term and long-term rate. And what's happened on the yield curve is there's typically a healthy spread between the short-term rate and the long-term rate, meaning the short-term rates are well below the long-term rates. Now, that spread has compressed. And historically when that has happened, that's typically a sign that the economy is not expected to do as well in the future as it is doing now. And so we’re seeing that now.
Now, there are a lot of different things going on from political uncertainty and tariffs. That could be one of the reasons why that's happening. That's certainly an issue. And there is certainly regulatory uncertainty. And then there's new issues in the tax code in terms of deductibility of interest expense that could be thought through. And then lastly, one thing that can be difficult is labor shortage and some of the increases in overall labor costs. So I think that what that all means is you really have to manage those issues closely and it's difficult. We have one situation where it's in a highly regulated industry in healthcare, and the top line has a regulated amount that can be paid at a maximum level. But the wage increases are outstripping the increase in revenue. And essentially what's happening is the business has margin compression, and they’re looking for spots where they can cut additional costs.
So a long-winded way of saying, I think it'll be a little tumultuous in '19. I think it'll go sideways. And it depends on how much political uncertainty we have whether or not it may tip downwards. So I do think it'll be interesting in the next couple years to see how it all plays out. And one other thing that we should all be aware of. In the bull run that we’ve had, a lot of businesses have refinanced their balance sheets with covenant like deals. And I think that that'll be interesting to see as the interest rates going higher, and businesses that may have been hanging on, may not be able to do so as easily as the interest rates rise. So they definitely have to have sharper pencils for 2019 given the economy that we’re looking at.
Great. Well Mark, we appreciate the insight. And thank you so much for joining us today. I really enjoyed it.
Great. Well, thank you very much.