It's an active M&A environment across industries and the entire spectrum of companies — from large to middle market to small. And that’s not expected to change much this year, despite warnings of a possible economic downturn.
According to EY’s Global Capital Confidence Barometer, 52 percent of executives surveyed expect their company to actively pursue M&A in the next 12 months, a sentiment that’s ahead of the average of 45 percent who’ve shared that perspective since 2010. Executives are mostly seeking deals to acquire new technology and add production capabilities, or as a gateway to new markets, according to the October report.
There are two key factors driving the current M&A market, says Larry Otto, president of U.S. Bank in St. Louis. One is the low-growth environment in the U.S., which is making organic growth more difficult and forcing business owners to give more consideration to acquisitions. Second is the very low interest rate environment, which lowers the cost of capital for acquisitions and may help to maximize valuations for sellers on the other side.
However, there’s another side to the hot deal environment. While access to capital and increased need for growth by acquisition has boosted interest in M&A, that same interest is tightening the market, making it hard to find good value.
“It is a very active and very inflated marketplace right now,” says Andrew Fulford, vice president of corporate development for HBM Holdings Co., a St. Louis-based investment company that buys and operates middle-market industrial companies.
Among the factors contributing to that, from Fulford’s perspective, is that there’s a lot of money that has been committed to direct investments or through private equity, and the expectation is that money needs to be put to work.
“As a consequence, it's raising multiples,” he says. “That makes it a very good seller's market, not a good buyer's market. And I think there's less scrutiny and there's less methodical acquisitions going on right now.
“I think there's a lot of just, we have to buy something, we have to grow and we have to deploy this capital, put it to work. So it's a great market to be selling right now, that's for sure.”
U.S. Bank’s Otto says he’s seeing a lot of roll-ups targeted at businesses that are single operators or small operators — dentists and veterinarians, for example.
“There's been a lot of consolidation in the middle market, a lot of it driven by private equity,” he says.
These operators are benefiting from some of the scale that a private equity firm can provide to all of them.
“Companies are always trying to enhance value,” Otto says. “If you can't get value through organic growth, you've got to try to find it differently. Acquisition is certainly a way to do that.”
Even family-owned companies are trying to maximize that value, he notes. Depending on age, family circumstance and children, they may find selling or taking on an investor a better option than continuing with the status quo.
More knowledgeable owners
As M&A has become more top-of-mind for business owners and executives in recent years, they are recognizing opportunities to acquire complementary business to grow their capabilities and increase market share, says Sandra M. Moore, managing director of venture capital firm Advantage Capital.
“M&A is very vibrant,” Moore says. “And I would attribute it overall to a good business climate. We are at a period that even in capital-starved markets people like us are there with capital to deploy. And with availability comes the freedom to think more broadly about how you can get your company from step one to step two and from step two to step four. The overall business climate is providing the foundation for companies to stand on to think about M&A.”
Business owners today seem to be more comfortable and more savvy about M&A, either as a growth strategy or as an exit strategy, than in the past, HBM’s Fulford says. “I think there's more information out there about it, and there's more players involved than there were 20 years ago.”
Spreading the word
That awareness is aided, he says, by the proliferation of middle-market investment banks, advisers, service providers, accountants and law firms that have gotten into the business valuation and sell-side advisory work, creating more visibility to M&A activity.
That proliferation of advisers, he says, has uncovered a lot more sellers that are willing to sell.
“It makes the opportunities greater than they perhaps were, or certainly easier and more efficient than what they were before,” Fulford says. “It also means it makes it harder and harder to find proprietary deals because somebody's going to more than likely have some level of advisor helping them on the sell side, unless you just luck out and call them out of the blue and they've thought about it, they've heard from friends, but they haven’t engaged with somebody yet because their focus wasn't on exit over the next year whatever the time frame is.”
As the baby boomers have sold their businesses to retire, they have shared their experiences with friends: how the M&A process works, what to expect, what to do and what not to do. That helps put M&A top-of-mind for many owners who increasingly recognize the opportunities that exist in the market to help them realize a profitable exit.
“And so it's a better-educated seller today than I think it was before, and a more comfortable seller than it was before,” Fulford says. “There's more people for them to reach out to and more research and more ability to get more familiar with how the process works and the value for them.”