June 2016 Newsletter



When a business runs smoothly it is because there is a happy synergy between its 3 countervailing forces: the owners, the investors and the managers. The owners want more profit so they hire capable managers and allow them to manage. The investors also want more profit so they use their skills and contacts to help the owners in rendering the business even more successful. The managers want a higher salary or to start their own thing so they work hard to ensure the business grows. That is a business ecosystem, and in fact, everything is an ecosystem, this is why they tell you to find a niche. Find a niche when you go to college, find a niche when you´re going to start a business, find a nice when your business works well but can be better, find a niche in a variety of ways: choose a major, corner the market, specialize…

The idea of search funds can be tracked to Irv Grousbeck in the mid-1980s and the Stanford Business School. These funds take recent MBA grads and put them in charge of an already profitable business. The MBA´s role is to put into practice his/her elite education to increase´s the business profitability, market share etc. The key point in this model is that the MBA is backed at all times by the investors in the funds, who provide their wealthy commercial experience and act as a corporate board.

In the end, search funds provide a middle ground for investors, sellers, and entrepreneurs. While they offer investors lower returns than venture capital home runs, they are less risky.

Until recently, search funds were almost exclusively a North American phenomenon, with about 200 successful purchases in the U.S. and Canada. But in recent years, they have expanded, first into the United Kingdom and then Europe, Africa, Asia, and Latin America. According to a recent study by the Search Fund Center at IESE Business School in Barcelona, 36 search funds have been raised outside of North America—including 14 in the last two years. The UK has the most, with 11, followed by eight in Mexico.

The results are impressive. A 2013 study by the Stanford Centre for Entrepreneurial Studies found that the aggregate pre-tax ROI was just shy of 35% and that the aggregate pre-tax return on invested capital to be 10X.

Now what if we reverse the search fund model?

The most challenging part of a search fund is that the MBA has to perform a great deal of research in order to find THE most suitable company: a company that has survived the start-up phase but yet, has not exploited its niche sufficiently to be considered super profitable, which is not easy at all, and can take up to a year or more.

In the reverse model of the search fund, it is the firm that looks for capital and expertise, and once connected to a reverse search fund, the company or the fund itself can contact the business school to find the appropriate candidate(s) for the position.

In that way, this simple model offer an exit strategy for aging business owners.

Jueves, 06 Abril 2017 00:00

How much is a company worth?

I remember that in the historic Spanish entertainment program entitled Crónicas Marcianas (Chronicles of the Martians), the multifaceted author Boris Izaguirre advised the actress Bibiana Fernandez to show her breasts when she had no idea of what to say or to do, as that would always be a last resort to cheer up the crowd.

Something like the bottom of a closet. It has been the same for me for my financial career, when I just started in the world of investment banking and in some embarrassing silences I did not know what to talk about, I would introduce the subject of business valuations. But with the difference that I cannot teach at that time but only share my ignorance. Came along Socrates ‘paradox ¨I know one thing: that I know nothing¨.

Obviously, we must specify a price in order to conclude a transaction, or otherwise, how would it be done? But there is also emotional support in making the decision; that is, the human being does not live well in the uncertainty and needs to concretize to the maximum when it is essentially impossible.

Let's see some examples. One: compare any mega bank 10 years ago and today; they are liquid companies in 2007 and in 2017 in comparatively stable markets (not very different one from the other) with relatively easy trajectories and future to analyze ... and their value is half that. Another example to reflect on: when there is a controversy and the parties go to different advisors, the valuations always differ in relation to the defense; If they are serious disputes between parties, the difference can be significate, but if they are aiming similar objectives, the difference is probably small.

Valuation is not an exact science and is a fact to be taken into account within another set of criteria that are impossible to quantify and are based on the intuition of the leader: leadership position with everything that this situation involves, real synergies to obtain, need for a minimum size, cash position, other alternatives, market share, etc.

In my opinion, two important mistakes are made: beliefs are created when they are almost never met (by excess or defect) and the use of the WACC. This acronym stands for Weighted Average Cost of Capital; i.e. the weighted cost of capital or in another words, the resources that a company has to finance its assets.

Let's take an approximate example: if a company gains 10 it will be able to search for let´s say 3 profitability scenarios. If it is looking for 10%, it can pay around 100; If it is looking for a 20% profitability it can pay around 50, and if it is looking for 5%, then around 200. That is, the less profitability you are looking for, the more you can afford. Placed at one end, if everything is financed through a bank debt, which is usually cheaper than the profitability that a shareholder looks for, then much more can be paid. And this has to do with the non-financial business?

Another example. If my company is trading at a multiple of 20 and I have a profit of 10, I am worth 200. If I buy a company with a profit of 2 to a multiple of 10, I pay 20 but I increase my value by 20 (2 of profit to the new multiple of 20 minus 20 that I have paid). The theory says that to a stock market there is more security, liquidity, etc. But it's not always the case.

So, what to do? Of course, make different valuation scenarios and introduce subjective elements (analyzing the barriers of Porter for example, the quality of the managerial team, etc.) and, after several years, you will have learned with the help of your team and professional and loyal experts.

Jueves, 06 Abril 2017 00:00

The Oysters

We are going to be frivolous today and give you some advice about eating oysters because we know how much you like them.

The Spanish aphorism that seafood should be consumed during the months that contain the letter R is over now because aquaculture has advanced a lot. Be indulgent and have them whenever you want during the year, also consider that their freshness endures a few hours even when open.

Cicero is mistakenly attributed to the saying on tastes. There is nothing written and this is the first assertion: you can have them flat and concave without any problem of appearing uneducated. In addition, the size (caliber 5 is the maximum) is like wine: each prefers a type.

If it is true that the oyster filters hundreds of liters of water a day and the phytoplankton of the growing area consequently marks its flavor, but then, what is better? a Rioja Alta or a Barolo? ... Yes, the meat should have a light color and a clean and sleek appearance, but that's it. In addition, to enjoy it well, the temperature should be between 12 and 14 degrees.

As for whether to have them with lemon, wine vinaigrette sauce and chives or ketchup ... You decide ... in America, they love them with Ketchup and even mustard. Same with the pairing: the experts talk about the amontillados of Jerez, but in America they like them with Bloody Mary ...

Come on ... enjoy and ignore everyone ...

Jueves, 02 Febrero 2017 00:00

Are Anti-Globalists Wrong?

Globalization describes the process through which regional economies, societies and cultures have become integrated through communication, transportation and trade; a unification of the world order.

No one can deny that this phenomenon lead to improvements in global living standards in the decades after World War II, which was marked by an explosion in world trade. Exports of goods increased from 8% of world´s GDP in 1950 to almost 20% half a century later, a growth that in addition to foreign investment, dragged hundreds of millions out of poverty in China and transformed economies from Ireland to South Korea.

Some westerners criticize that the emerging markets are the ones who are benefitting from this wave, however, the overall benefits of free trade are unarguable. Firms with high exports became more productive and thus pay higher wages than those who are confined to their domestic market. For example, half of America´s exports go to countries with which it has a free-trade deal although their economies account for less than 1/10 of global GDP. Also, by contrast, protectionism hurts consumers and the less-fortunate benefit far more from trade than the rich. A study has showed that the richest consumers would lose 28% of their purchasing power if cross-border trade ended, but those in the bottom tenth would lose 63%. Migrants improve their own lives and the economies of the host countries: European immigrants in Britain since 2000 have net contributed by more than 20 billion pounds to the public finances between 2001 and 2011. Finally, foreign direct investment deliver competition, technology, management know-how and jobs.

So why are some people still fighting Globalization?

In the lead, Donald Trump, the new president of the USA, incoherent on so many fronts, clearly makes his point on this area stating that unfair competition from foreigners has destroyed jobs at home. He threatens to dismantle the North American free Trade Agreement (NAFTA), withdraw from the Trans-Pacific Partnership (TPP) and start a trade war with China. In Germany, one of the world´s biggest exporters, tens of thousands marched, in the end of 2016, against a proposed trade deal between the European Union and the United states. The Brexit vote reflected concerns about the impact of unregulated migration on public services, jobs and culture, and big business have been attacked for taking advantage of foreign soil to dodge taxes.

It can thus be argued that globalization as a process does have winners and losers, however, there is a big difference between improving and reversing it. Since the 1840s, free trade lovers gave believed that closed economies favor the powerful and hurt the laboring classes, they were right then and still are. More varied and greater opportunities are available today because of this move which makes people better off

Jueves, 02 Febrero 2017 00:00

Incorporation of Juan Rodrigo

Juan has joined Closa Investment Bankers as a Senior Associate in the Barcelona office as of October 2016.

During the past 20 years, Juan has managed projects in various sectors such as industrial, consumer, pharmaceutical, real estate, publishing and services. He has developed his career with main exposure to the financial, organizational, technological and strategic areas, offering results to both multinational and family companies (Andersen, Pirelli, Puig, Zeneca Pharma, Inmobiliaria Colonial, Grupo Planeta, Federation union of editors).

He holds a degree in Administration and Business Management, and MBA (ESADE) and a PDD (IESE).

Jueves, 02 Febrero 2017 00:00

Closa´s new office

As of the beginning of 2017, Closa has moved to its new office, located in one of the most admired neighborhoods of Barcelona, on Paseo Bonanova 78-80D (08017).

We have also changed the location of the Madrid office to C/Velázquez 73, Apartment 3ºB (28006).

Jueves, 02 Febrero 2017 00:00

New structure

Closa has adopted a new structure and has divided its business into three main areas:

-          Gordon: an investment fund leaded by Josep Maria Romances and Xavier Mallafré

-          M&A: leaded by José Alvarez from the Madrid office

-          Back-Office leaded by Xavier Mallafré and Mid-Office leaded by José Alvarez.

Jueves, 02 Febrero 2017 00:00

2016 M&A Review

Global Activity Level (from 1 January up to 7 November 2016)

Global M&A fell by 17% and the total deal value reached 2.7 trillion $ against 3.3 trillion during the same period in 2015. It should be taken into account that 2015 was an exceptionally great year in M&A and that the activity picked up significantly in September and October of 2016 (both months recording deal values higher than the same period in 2015).

Deal value in North America fell by 23% year on year and US domestic M&A decreased by 33%. Asia Pacific total M&A went down by 19% and in Europe by 6%. Although there were significant discrepancies between the markets, for example in UK it fell by 54% while it rose by 20% in Germany.

Cross-border deals represented 28% of total M&A value leaded by Chinese buyers with outbound investments totaling 187.5 billion $ ( 180% year on year). Targeted regions were Europe (81.7 billion $), North America (52.6 billion $) and Latin America (16.1 billion $).

The hot sectors are Technology and Industrial & Chemicals. The business services sector attracted technology-focused transactions that were not limited to the TMT sector. Mega deals included Time Warner/AT&T and Monsanto/ Bayer. The consumer, retail and leisure sector witnessed the biggest fall in deal value, with its share of total deal activity falling from 16% in 2015 to 9% in the year to date.

A focus on Media, Information, Marketing, Software and Tech-enabled Services Sector (up to Dec 2016)

In 2016, the deal value of M&A transactions increased to almost 220 billion $ (a 44% increase from 2015) driven by mega deals such as the acquisition of LinkedIn by Microsoft that was valued at 29 billion $.

The 10 most active strategic acquirers accounted for 162 transactions in 2016 and 7.5% of all announced transactions for the year. These leading companies use M&A as a growth tool to continue innovating and transforming their business models to stay ahead of the rapidly increasing use of technology and enhance product and service offerings.

2016 saw a large number of mega deals (above 1 billion $). Strategic deals accounted for 14 out of the top 20 transactions in this sector.


Jueves, 02 Febrero 2017 00:00

How will Chinese outbound M&A look in 2017

Chinese outbound M&A registered a record in 2016 with 372 deals worth 206.6 billion $ and a 20% increase in deal volume.

Chinese buyers are playing an important role in Asia Pacific M&A activity. In fact, 7 out of the 10 largest cross-regional acquisitions out of that region in the first four months of 2016 were announced by Chinese buyers. Chinese companies are looking to North America (a 558% rise) and Europe (a 223% rise) when considering M&A as the slowdown in domestic growth echoes across Asia and China’s economy rebalances from an export-driven manufacturing economy to one driven by technology, industrial know-how and consumption by the rising middle class.

The key drivers:

  • Shift toward technology, industrial know how and consumption: the strategic priorities of Chinese buyers is reflecting this shift in economy, by acquiring North American and European companies to enhance technological capabilities and move the nation´s industrial sector upstream, to gain high-value brands aimed at the maturing consumer in China and to build scale and distribution on strategically important markets and geographies. They want to become market leaders globally.
  • Mature economy and slower organic growth: China´s exploding GDP growth of 10.6% recorded as recently as 2010 cannot be maintained anymore. They are predicting a growth rate of 6% as the country´s economy rebalances toward consumption and services, so the Chinese companies have turned to domestic and outbound M&A to boost slowing organic growth.
  • Scarcity of attractive domestic assets: as small to medium-sized companies consolidate in China, the number of domestic targets decreases. Also, many prefer public market transactions or have high-value expectations, given local valuation benchmarks, which is encouraging Chinese buyers to look abroad for targets.
  • Supportive financing environment: the People´s Bank of China (PBOC) has taken monetary easing measures to attack China´s slowing economy, such as reducing the minimum required reserve ratio for domestic banks and reducing the benchmark interest rate. Chinese buyers are offered numerous financing sources including foreign banks, domestic commercial banks, A-share placements, co-investment from domestic PE and support from regional governments and policy banks.

However, there are challenges that Chinese buyers are facing in order to make it to the finishing line of post signing such as the regulatory hurdles and market policy restrictions from regulators both in domestic and foreign markets. In any case, in 2016, 35.6 billion $ worth of Chinese companies´ bids failed compared to 2 billion $ in 2015. In the West, foreign regulators have increasingly scrutinized Chinese M&A efforts, often reasoning through antitrust and national security concerns. At home, Chinese are also facing threshold when moving large amounts of capital offshore, especially for financial interests that are non-strategic in nature (a cap on investments such as real estate, hotels, entertainment and sports).

The outlook for 2017 definitely seems uncertain as regulatory and policy roadblocks will likely cause delays in the deal process and affect the likeliness of successful deal execution, in particular for large deals in strategic industries. In turn, overseas sellers will likely demand higher break-up fees as insurance (the percentage is already around 10-15% compared to a low single- digit in earlier deals), as well as larger premiums and upfront payments, and the deal value may be skewed by overall funding costs as Chinese banks will increasingly find it hard to finance large overseas deals.

Due to this, smaller weaker Chinese companies might find it harder to conduct M&A deals overseas. However, through their recent experience in expanding and operating within a competitive global landscape, Chinese companies have proven to be flexible and will surely learn to navigate the ever-changing political and financial scene to complete larger and more strategic overseas M&A transactions.

Jueves, 02 Febrero 2017 00:00

Millennials: We Believe in Life After Work

I was asked by Dr. Romances to write about how do millennials view the job market nowadays, what are their career objectives, what drives them in life etc. At first, I was caught by a wave of confusion as I tend to believe (like everyone) that my thoughts and opinions are unique and cannot be considered representative of a whole generation, but surprisingly, after doing some reflections and reading some of the many articles written on this subject, I realized that we actually do have a common moto which I like to call Life After Work.

Millennials, also known as Generation Y or Net Generation, are the demographic cohort that directly follows Generation X (the generation that followed the Baby Boomers). Technically, it´s the generation that reached adulthood around the turn of the 21rst century, but most importantly, it´s the generation that grew up in an electronic-filled and increasingly online and socially-networked world, a generation that was raised under the mantra ¨follow your dreams¨.

Statistics regarding millennials have shown that:

  • 50% of millennials consider themselves politically unaffiliated
  • 30% consider themselves religiously unaffiliated
  • They have the highest average number of Facebook friends (compared to other generations)
  • 55% have posted a selfie or more to social media sites
  • They spend a median of 50 texts a day
  • 20% have at least one immigrant parent

My generation is less concerned with the traditional metrics of success, the ones our parents were threatened by such as savings and home ownership, instead, we want our lives to be defined by meaning, innovation, creativity and a sense of community and shared values. For us, our personal values and interests come ahead of organizational goals, therefore, the most successful businesses to attract millennials nowadays are the ones that offer a good work/life balance, companies that are involved in improving society and that offer a degree of flexibility (such as remote working possibilities). This is a fearless generation that embraces changes and that can adapt quickly, which explains the rise of people working as freelancers, the emergence of start-ups and the decrease in the average job tenure for employees.

With this in mind, I believe that organizations need to respond faster to this generation´s desire to align work with purpose. They need to welcome instability and experimentation and help the new workforce to achieve what it actually wants: a way to create meaning and not just money.

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