Another Data Request – Has Diligence for M&A Deals Gone Too Far?

I am amazed by the number of former clients that echo similar statements: “I was absolutely shocked and unprepared for the amount of data the buyer’s third-party advisors requested once we accepted their offer.”

For most M&A deals started in fall 2022, the next couple of months will either end in a successful transaction or “deal fatigue.” The challenging global headwinds of 2023 have certainly been felt by management teams and their operations.

So why “deal fatigue” by the management team?

The most likely answer is data. More specifically, the process of data collection, internal validation, dissemination and then cross examination of the data by the buyer’s advisor team.

Sellers should anticipate initial data requests grouped by function: human resources, operations, customer and commercial, finance, governance, and environmental health and safety.

The following list is a compilation across the various functional areas.

Important diligence questions prior to a deal close:

1. Overtime policy – historical OT actual incurred going back to 2020

2. Discussion of current/historical use of temporary employees

3. Theoretical production capacity based on current shift structure

4. Discussion of transport/logistics –frequency of job drop-off/pick-ups

5. Discussion of current production bottlenecks; investments or other steps to remedy

Organization

Authority of Seller

No Conflicts: Consents

Financial Statements

Undisclosed Liabilities

Absence of Certain Changes, Events and Conditions

Material Contracts

Title to Purchased Assets

Inventory

6. Understand customer churn, outside of top 10 customers – approximately what percentage is repeat business

7. Discussion around customer profitability analysis and approach to shifting from low profit customers

8. What is your capitalization policy ($ amount)?

9. What is your annual budgeted maintenance CapEx (% of sales)?

10. Can you provide a list of accrual true-ups that occur year end or quarter end?

Your M&A team is best positioned to help the seller and the management team set priorities on data collection. Utilizing the first 60 days of the assignment to pull and analyze data will be the most efficient use of everyone’s time – especially since the management team has to run the daily business operations.

Could deal fatigue have a negative impact on the deal?

Threats To the Purchase Agreement

The seller must be prepared when the legal teams begin to discuss Reps & Warranty (“R&W”) section of the purchase agreement.

Some of the blanket R&W statements will not feel good and many will go against the views of the business owner. Plan on spending quite a few hours with your legal team reviewing these major categories. Some major R&W sections are listed below:

For R&W discussions, the term “to the best of our understanding” may be what ownership wants to state – like pleading the 5th. Unfortunately, the buyer’s legal team will need “meat on the bone.”

Real Property

Intellectual Property

Accounts Receivable

Customers & Suppliers

Legal Proceedings and Government Orders

Compliance with Laws: Permits

Environmental Matters

Employee Benefit Matters

Closing the M&A transaction in 2023 while the economy is in challenging times.

The ISM Manufacturing PMI for the U.S. fell to 48.4 in December 2022, slightly below forecasts of 48.5, pointing to the second month of contraction in factory activity as Americans are shifting spend- ing away from goods to services. A reading below 50 indicates contraction.

Excluding the decline in April 2020 at height of the COVID pandemic, this was the lowest reading since February 2016.

New orders (45.2 vs. 47.2), and new export orders (46.2 vs. 48.4) declined further and production shifted to the negative territory (48.5 vs. 51.5).

Also, inventories grew faster (51.8 vs. 50.9) and price pressures eased (39.4, the lowest since April 2020).

The month-over-month performance of supplier deliveries (45.1 vs 47.2) was the best since March 2009.

Good luck closing your transaction!

This article has been prepared solely for informational purpose. This article does not constitute an offer, or the solicitation of an offer, to buy or sell any securities or other financial product, to participate in any transaction or to provide any investment banking or other services, and should not be deemed to be a commitment or undertaking of any kind on the part of Wiley Bros. –Aintree Capital, LLC (“WBAC”) or any of its affiliates to underwrite, place or purchase securities or to provide any debt or equity financing or to participate in any transaction, or a recommendation to buy or sell any securities, to make any investment or to participate in any transaction or trading strategy. Any views presented in this article are solely those of the author and do not necessarily represent those of WBAC. While the information contained in this commentary is believed to be reliable, no representation or warranty, whether expressed or implied, is made by WBAC, and no liability or responsibility is accepted by WBAC or its affiliates as to the accuracy of the article. Prior to making any investment or participating in any transaction, you should consult, to the extent necessary, your own independent legal, tax, accounting, and other professional advisors to ensure that any transaction or investment is suitable for you in the light of your financial capacity and objectives. This article has not been prepared with a view toward public disclosure under applicable securities laws or otherwise.

Cummins’ Filtration Business Files for IPO

Cummins Inc. announced that its Filtration business, Atmus Filtration Technologies, has filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission (the “SEC”) for a proposed underwritten initial public offering (IPO) of newly issued common stock.

Atmus Filtration Technologies intends to apply to have its common stock listed on the New York Stock Exchange (NYSE) under the symbol ATMU. The number of shares to be offered and the price range for the offering have not yet been determined. The IPO is expected to commence after the completion of the SEC review process, subject to market and other conditions.

Steph Disher will continue to lead Atmus Filtration Technologies as CEO alongside an experienced and capable leadership team. Atmus Filtration Technologies, which was founded by Cummins in 1958, is one of the global leaders of filtration products for on-highway commercial vehicles and off-highway agriculture, construction, mining and power generation vehicles and equipment. The company’s name is derived from “atmosphere” and reflects its purpose of creating a better future by protecting what is important. www.cummins.com

Donaldson Acquires Biotech Isolere Bio

Atlas Copco Celebrates 150 Years of Innovation

Atlas Copco, founded in Stockholm in 1873, celebrated its 150-year anniversary in February. During a century and a half, Atlas Copco has been driving development and delivering breakthrough innovations to customers in many different industries.

“We are extremely proud of our past, and we continue to shape the future through our technologies and service solutions,” said Mats Rahmström, CEO and President of the Atlas Copco Group. “Much has changed since 1873 when we were a small local start-up. But I think our founders would recognize our innovative spirit, the passion shown by our employees and our dedication to drive development together with our customers.”

Atlas Copco was founded in Stockholm, Sweden, and initially delivered equipment for construction of the Swedish railroad system. Since then, the Group has evolved and today supports customers in many different industries, enabling everything from food production to space travel. www.atlascopco.com

Donaldson Company, Inc., a leading worldwide provider of innovative filtration products and solutions, announced the acquisition of Isolere Bio, Inc. (Isolere), an earlystage biotechnology company that develops novel and proprietary IsoTag™ reagents and accompanying filtration processes used for the purification and streamlined manufacturing of biopharmaceuticals. Aimed initially at the purification of viral vectors used for cell and gene therapies, IsoTag™ reagents are designed to substantially improve product quality and purity with faster timelines compared to competing solutions, enabling accelerated and more affordable delivery of life-changing therapies to patients globally.

“With the integral addition of Isolere to our Life Sciences portfolio, Donaldson is positioned to create premier separation and filtration solutions for emerging genetic-based drugs,” said Tod Carpenter, chairman, president and chief executive officer of Donaldson. “We look forward to accelerating Isolere’s growth trajectory through sales synergies from our recent acquisitions of Solaris Biotechnology and Purilogics and through the strength of our balance sheet.”

“Isolere is thrilled to join the Donaldson family and bring our novel affinity-phase separation technology to market,” said Kelli Luginbuhl, Ph.D, co-founder and chief executive officer of Isolere. “Our technology, complemented by Donaldson’s filtration excellence, is part of a larger vision to bring end-to-end solutions to the life sciences industry.”

Founded in 2017 by Kelli Luginbuhl, Ph.D, Professor Ashutosh Chilkoti, and Joe McMahon, Isolere is headquartered in Durham, North Carolina. Once commercialized, revenue from Isolere will be reported within the Donaldson Life Sciences segment. www.donaldson.com

Evoqua to Divest its Carbon Reactivation and Slurry Services to Desotec

Evoqua Water Technologies has entered into a definitive agreement to divest its carbon reactivation and slurry operations to Desotec, a European provider of industrial mobile filtration solutions based on activated carbon technology.

The agreement includes the product line’s workforce, reactivation facilities and associated equipment in Darlington, Pennsylvania, and Parker, Arizona, and the reactivation and carbon vessel manufacturing facility in Red Bluff, California, USA. The deal is expected to close during Evoqua’s third quarter of fiscal 2023, which ends June 30, 2023.

Desotec, which was acquired by private equity funds managed by Blackstone in 2021, is headquartered in Roeselare, Belgium and employs approximately 250 people across Europe.

www.evoqua.com

DuPont Consolidates Ultrafiltration Technologies Under New IntegraTec™ Brand

To better serve municipal and industrial customers, DuPont is consolidating and rebranding its diverse portfolio of ultrafiltration (UF) membranes for the sustainable purification, conservation, and reuse of water.

The DuPont™ IntegraTec™ portfolio of ultrafiltration technologies and products consolidates several legacy ultrafiltration brands – from Inge®, Memcor®, and DuPont Ultrafiltration – into a singular portfolio available to customers.

This new offering makes it easier for DuPont’s customers to harness the benefits of the Best-Fit ultrafiltration technology, either to be used alone or as a part of a multi-technology water treatment solution, toward the goals of high-filtration performance, high recovery, and energy savings.

With a global network of UF experts, DuPont’s team can help customers navigate the IntegraTec™ portfolio to tailor scalable, sustainable water and wastewater filtration solutions for industrial, municipal, and commercial applications. www.dupont.com

Evonik Starts Membrane Production in Austria

Evonik has started up a new hollow-fiber spinning plant for production of gas separation membranes in Schörfling am Attersee in Austria.

The new production capacity enables the company to meet the ongoing strong demand for SEPURAN® membranes in biogas, nitrogen, hydrogen and natural gas applications. Evonik invested a low double-digit million-euro amount in the new plant and created around 30 new jobs in Schörfling.

Lauren Kjeldsen, Head of the Smart Materials Division, said: “The growth path of the membranes business clearly follows the group’s new sustainability strategy.” www.evonik.com

Throughout the years, Wallner Expac has partnered with filter manufacturers to supply them with expanded metals. Whether the need is residential, commercial, industrial, HEPA, microfiltration, or other type of filtration, we pride ourselves on providing strong and sustainable solutions that help deliver optimal air quality and contribute to a healthier environment.

 Employee-owned and North America’s largest manufacturer of light gauge HVAC expanded metals.

 Developers of X-Mesh®, light gauge expanded metals specifically engineered for filter media backing. U.S. Patent 8,696,781

 Manufacturers of MicroForm® expanded metals for microfiltration.

 US-based manufacturing plants in California, Georgia, and Texas.

 Customizable specifications to achieve open area and breach test requirements.

 Additional services include conical, corrugation, slitting, powder coating, engineering & design, and more.