The M&A market is heating up as the U.S. heads toward the light at the end of the pandemic tunnel. As buyers and sellers look to transact, Mark Guterman, managing director of loan syndications for First National Bank, and Martin McCormick, managing director and head of FNB Mezzanine Finance for F.N.B. Corporation are seeing capital trends starting to take shape.
Guterman says in terms of capital trends, what's been interesting to watch is banks’ loan deposit ratios and the appetite they have for booking assets. This year, he says, banks’ ability to commit and hold higher levels of capital for deals has increased.
“For example, say there's an M&A deal for $65 million,” Guterman says. “Maybe before COVID a bank that would do that deal may hold $50 million of that and then syndicate the rest, bring in a partner for the other piece of that deal. What we're seeing now across the board — I would say community banks, regional and the larger money-center banks — is the ability to commit that capital and hold at a higher level has increased. So that $65 million deal that necessarily would have meant to be syndicated pre-COVID, now, you may have banks willing to underwrite and hold the entire amount.”
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Guterman says that benefits M&A market in that there's lower execution risk. It means there’s committed financing because a bank is underwriting the entire capital structure of the deal. That’s something as banks look to put more assets on their books that could help accelerate M&A deals.
Guterman and McCormick spoke on the Smart Business Dealmakers Podcast about the state of M&A financing post-COVID, and what dealmakers can expect to see in different types of capital stacks for the second half of 2021 and into 2022.
McCormick says he’s seeing valuations for businesses continue to increase since the fourth quarter of last year. Part of that is because the demand for a good business has outstripped the supply of good businesses. Some businesses are still bouncing back from the pandemic disruptions they faced, so those who have a nice asset from an acquisition standpoint, valuations have are going up and buyers are willing to put more equity into these transactions than they were even a year ago.
“And they're being equitized well right now because the debt world tends to be finite on how much debt you want to put on a business or put into a transaction,” McCormick says. “So buyers are having to fill that gap and bring more equity to the table.”
Guterman says the equity component in transactions is a bigger factor in deals, post-COVID than they were pre-COVID. As banks look at M&A transactions, bring it through their credit chains of command and through their credit partners, the equity component has been critical to a successful deal.
“Those equity checks from private equity or from business owners are at a higher or elevated level now than it was pre-COVID,” Guterman says. “That is definitely an important factor in some of the trends I've seen in the capital structure of a deal.”