M&A activity will continue to make headlines in 2015
Mergers and acquisitions will continue to make headlines in 2015 as a positive climate is expected to continue for both buyers and sellers.
Tracy Larsen, managing partner of Barnes & Thornburg’s Grand Rapids office, said the current situation is rather unique.
“We have something that doesn’t always exist in the marketplace, economic dynamics that are bringing both buyers and sellers into the market at the same time, which creates a lot of the deal volume we’ve seen in the last 18 months and project to see through the remainder of 2015,” Larsen said.
Larsen noted in 2013 M&A activity began to rebound, in 2014 it returned to pre-recession levels and he expects 2015 could be even better.
“Those of us in the deal market are very bullish that 2015 will be an even greater record-setting year for M&A activity,” he said.
Larsen said the region is “very much in the mix” and can expect to see national trends playing out locally.
“West Michigan is considered a very attractive area for buyers to purchase companies,” he said. “Part of that is because of the strong workforce we have in West Michigan, and it’s a tribute to the good solid companies that exist here. I’m really seeing a high level of interest in the big national and international private equity groups looking at West Michigan companies.”
Larsen said on the buying side there are several contributing factors that point to a good year ahead. Strategic buyers are reportedly in growth mode and expect acquisitions to play a meaningful part. “I think that is being driven by some relatively strong and unlevered balance sheets, record levels of cash existing within those companies and record stock prices,” he said.
He said private equity buyers also are in growth mode and very competitive right now.
“What is really fueling the financial buyers are a few things: First and foremost, we have extremely low cost of capital and some increased risk tolerance from lenders, which means they are able to stretch on acquisition bids and offer greater value to sellers,” he said.
Larsen said private equity buyers also have a significant amount of “dry powder capital in their funds that needs to be put to work. It’s at historic levels, so they are very aggressive in trying to deploy that capital.”
International buyers, particularly in Asian countries, are eyeing U.S. businesses.
“I think one of the things that has been somewhat unique in the last little bit is Chinese buyers entering the U.S. market,” Larsen said. “We have an example of that locally: The Burke Porter company is in the process of being acquired by a Chinese public company. It’s the first activity that I’ve seen locally, but we certainly expect to see more of that.”
Sellers are coming to market, thanks to significant competition among financial and strategic buyers for deals and continued favorable tax rates.
“That competition is driving valuations to record levels,” Larsen said. “I project we will see in 2015 a further enhancement of transaction values, which makes it a wonderful time for a seller to be in the marketplace.”
Larsen said sellers also are obtaining much better transaction terms regarding risk allocation and representations and warranties. He said while the European market has adopted representations and warranty insurance, the United States has largely ignored it, but as private equity groups become more competitive, those agreements are growing.
“What that means to a seller is there is a much better risk allocation — they don’t have to stand behind as much risk after the acquisition closes.”
He noted increased investment bank activity in the region as one reason for the positive outlook.
“I would say the investment banking activity I am seeing is really at an all-time high right now and I expect that will continue throughout the year,” he said. “What that means is an increase in the number of investment bankers working with potential sellers to bring companies to market.
“Private equity is certainly a significant player now for almost all West Michigan companies coming to market. In fact, some West Michigan companies I am in market with currently are looking solely at private equity buyers as potential buyers of their businesses. I think we will see a lot of announcements of private equity-backed deals in West Michigan.”
There are a couple of factors that could have a dampening effect on M&A activity, but Larsen is not overly concerned.
“If interest rate increases are material enough, that will put a quieting effect on some activity and will probably put a quieting effect on some of the valuations that are being offered. But we are in such a favorable interest rate environment that I don’t think modest increases in interest rates will have a meaningful impact on deal activity, nationally or in West Michigan,” he said.
A stock market drop would also dampen M&A activity, but currently the stock market is indicating a positive year ahead.
While international turmoil sometimes slows M&A activity, Larsen said the opposite seems to be happening.
“It has not seemed to have had an effect on our domestic M&A activity or the desirability of U.S. foreign buyers,” he said. “If anything, I think some of the international turmoil has caused foreign buyers to look at the U.S. as the best place in the world to buy new target companies.”
Often M&A activity is better in certain segments of the economy than others, but Larsen said that is not the case now.
“Sometimes we will see technology have more interest than, for example, retail, or we will see manufacturing may have more or less interest than distribution,” he said. “What we are seeing now — and it is a somewhat unique situation — we are seeing increased activity in all sectors. Certainly some are stronger than others.”
Larsen said technology remains a particularly hot sector, and the energy sector is a bit cooled due to oil and gas prices, but nationally it remains fertile ground for transactions.
Auto experts have projected an increase in M&A activity for 2015, and Larsen said the industry is hot, but he doesn’t believe it is any hotter than several others. He expects there also will continue to be an increase in joint ventures as Tier 1 and Tier 2 suppliers face pressure from OEMs regarding their supply capabilities.
So what if you want to get in on the action this year?
“It takes some preparation for a company to ready itself for sale,” Larsen said. “A typical sale process will take six to nine months from start to close. Companies with a serious interest in a possible sale in 2015 owe it to themselves to be seeking some professional counseling now on what steps to take to best position them for a successful transaction.”