You have a Ph.D. in chemistry. How come you’re selling companies instead of doing polymer research?
I worked for several years in the chemicals industry before joining BCG. The move was motivated by my hunger, coming from academia, to learn more about the industry and its market dynamics in general. In the end, the industry was moving to slow for my liking and didn’t offer me the breadth of learning opportunities I was looking for. After joining BCG and almost 10 years as a management consultant I founded my own advisory company in the healthcare space. 9 years later I joined Quarton that then got acquired by Cowen, and still have the same focus.

In Europe, Cowen has about 50 people in 5 offices in Germany and Switzerland. Do you often work with your colleagues abroad?
I do, especially in multinational transactions. Recently we did the carve-out of Extract Technology, a business headquartered in England that belonged to a US company. The acquirer was the Swiss company Dietrich Engineering Group, a portfolio company of the German investor Capiton. In such a relatively complex transaction, a number of colleagues from different offices are involved and I really enjoyed working with my US colleagues on a daily basis on this.

Healthcare, your specialty, is one of the sectors Cowen is active in. How important is knowledge about what a company does in an M&A transaction?
It definitely helps to know an industry, its actors, and who to call in your network. It’s fair to say that knowing many or most of the relevant people in this field is certainly an advantage. Understanding a company and its product also helps getting a clear picture of potential buyers and competition, and of who you want to call first, because there is a good fit and who you want to call later, because the information that a company is for sale might become spread more broadly. Most sellers don’t want to publicly announce their intention.

What about the dual-track process, when a company is pursuing a possible M&A transaction while at the same time preparing for an IPO?
This is another possibility, but it poses some challenges. First, you need to be “IPO ready”, this includes for example a very experienced management team, particularly with a CFO that has capital market experience, otherwise this approach is implausible. It is a tough process to prepare for an IPO that stretches the resources of the management team, and you often want to raise money at the same time to have some reserves after the IPO, because you don’t want to go public and instantly afterwards start raising money again. But it does also pose a dilemma for the buyers, because they need to assess if they are ready to buy the company right now or if they want to for the IPO to go well and that they will probably pay a much higher price later. Kite Pharma, a biotech company, is a good example. They did an IPO at USD 17 per share in 2014. In 2017, they were acquired by Gilead for USD 180 per share, for a total of USD 11.9 billion.

Cowen Europe is active in the mid-market segment, which means transactions somewhere in the range of EUR 25 to 500 million equity value. Who are the buyers in this segment and why are they buying?
Generally, you can distinguish between financial and strategic investors. In the first group, there are private equity firms that often pursue a buy and build strategy and help their companies expand. They tend to invest in well-established and profitable SMEs. In the second group you have large companies such as Johnson & Johnson or Medtronic that are buying products or technologies that fit their portfolio. They also buy startups, but often prefer to wait until they are well on their way to profitability. But in the end, it’s a question of the buyers’ individual strategy of what and when they’re interested to buy.

“It’s not just strategic buyers, private equity firms have raised a lot of capital that needs to be deployed as well.”

According to PwC, strategic buyers have amassed dry powder ready for M&A deals in excess of EUR 1.2 trillion. Does that mean that deals are more easily made than in the past?
It’s not just strategic buyers, private equity firms have raised a lot of capital that needs to be deployed as well. Capital is quite abundant at the moment. We observe that the EBITDA multiples by which companies in Life Sciences are valued have risen substantially. Due to Covid, a lot of money has flown into the healthcare systems. Companies such as Dräger, which manufactures respirators, have seen their sales increase dramatically, and there are observers that think vaccine company BioNTech might reach a market capitalization of EUR 500 billion. Two years ago, such a figure for a European company founded only 13 years ago would have sounded preposterous. But to come back to your question, a lot of money doesn’t mean that it is stupid money. I don’t see that acquirers are taking the due diligence process more lightly, they just try to prepare even more upfront to be competitive in the process. High prices are only paid for companies with a strategically sound business model or, in the case of startups, those that are very likely to succeed in the market in the long term because of their unique technology.

Is an M&A transaction that involves a startup much different from one that involves a mature company?
They are similar from a process and effort perspective but differ in their probability of success. I still see a big difference between Europe and the US in terms of how easy or difficult it is to raise growth capital. The risk appetite in the US is higher, European VCs tend to do much smaller investments. If it gets difficult to raise more capital, startups get sold earlier.

We talked about the buyers, but what about the sellers? Who wants to sell their established SME?
In the past, one of the main reasons was succession planning, which usually meant that the whole firm was put into new hands. But I see a new generation that owns and manages their businesses and who understand the capital markets better. They don’t shy away from bringing external investors on board, even if it means to sell the majority of their company. They want to bring their firm to the next level, thanks to a capital infusion and the expertise of the investor. They don’t like the alternative of begging banks for money at not so attractive terms. I know a few cases where the owners of a family company, together with private equity firms, increased the turnover substantially, in the order of going from EUR 10 million to 100 million and now heading towards reaching 1 billion. Private equity firms want to have good management on board for the future, therefore they are happy to leave them with a substantial share of ownership. If the company is a good strategic fit, a talented management is one of the main value drivers and reasons to pay a high price.

“A talented management is one of the main value drivers and reasons to pay a high price.”

How long does an M&A transaction take?
About as long as a pregnancy (laughs). If everything goes smoothly, usually 6 months are enough between first contact and signing and we have done transactions in as little as over 2 months. It depends a lot on the objectives of the seller and the attractiveness of the overall transaction.

Where does the advisor put the emphasis on the preparation of the deal?
Your business plan has to be rock solid. If it isn’t, we’ll help to rework it. Potential buyers want to have visibility where the company and the market is heading over the next 3 to 5 years, and what the competition is doing. Financial investors also like to get a good idea who the next buyer might be. The business plan is usually the document that takes quite some time to prepare and polish. An additional element is the financial plan that shows what investments will need to be made and when, and what foreseeable value inflection points are. In the case of large companies, it makes sense to let an accounting firm check these documents for plausibility.

And what if the company to be sold is a startup?
If we’re talking about a company that proposes incremental innovation, their way to the market must be very clear and foreseeable. Based on this, the potential buyers can calculate how long it will take to generate returns. On the other hand, if a company proposes a disruptive new platform, the buyers will want to assess the quality of the platform and the likelihood that this platform establishes itself as a new standard. They will talk to experts and look at the board of directors and the advisory board. Is it composed of key opinion leaders and eminent authorities in the field, and is the company backed by one or several leading venture capital firms? These are all signs of the inherent value of a technology platform. In any instance, for strategic buyers, the most important condition is a good fit with their product and technology portfolio.

But is it fair to say that in general, strategic buyers would rather wait a bit longer and buy a MedTech startup at a later stage, after market approval, even if that means paying a higher price?
Indeed, it is a form of de-risking that makes sense for strategic buyers. They don’t want to do venture capital and nurture countless firms; they have their venture arms for that purpose. The number of new platforms even large companies can manage is finite. By the way, you see a similar pattern in pharma, where the stages of clinical trials are very well defined: There are just a few topics like immuno-oncology where the potential is so enormous that buyers will pay high prices even after phase I, when the efficacy of a novel approach hasn’t even been proven yet. For other more traditional domains, buyers will often wait until after phase III when there is evidence that a compound works much better than what is available today.

What about digital health companies, are they different when it comes to M&A?
The way I think about them is to ask myself who are the stakeholders in the healthcare system that profit from their services. The more beneficial a digital health company is for all relevant actors, doctors, hospitals, health insurers, patients, etc., the more likely it is that it will be successful. Let’s take the example of Liva Healthcare, a Danish startup that has developed a digital platform that helps fight obesity and diabetes 2. Fitness trainers and nutritionists like it because it allows them to have more clients, the insurers like it because progress and weight loss is well documented and the savings for the healthcare systems are calculable, and the doctors like it because they have a tool for disease management that works. Other companies like Nyquist Data are building specific information repositories that have the potential to significantly increase efficiency when searching for regulatory information in medical devices. This will reduce lead times in MedTech regulation and enable better decision making, when it comes to regulatory processes. Google has just recognized their potential by including Nyquist Data into their accelerator program. The healthcare systems are complex, and the regulatory frameworks keep changing. In this regard, all the foreseeable changes that will affect digital and other health companies need to be accounted for in the business plan.

What are things that can break a deal?
Sometimes founders and shareholders of a company calculate the value of a company by making generous assumptions. Then it comes as a surprise if the market assigns different success probabilities and hence quite a lower value to their company. Therefore, we do our own due diligence first. If we think that the company came up with an interesting innovation, but unfortunately, we believe the value is below shareholder expectations, we’ll be honest about this assessment. In most of the cases, they will discuss this with us and usually we come to an agreed valuation.

And if they insist upon their point of view and won’t accept anything less?
Then we won’t be able to support them in their process.

Is it more difficult to sell a company if there are just a few potential buyers worldwide?
No, if there is competition, you should be fine. If there is only one buyer and they know it, that’s a position you don’t want to have as a seller. The important takeaway for founders is that they shouldn’t place themselves in a situation of dependence on one potential buyer, for example, by granting them a priority right to match a competing offer in the case of a sale. This reduces the attractiveness of the target considerably. It’s very off-putting to other potential buyers to know that they can be outbid and that their offer may be communicated to a competitor.