How Cleveland Cultivated an Environment of Excellence and Innovation in M&A

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At the dawn of the 20th century, Cleveland was the Silicon Valley of its day. The city’s population, swollen by an influx of immigrants from southern and eastern Europe, has no shortage of industrial jobs. Although no longer America’s largest oil refiner, Cleveland was still home to John D. Rockefeller’s Standard Oil. Mills and factories dotted the banks of the Cuyahoga River through the flats. The new Hulett ore unloaders – invented and built locally – extracted raw materials for steelmaking from the bellies of Great Lakes freighters. The city had even become a hub for the fledgling automotive industry, and Cleveland was said to have more patent applications than any other city in America.

The rise of financial services was an integral part of this industrial growth. In 1903, AC Ernst and his brother created the accounting firm that would become Ernst & Young. In 1916, former Cleveland Mayor (and future Woodrow Wilson Secretary of War) Newton Baker founded a law firm with Joseph Hostetler. Today, Baker Hostetler is one of the largest companies in the country.

Cleveland’s business community has changed significantly, but the financial infrastructure remains strong – and probably the biggest reason Cleveland continues to outperform its weight in the mergers and acquisitions (M&A) market.

Innovation Hub

One of the major strengths of Cleveland’s M&A environment is the wealth of talent the region boasts. Stewart Kohl, co-CEO of Riverside Company, a private equity firm headquartered in Public Square as well as New York, attributes this accumulation of talent to the cluster theory, whereby like-minded companies gravitate to the region because of its business environment. – and people interested in these businesses have also started to gravitate there.
“Cleveland was a manufacturing powerhouse,” says Kohl. “It was such a rich and healthy past, and because you had all these successful businesses, you had law firms, accounting firms and banks.”

Nearby towns like Pittsburgh and Detroit quickly became single-industry towns – steel in Pittsburgh and auto manufacturing in Detroit. But the diversity of businesses in Cleveland has led to a vibrant economy — and a vibrant financial services industry. Over time the businesses consolidated and as they matured they prospered and became large enough to be desirable, yet small enough to be sold. This in turn has made these companies fodder for mergers and acquisitions.

“Our big companies were just big enough to be taken over by the biggest companies,” says Russ Warren, managing partner of EdgePoint and Cleveland business historian.

Even today, says Tom Welsh, co-chair of the business and finance group at law firm Calfee, Halter and Griswold, it’s not just private equity firms that facilitate M&A deals. , but companies like The JM Smucker Company, RPM International, Eaton Corporation, TransDigm and Parker Hannifin are constantly making acquisitions.

“We’ve always had a lot of public companies and strategic buyers,” he says. “There are many sophisticated transactional parties out there that do sophisticated transactions and use sophisticated advisors.”

Continue to propose solutions

The deep well of experienced financial services firms became a boon to even smaller family businesses that could cash in after several generations of success. Warren said that in his early days in private equity when he was still in his infancy in the 1970s, owners who wanted to sell their businesses had two options: finance the deal themselves and wait years for full repayment, or sell the business to a competitor in the market, who would likely consume it in whole or in part, causing it to lose its own identity – and possibly get rid of its staff.

Bob Pavey, partner emeritus at Morgenthaler Ventures, said that in 1978 capital gains taxes were also significantly reduced, removing a barrier to mergers and acquisitions. As a result, buyouts flourished in the 1980s, a time when mergers and acquisitions also split into two streams: venture capital for growing companies and buyouts.
At a time when population loss and brain drain remain a concern in Ohio in general, and Northeast Ohio in particular, Kohl sees the M&A industry in Cleveland remaining vibrant – largely because of the results, but also because of the region’s work ethic.

He adds that the Cleveland area continues to outperform comparable cities, and even some larger ones.

“If you rate it against its regional peer cities, Cleveland has a larger, more mature, and more developed M&A market,” Kohl says. “You could say we have a healthier M&A market than the big cities, say Denver and Atlanta.”

And the future continues to look bright, says Kohl. Advances in virtual meetings and communication — spurred by the COVID-19 pandemic — have made geography less important than before, and he says that’s playing into some of Cleveland’s strengths, like a better quality of life and a lower cost of living.

“Cleveland punches above its weight in many ways, like its art museum and its symphony,” says Kohl. “This region has been important in the development of America, and I hope Cleveland will also play a growing and stronger role in the next evolution.”

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