Client Success Stories
Technology Startup Built on Solid Foundation
What does it take to transform a third-generation family business with a solid foundation in the bricks-and-mortar world (literally) into a 21st century venture? In the case of Hycrete, Inc., it takes vision, a good business plan and, of course, capital.
Hycrete is a space-age company in an age-old business. Its medium of trade is concrete, a building material that has been used in one form or another for at least 5,000 years. But the products Hycrete sells—additives that greatly expand the types of applications for which concrete can be used—were first developed by an inventor who at one time worked closely with NASA on the development of solid rocket fuels and heat shields for the space program.
Hycrete provides concrete producers, builders, designers and owners with modern concrete construction systems that deliver cost savings, schedule acceleration and sustainable construction solutions. Its primary system delivers integral waterproofing that eliminates the need for external membranes, coatings and sheetings.
“Hycrete is an easy-to-use, water-based concrete additive that improves concrete wear with respect to corrosion resistance and reduction of water penetration,” explains David Rosenberg, the company’s chief executive officer. The additive, which is environmentally safe for use both as an admixture in new construction and as a spray-on product for post-construction applications, blocks penetration of water by forming a non-soluble material that fills the millions of tiny pores, capillaries and internal voids found in conventional concrete. Its molecular structure is a long hydrocarbon chain that repels water.
Innovative Technologies Propel Family Business to Next Level
While Hycrete, Inc. is only about a year old, it is the direct descendant of a company founded by Michael S. Rhodes, the NASA-affiliated inventor mentioned earlier, who just happens to be Rosenberg’s grandfather.
“Historically, the family business has been in manufacturing and research and development,” says Rosenberg, a Columbia MBA who worked on Wall Street before launching Hycrete. In the 1950s, Rhodes developed a class of oil-soluble inhibitors that are still used in automotive lubricants, and this proprietary technology he created is the basis for Hycrete additives.
“Hycrete is an easy-to-use, water-based concrete additive that improves concrete wear with respect to corrosion resistance and reduction of water penetration. Our business is taking concrete, the most widely used building material in the world, and correcting its greatest flaws.”
Rosenberg decided to spin out Hycrete, Inc. as an independent company with a focus on sales and marketing. Demand for the kind of hydrophobic concrete additive that Hycrete manufactures is wide spread, and sales are starting to skyrocket. Not only do Hycrete’s additives make concrete functionally waterproof, they prevent corrosion of the reinforcing steel (rebar) used in many concrete structures by coating the steel’s surface with a monomolecular film.
“Our business is taking concrete, the most widely used building material in the world, and correcting its greatest flaws,” is how Rosenberg describes it. But as compelling a business case as that may make, he admits it wasn’t always easy getting venture capitalists to listen to it. “It was challenging getting people to look at our business plan. We’re kind of a funky company that doesn’t fit neatly into the company categories that venture capital firms typically fund,” he says.
Financing Growth with “Smart Money”
But Rosenberg knew he needed capital to finance the sort of growth he anticipated for Hycrete, so he began pounding the pavement in search of private equity funding. He started his search about two years ago, and once he was finally able to get prospective investors to look at his business plan, things began to take off.
“We went the private equity route because we wanted to get smart money in the form of experience in building businesses,” he explains. Hycrete recently raised a second round of financing with its existing venture capital firm, NJTC Venture Fund, as well as two new funds: NGEN Partners and RockPort Capital Partners.
“I started looking for the right investors for our Series B financing in January, had my first meetings with them in March, got term sheets in late spring and completed the financing in August after a long due diligence process,” Rosenberg relates. “We ended up being three times oversubscribed to our offering, so there is a lot of interest in what we are doing right now.”
Rosenberg plans to put the invested capital right to work supporting Hycrete’s growth. The company has doubled in size in terms of the number of employees since its private equity placement, and he expects it to grow at a similar pace in 2007.
For more information, please contact Frank Kimmerling at fkimmerling@gellerco.com.
Capital Trends
The Clock May be Ticking on the M&A Boom
By most measures, merger and acquisition (M&A) activity remained at record levels both domestically and internationally entering the final quarter of 2006, but some experts believe the first signs of a slowdown are making themselves known. Their advice to those who may have been sitting on the fence about pursuing a deal is straightforward: Do it now, before the once-in-a-lifetime confluence of positive factors that still characterizes the M&A market begins to wane.
The current environment is particularly attractive for those thinking of selling a company because the market is still jammed with both strategic buyers and private equity firms looking to make a purchase. “Demand is strong in many quarters, including other businesses, corporate buyers and equity funds,” notes Joe Gitto, managing director of Geller & Company’s Emerging Business Group. “Multiples have been on the very high end of historical norms in many cases, reflecting buyers’ willingness to pay top dollar for well-run businesses.”
Andrew Shiftan, managing director in the corporate finance department at Morgan Joseph & Co., points out there are still plenty of positive factors driving M&A activity. “Rates are still relatively low, businesses continue to sit on near-record levels of cash, the Dow is in record territory and there is a lot of capital flowing into private equity funds,” he says. “Basically, there’s still a lot of money out there looking for deals.”
However, he acknowledges, no market can keep going up forever, and there are good reasons for companies considering deals to move forward now. “We’re starting to see some compression in multiples of EBITDA being paid for companies. They’re not being bid up as high as they were a few months ago,” Shiftan says.
Record Levels of M&A Activity
The second quarter of 2006 was the third-busiest in history for M&A transactions, trailing only the final quarter of 1999 and first quarter of 2000, according to market researcher FactSet Mergerstat, LLC. The value of U.S. deals climbed to $355.8 billion in the second quarter of 2006, up from $258.2 billion a year earlier. Announced U.S. transactions were up to 2,637 from 2,476 over the same time frame.
“Right now companies are still getting strong valuations, conditions are good, and there are a lot of dollars looking for deals. Why risk uncertainty going forward, such as possible changes to favorable tax laws which are set to expire soon?”
As of early October, Mergerstat reported 8,491 U.S. deals valued at just under $997 billion completed or in the works, while European M&A activity stood at 8,610 deals valued at more than $1 trillion. With aggregate value of U.S. deals up 24% during the first half of 2006, the M&A market was poised to set a new record for the entire year.
Daniel Varroney, president and chief executive officer of the Association for Corporate Growth (ACG), describes the current market as “the perfect M&A storm. Everyone has cash they want to put to work.” In a mid-year survey conducted by ACG and Thomson Financial, dealmakers singled out technology as likely to be the hottest sector for M&A activity through the remainder of 2006, followed by health care/life sciences and manufacturing/distribution.
Deals involving software ventures have dominated the field through the first two quarters of the current year, accounting for about 400 deals with an aggregate value of about $10 billion, according to Mergerstat. The banking and finance sector had many fewer deals—about 100—but the highest aggregate value at about $55 billion.
Some Emerging Factors Point to Change in Momentum
While deal-making activity remains at or near record levels, some experts warn that missing the top of a cycle can have negative consequences, as happened when the M&A market peaked in 1999–2000. “Some business owners who wanted to sell then but were waiting for a little bump in valuation saw the window shut very quickly,” Gitto recalls. “They missed out on a very good opportunity, and it was several years before conditions began to improve again.”
Some market watchers point to rising interest rates and a decline in the number of deals closed by the nation’s top investment banks in the third quarter as signs the party may be nearing its end. According to M&A tracking firm Dealogic, the volume of closed M&A deals declined in the third quarter compared to the second quarter. Goldman Sachs, the long-time leader in the global merger advisory business, saw its deal volume slip to $77.2 billion in the third quarter from $271.7 billion in the second quarter.
“Trying to time the top of the market is never a good strategy,” Shiftan advises. “Right now companies are still getting strong valuations, conditions are good, and there are a lot of dollars looking for deals. Why risk uncertainty going forward, such as possible changes to favorable tax laws which are set to expire soon?”
In other words, while no one can predict with certainty what the future holds, conditions for doing M&A deals are extremely positive right now and dealmakers should seize the opportunity.
For more information, please contact Joe Gitto at jgitto@gellerco.com.
Financial Reporting
Tips and Strategies to Prepare for Year-End Planning
With the current fiscal year winding down at many companies, attention is focused on preparation for year-end reporting and planning, as it should be. However, as Barry Schreiber, Director, Growth Company Services at Deloitte & Touche LLP, points out, those activities should not be considered a once-a-year proposition.
“The interaction related to year-end reporting that businesses have with their accountants should be recurrent throughout the entire year,” he says. “You shouldn’t try to compact an entire year’s worth of discussions into the last few months. That said, there are specific items which companies should be paying more attention to as the year draws to an end, such as getting their books closed and preparing to deal with whatever issues are likely to arise in the audit.”
Creating a Year-End Reporting Checklist
Companies should already be thinking about a year-end reporting checklist, advises Antonette Favuzza, senior executive member of the Emerging Business Group at Geller & Company. “Any issues from past audits that have not been addressed, any changes since the last reporting period that need to be examined, new and pending contracts—these are the types of things on which they need to begin focusing,” she says.
One of the big issues confronting many firms in the area of year-end planning is FAS 123(R), Schreiber and Favuzza agree. The revised accounting standard contains significant changes that companies should have been discussing with their accountants throughout the year. “If they haven’t been doing that to prepare for the changes and to resolve issues related to fair value, they need to address that right away,” Schreiber says.
“Companies used to be able to rely on auditors as a resource in certain areas, such as FAS 109, and they no longer can. If they don’t have the internal expertise to offset that lost resource, they shouldn’t wait until the last minute to find it because there will be a mad dash for those resources as the year winds down.”
Determining fair value of common stock becomes particularly challenging for private companies, as most have only had sales of their preferred stock. Some companies turn to third-party valuation firms while others attempt the exercise internally. Either way, valuation and volatility—the key issues related to FAS 123(R)—need to be addressed, as well as the respective tax accounting implications.
Important Tips for Year-End and the Year Ahead
The two financial reporting experts offer a number of other tips that can help companies prepare for year-end reporting:
- Review treatment of goodwill and respective impairment. “You don’t amortize it any more, but you have to test for impairment, and you should also be reviewing other assets to see if any other items have been impaired,” Favuzza notes.
- Review balance sheets, capitalized expenses and other items that need to be expensed.
- Have a discussion with your accounting firm regarding what data, documents, files, etc. will be needed. “Accountants should give their clients a to-do list so they can hit the ground running,” Schreiber suggests. “That benefits both sides, makes everybody happy and can help keep fees down.”
- Have relevant documents scanned. “That way you’ll have a permanent electronic copy,” Favuzza says. “It’s also easier to give documents to your auditor or anyone else who needs them and to track them through the process.”
- Company CFOs should schedule internal planning meetings with their controllers to make sure all relevant responsibilities and tasks have been assigned. If there is an audit involved, a pre-audit internal meeting should be held.
- Review internal controls with an eye toward anything that might have changed over the past year.
- Focus on executive compensation, which has become a hot-button issue recently. “Public companies need to consider whether proxies need to be redone,” Favuzza points out. “Anything over $10,000 now needs to be disclosed.”
- Be aware of post-Sarbanes Oxley (Sarbox) issues that affect the relationship between auditors and clients. “Companies used to be able to rely on auditors as a resource in certain areas, such as FAS 109, and they no longer can,” Favuzza says. “If they don’t have the internal expertise to offset that lost resource, they shouldn’t wait until the last minute to find it because there will be a mad dash for those resources as the year winds down.” (For more on this topic and to download “The Changing Relationship Between Auditors and Companies,” a Geller & Company white paper, click here.)
Favuzza and Schreiber say companies should also use this opportunity to do some forward-looking planning for the coming year. “When you end a year, you begin a year, so think about the year to come and what steps you should take to kick it off on the right foot,” Schreiber advises. Adds Favuzza, “The earlier you can get started on this and the more you can do in advance, the better the outcome is likely to be for all involved.”
For more information, please contact Antonette Favuzza at afavuzza@gellerco.com.
