While Houlihan Lokey Inc.'s expensive acquisition of Japan-based GCA Corp. certainly surprised analysts, the deal ultimately drew a positive reaction as it will help expand Houlihan Lokey's global footprint and bolster its technology offerings.
The $599.1 million transaction, which was originally valued at $591 million before Houlihan Lokey's tender offer was upped in early September, represents the investment bank’s first acquisition of a company based in Asia, as previous acquisitions focused on companies based in the United States and Europe.
JMP Securities analyst Devin Ryan wrote in an Aug. 3 report on the deal that "this transaction should meaningfully scale the firm's presence in the region and creates a broader base off of which to build."
Keefe Bruyette & Woods analyst Michael Brown echoed a similar sentiment, writing in an Aug. 2 report, "Houlihan Lokey is aiming to diversify their revenue streams and the acquisition of GCA provides significant geographic diversification for the firm."
Piper Sandler analyst Jeff Harte agreed, but also noted that Houlihan Lokey is likely to continue to focus on acquisitions in Europe and the U.S.
"This gives them some size in Asia which they didn't have before, but I would still kind of think U.S. and Europe are going to remain their near-term focus," Harte said in an interview.
The size of the deal was eye-opening, considering Houlihan Lokey had not ventured into deals over $500 million in the past. Most recently, Houlihan Lokey acquired Baylor Klein Ltd. earlier in the year for an undisclosed amount, and acquired MVP Capital LLC in a 2020 transaction valued at $21.5 million.
"I was surprised by how big it was, but the fit seems good enough that when something like that comes along, go ahead and do it," Harte said. He estimated that the GCA acquisition would increase Houlihan Lokey's employee count by 32% and grow their managing directors count by 35%.
Analysts also praised the acquisition of GCA Corp. because it would help Houlihan Lokey bolster their presence in the technology sector.
"As a combined firm, management expects revenues in the TMT [technology, media and telecom] group to grow from 'underweighted' relative to the industry size to become the firm's 'largest and most global' industry group," Ryan wrote.
Harte noted that nearly 70% of GCA Corp's advisory business was TMT-related, in comparison to just over 10% for Houlihan Lokey.
"I think it kind of takes them from being somewhat undersized in technology to kind of being right-sized in technology and it's not a bad time to do that," Harte said, adding that technology seems to be the strongest sector for M&A announcements so far in 2021.
Analysts agreed that such a large deal for Houlihan Lokey may present challenges around integration of the two companies.
"GCA has historically run with much lower margins than Houlihan Lokey and there could be some 'friction' as GCA transitions to Houlihan Lokey's platform which has historically run with renowned expense discipline," Brown wrote.
"The question becomes the ability to really integrate such a large transaction, but I mean they have historically done well with integrations … In the U.S. there's not a whole lot to integrate. In Asia, there's not a whole lot to integrate. It's really kind of more Europe, and I think they'll do okay with that," Harte added.
Provided Houlihan Lokey overcomes any potential challenges during the integration process, analysts expect the deal to be quite accretive for the company.
"Financially, we estimate the deal could be quite accretive at first blush … We estimate the deal would be upper single-digit percent accretive to EPS, which is based on current projections of GCA's business," Ryan wrote.
Brown agreed, writing, "We estimate the transaction could be 11% accretive to EPS."
The updated tender offer is expected to close Oct. 4.