Rob White is a Managing Director at the Investment Banking division of M&T Bank. He co-founded and continues to lead a service line focusing on middle market M&A and corporate finance transactions. As a follow up to last year’s interview, below is a Q&A with White about his experiences in middle market M&A and some of the current industry dynamics.
What are the recent trends you are seeing in Middle Market M&A?
2017 was another strong year for mergers and acquisitions activity, with the market continuing to favor sellers. Fueled by low cost, abundant debt and significant amounts of equity capital, the buy side remained extremely aggressive, resulting in high multiples and robust transaction processes.
While 2007 still marks the watershed year for private equity fundraising in the United States, according to Pitchbook, the last five years have been higher than any other previous year (besides 2007), averaging nearly $200 billion in new equity capital raised annually and additional, newly minted buyers targeting a finite amount of deals.
Interestingly, there was a surge in Special Purpose Acquisition Companies (SPACs) in 2017. These vehicles are listed publicly and raise money from investors with the promise to find and execute a deal within the next few years. While popular around the 2007 time frame, SPACs had fallen out of favor during and after the recession. According to the Wall Street Journal, there was nearly $14 billion raised worldwide through SPACs in 2017, up approximately 350% from 2016 and almost $2 billion more than 2007, the previous high.
This steady flow of fresh capital into the institutional markets reflects the abundance of money looking for an investment with the promise of any sort of enhanced return. These funds are not only competing with each other, but also with cash-flush strategic buyers, which have benefitted from the slow, but steady recovery period.
To compete with strategic buyers that can have natural synergies and lower return requirements, we are seeing more funds executing platform strategies, whereby they purchase a company and grow it through acquisitions. Private equity-backed platforms combine the capital and discipline of a fund with the synergies of a strategic resulting in an excellent prospective buyer. According to Pitchbook, in 2007 about one half of the private equity deals were add-on acquisitions, while the other half were platform deals. Today, add-ons account for nearly two thirds of all private equity acquisitions.
What should a business owner consider when making the decision to sell?
While the market has been open for sellers, we have seen buyers become more discerning, diligence more rigorous and processes taking longer. Well-run companies that have clear differentiators will demand premium valuations and attract multiple suitors. Further, companies with robust financial systems and disciplined accounting that can produce the market-required data and analyses to facilitate a seamless, efficient diligence process are most likely to see successful outcomes.
In our experience, although the market may be strong, it is not always the right time to sell for every business. Scale, trends, sector, customer concentration and the business’ infrastructure are a few things that can impact market appetite, valuations and ultimately the success of a process. For a business owner, finding professionals that will give an unbiased viewpoint on whether their business is ready for a sale should be a critical step in the decision process.
This aggressive market has also triggered massive prospect calling efforts by private equity and strategic buyers, leading business owners to a false sense of optimism. The introduction of an advisor to prepare a business for market, facilitate a process and guide an owner through the event is crucial to improve the transaction. Even a smaller process will wring out market inefficiencies, provide options and enhance the likelihood of success.
Do you expect deal activity to remain robust in 2018?
Yes, we do. The recession technically ended in June 2009, so we are rapidly approaching the 9th year of recovery. This expansion period is the second longest since World War II, behind only the period after 1991, which lasted 10 years.
With history as a guide, these statistics might suggest that we could be facing a contraction in the coming year. But we believe the market will stay strong at least through 2018. The relatively slow pace of the recovery, coupled with the abundance of unusually low cost, debt capital and the continued rise of the public markets all bode well for a sustained expansion. In addition, the perceived regulatory temperament of the current administration and recent tax cuts should drive continued optimism from strategic acquirers.
Our message to prospective clients is that the market is open and active today. But, given the length of the expansion period, if they are contemplating any sort of transaction, from the sale or recapitalization of their business to raising growth capital, they should act now.
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