There’s been a lot of talk lately that M&A activity will trend downward in the coming year because of…
- The trade war with China
- Global economy slowdown
- Rising interest rates
- Trade tensions
These factors do have an impact on the economy, but I think the impact on M&A specifically has been vastly overstated. It’s not hard to see why, when you consider those issues popped up in the last 60 days of 2018. It was overwhelming bad news in a short timeframe. It made people nervous.
But, when you look at current real market factors, the same ones that made 2018 a banner year for M&A, you’ll see that the same conditions are projected for 2019.
In the first nine months of 2018 alone, there were $1.3 trillion worth of deals for American companies. If you look at the worldwide figure – it’s $3.3 trillion.
This is the most in the four decades that records of M&A transactions have been kept.
There may not be a mad frenzy of buyers, because they have so many options for acquisitions. But especially for transactions in the $50 million to $300 million range, it’s going to be a good year.
1. Plenty of “Dry Powder”
Corporate America and private equity firms have plenty of cash on hand, popularly known as dry powder, and they’re spending it to increase their market share, obtain valuable intellectual property, and more. As of June 2018, there was more than $1.8 trillion in capital waiting in the wings, which is a record.
Investors are also driving this trend, as when they give money to a PE firm, they expect them to buy something. Investing in other companies is a more efficient – and profitable – use of the money than sitting on it. That’s the attitude. And with so many attractive acquisition targets (see #4 and #5 on this list), who can blame them.
2. Historically Low Interest Rates
It’s true that interest rates have gone up. The Fed raised its benchmark rate to 2.5% in December 2018 and has announced plans to go to 3% in 2019. This is up from a low of 0.25% in 2008, at the kickoff of the Great Recession. It’s gradually gone up since then, starting with a hike to 0.5% in December 2015.
But, when you look to the past, you’ll see that current interest rates are actually quite low in comparison. In 2007, the rate hovered around 5%. It was at nearly 10% in 1989. And in the late 1970s, early 1980s, rates were all over place, ranging from 8% to over 20%.
Today’s interest rates are tame by comparison.
3. A Buyer-Friendly Market
The M&A market has been very seller-friendly based on macro issues, including the use of auctions rather than negotiated sales and an increase in private buyers. But this year things are going to even out, and may even tip to a more buyer-friendly market.
It’s all that dry powder. Buyers have all this cash and are getting more favorable valuations for target companies. Something that was valued at five times earnings is, in this climate, valued at four times earnings.
Another factor here is that Boomer business owners are ready to retire and looking for an exit. They’re ready to sell now. And Buyers know it.
4. Companies Built for Acquisition
More than ever, companies today are being created and carefully built for acquisition, not an IPO. I’m not talking about the headline-garnering acquisitions like Disney buying Lucasfilm for $4 billion back in 2012.
The real heroes are those companies that get sold in the $50 million range. These deals just don’t get the press, even though they’re often very beneficial to investors and Sellers.
Imagine two scenarios. In the first, you’re an investor in Uber, which is planning to go public later this year. Consider your return on investment with a small piece of the Uber pie and compare it to having a 40% stake in a small tech firm that gets bought for $50 million.
In one recent case, a tech company was sold for $80 million. Husband and wife owned it 100%. They would have never gone IPO. But, by building a solid company, they were able to be acquired for a tidy sum. And with the proceeds, they were able to give $1 million to each of their 15 employees.
5. More Solid Companies
In the current market, more companies are simply well managed and well run, with professional and effective leadership. Management is given the resources it needs to be successful. And good ideas are supported.
The days of the Dotcom era where companies were slapped together, investor money was thrown around freely, and “management” was a dirty word are long gone.
This means there are plenty of solid companies with good financials and management teams out there, ripe for acquisition. And often management stays on in the transition.
Looking Ahead
All these factors provide a rich environment for M&A that is strong and sustainable. And there are more that I believe are contributing to an ongoing M&A boom.
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