Cliff Atherton, Managing Director, GulfStar Group
In an interview with Invest:, Cliff Atherton, managing director of GulfStar Group, talked about how the company leverages its know-how, brand, and contacts to help entrepreneurs and families sell their businesses successfully by guiding them through the transaction process. He also highlighted that constraints in the credit market have pushed companies to look for strategic buyers for their businesses.
What have been the key contributions of GulfStar Group in the Dallas-Fort Worth area over the past year?
Our big contribution is representing business owners, families, and entrepreneurs in achieving liquidity from a business enterprise that they built up over one or several lifetimes. While many do not know what that means for a community, our former clients become more involved in the communities where they live on the backside of the transactions that we work on.
Our clients have tremendous experience, business know-how, and contacts, and after a transaction they also have the liquid wealth to support charitable activities. That is a major – and overlooked – community benefit from what we do.
How would you describe the investment banking sector in the Dallas-Fort Worth metroplex?
The focus of the middle market investment banking sector where GulfStar operates is on representing sellers and helping them achieve liquidity. Nevertheless, we do not see all industries being treated the same. With people’s attitudes toward oil, a lot of energy companies are out of favor. A huge part of the Texas economy has been driven historically by the energy industry.
Despite that, the Texas economy is a lot more diversified than many people realize. Most of the middle market banking in Texas comprises assignments for manufacturing, distribution, transportation, software, healthcare, and other companies. Considering the size of the Texas economy, there is tremendous opportunity to represent the entrepreneurs and family businesses like those GulfStar works with.
How have client expectations shifted considering the existing wide range of financial services and investment banking available?
Our clients want a completed transaction where everything is close to risk-free after the closing. They also want to get the best price and to place the business in the hands of someone who will be a good steward for it after closing the deal. Nevertheless, clients do not necessarily know how to get to those outcomes. They rely on us to quarterback a process that gets them there. Once clients articulate what they want to achieve, we run a process that gives them the best chance of achieving those results.
What initiatives has GulfStar Group implemented to enhance customer experience?
We play the role of matchmaker, so we must consider not only what is important to clients but also to buyers. We run an auction process where we get serial bids, so we aim to narrow a large pool of potential buyers down to one buyer that gives our client the best price and terms. To achieve that, we progressively give them better information.
Most buyers expect a quality of earnings report created by an independent accounting firm that goes through the company’s accounting. Additionally, buyers expect us to be more granular in the data we present in the offering memorandum, so they can better understand the nuts and bolts underneath those accounting statements. That includes a lot of data around the company’s products, services, and customers.
What are the key factors that help GulfStar Group stand out from other investment banks in North Texas?
Our 30-year history differentiates us. Our firm has been around independently since 1990, but our history dates back to the 1980s. There were two dominant, full-service regional investment banks in Texas back then: Rotan Mosle and Rauscher Pierce. As investment banking underwent consolidation, both companies were acquired by large firms in New York. Rotan Mosle was acquired by Paine Webber, but that company did see value in a regional, advisory-only practice located in the Southwest. The founders of GulfStar Group eventually bought that business from Paine Webber.
We knew that advisory work on the M&A side was the best piece of the full-service regional investment bank. Additionally, since our founders were investment bankers in the Southwest prior to1990, we have a lot of collective experience. When something novel pops up, there is a good chance that one of our partners has seen it in a deal before. If not, we can sit down and talk about how to deal with it.
What key characteristics does GulfStar Group prioritize in terms of brand building?
We knew from the beginning that building a successful investment banking company as an independent boutique meant building a brand in the communities where it counts. Our idea from the beginning was to build up our brand within the deal community so that legal, accounting, and other advisers would recommend us to companies considering a sale. If a company is worth $100 to $350 million, our name will be on the list along with some of our larger competitors. If that company is worth $25 to $100 million, we will also be on that list along with smaller competitors.
Additionally, we focus on more than one industry vertical. There are business models that transfer from one industry to another. One of my favorite clients is a family business that started in a flea market over 40 years ago and has grown to revenues ranging between $80 and $100 million. That company achieved its success thanks to a unique model that attracts a particular customer segment. I know there are other companies that were built by selling to an under-served segment.
What are some of the key opportunities that GulfStar Group has identified in the North Texas market?
The U.S. is experiencing a continuing transfer of intergenerational wealth by baby boomers, which creates opportunities for us. Baby boomers have been incredibly entrepreneurial and built valuable businesses that employ a lot of people, have created incomes for many families, and sent employees and children to college. We will continue as a leader in that transfer of wealth as we find new owners for their companies.
What are the significant challenges and opportunities in the investment banking industry?
When a segment goes out of favor like oil field services are now, it is more challenging to find a large universe of potential buyers. Currently, I represent a coiled tubing company, and our focus is exclusively on a short list of strategic buyers like public companies and private equity portfolio companies since most private equity firms and banks have red-lined the industry. Strategic buyers know this and have driven down valuations and terms as they consolidate the industry. Our challenge is to generate competition among a smaller set of buyers who know that terms across the industry are less favorable to sellers. As a result, we have begun looking at ESOPs as an alternative exit vehicle for some of our clients.
A continuing challenge is the fact that our biggest competition comes in the form of sellers who believe they can save money and generate the same result – a closed deal at the best price – without an investment banker. We consistently achieve higher values for clients through our process than they would be able to negotiate one-on-one with a buyer. Simply put, the buyer will cover the seller’s costs in the form of a higher price, and no one truly knows the value of a business until we generate a closed deal through our competitive process.
