Mergers and Acquisitions – Trends for 2012 and Beyond

By Generational Equity

08/22/2012

As with most sectors in the U.S., the first half of this year was slower than expected in the M&A industry. A variety of factors, not the least of which is the uncertainty over the Eurozone crisis combined with the unknown regarding long-term tax policies post-election, created this slower-than-expected environment.

When this happens we often hear from business owners that they are going to wait until “things get better” before they decide to start the exit planning process for their businesses. The key issue to consider is that generally it takes 12-18 months to close a deal with an optimal buyer. This means that by the time you realize that “things have gotten better,” the timing of your exit may actually place outside of the prime window to do so.

In addition, we always like to ask this question: By what measure will you know when “things have gotten better”? Most entrepreneurs usually indicate that leading economic indicators such as employment growth or quarterly GDP expansion will give them an idea of when things are getting better. Since these data points tend to get reported after the fact, you may not learn that things have gotten better until well after they improve. How does that affect your timing?

The reality is most analysts expect the remainder of this year, 2013, and 2014 to be prime for finding buyers. As the folks at Kramer Capital Research recently put it:

“Companies are sitting on a tremendous amount of cash. It reached the highest levels in more than two decades last year. When companies have stockpiles of cash, they put it toward business expansions, stock buy-backs, dividend increases, or, you guessed it – M&A activity. In an economic environment that makes it difficult to grow organically, many companies will use their piles of cash to go out and buy growth.”

Based on conversations we have regularly with buyers, we concur with the analysis by Kramer Capital Research. There is simply too much capital that needs to be invested, by both strategics and equity firms, for the ensuing months not to heat up in activity.

What History Tells Us

We need to balance this discussion with a longer-term perspective. The following chart illustrates this:

Source: Thomson Financial, Institute of Mergers, Acquisitions and Alliances (IMAA) analysis

As you can see, the recent high watermark for worldwide M&A activity was in 2007 when the total number of deals announced worldwide reached nearly 50,000. The low point during the Great Recession was in 2009 when the total dropped to approximately 42,000.

For comparison purposes though, look at the last trough during the recession of 2002 when deals announced dropped well below 30,000. The next five years deal closings rose dramatically. Look also at the recession in 1992. After that low point, we saw eight straight years of significant deal closings.

So what does history teach us? That despite economic malaise and political uncertainty, we should experience a number of years of solid growth in deal making. Again, the climate is ripe given the capital available to buyers right now.

Another striking aspect of the chart above: Every trough in deal making activity that occurs is HIGHER than the high point just a few years earlier. For example, the low point in deal closings in 1992 was actually higher than 1990’s total. The trough in 2002 was very similar to 1996, which at that point was a record-breaking year. And the bottom of the last decline in 2009 was nearly equal to the number of deals announced in 2006, which was another record year at the time.

Another observation can also be made: The time to enter the market with your company is at the beginning of an M&A cycle. This is when buyers are most active and valuations tend to be more favorable for sellers. This is the point of the cycle we are currently in.

So the time to sell is when several factors converge: active buyers, low interest rates, and positive valuations. The time not to sell is when you learn six months after the fact that GDP grew by X% in a quarter. By the time you learn this fact, the cycle could be well on the way up.

What You Need To Know Before Going to Market

Bottom line: Before you can hit the market with your company as an investment opportunity, you have to have an idea of what it is worth in today’s market. The best way to determine this is to have a professional and thorough evaluation completed on your business by an experienced M&A advisory firm. It is disturbing to meet business owners at our M&A conferences who tell us that they are going to sell their company on their own. The question becomes, what offer will you know to take since you have no idea what your business is worth? Sadly, far too many entrepreneurs make this mistake. Selling your company for less than it is worth is one of the five most common mistakes. 

No matter what, remember that based on historic data, it is pretty clear that we are entering into another M&A growth cycle. If you are at a point in your life where exiting and moving on – or finding an investor with which to partner and grow the business – sounds interesting to you, then you need to take advantage of this next cycle. Don’t be like so many who were waiting in 2007 “for things to get better” and mistimed the last cycle.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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